Friday, October 17, 2008

Over-Correction Overhyped

I am tired of reading articles about how we are not near the low, and how markets tend to over-correct when rebounding from a crash. Almost every article I am reading now talks about the possibility of over-correction, i.e., another 20% drop in the S&P 500.

First, the prevalence of such pessimistic articles is a contrarian signal. Second, Warren Buffett just highlighted that he was buying major U.S. stocks (he's probably adding to his Coca-Cola (KO) and Wells Fargo (WFR) holdings), because he thought they represented reasonable values. And third, almost all the articles base their theory on the 1929 and 1987 crashes. See, for example, this article:

The above article and ones similar to it fail to distinguish between 1929, 1987, and 2008. In 1929, the government acted too late. Bernanke himself has cited a failure of speedy government intervention as one cause of the Great Depression. In 1987, again, the government arguably did not intervene quickly enough and did not pump into the market substantial taxpayer monies to inspire investor confidence. In addition, the crash of 1987 did not lead to a prolonged bear market--within two years, markets had begun moving substantially higher.

Now, in 2008, not only is the U.S. government inserting between 700 billion and 2 trillion in the markets, but worldwide governments (the G-7) are following suit. Thus, the current situation is completely different from 1929 and 1987. As an attorney, I see briefs all the time where opposing counsel uses one line from an appellate court's opinion that supports his or her client, but fails to mention that the case involved completely different facts, diminishing its applicability. Investors and writers who compare 1929 and 1987 with 2008 are making the same amateurish and unfortunate mistake.

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