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Mark's Market Blog

9-24-08: Buying Opportunities in a Recession

By Mark Lawrence

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As we left our hero last Friday, the government was going to throw $1T at the problem and a good time was being had by all. Since then, perceptions have changed. . .

The markets continue to be in a hold pattern while everyone waits to see what congress will do. Mostly, I think this week should be spent on the sidelines. If the S&P drops below about 1150, I may re-think that position. I don't think that likely.

Today, the democrats are making noise about slowing down and understanding before spending all this money. The amount to spend is currently at more like $700B. There will likely be some riders on this bill - popular is executive pay limits for companies that participate. There are also questions about the price to be paid for these troubled bonds. The last market for a substantial amount of bonds was a fire sale by one of the investment banks, I forget which, and they got 22 cents on the dollar.

There is also noise that the Detroit $25B loan package will be passed and funded this week. And that there will be more help next year. Chrysler has announced three plug-in electric cars, a jeep 4wd model, a mini-van, and a typically weird and undefinable future-retro thingy. Detroit is betting heavily on plug-ins, it seems. Meanwhile, no noise from the Japanese - this makes sense, as the Japanese are internally funded and need to continue to sell Civic and Prius hybrids as they develop, whereas detroit needs to generate interest in hopes of staying alive.

Meanwhile, GM sank back into the mid-10s. I bought a bunch more. Now I have to decide what to do with it - hold it for the long term, or sell if it gets to $14, confident that I'll get a chance to buy it back in the $11s. I bought GM with a limit order. At the instant I placed my order, GM was $10.63 and raising. I placed an order to buy at $10.56, if it got down there. A couple hours later we hit that price and I became the proud owner of a humbled company. At this instant we're at $10.60, so I've made $0.04 per share. If GM sinks below $10, I'll likely buy more.

I've had a couple questions, so here's a couple answers.

Back in December '07 I decided we were headed for a recession. In a typical recession stocks fall a minimum of 20% from peak, more normal would be 25%, 30% is moderately likely and 35% off peak would be an effective bottom for modern bear markets. So I took the recently established highs from October '07, and discounted them 25%-33%. This gave me my buy targets for the US stock indexes. The S&P peaked at about 1575, so last December I set my buy bands for this was 1200-1050. This month I'm implementing decisions I made late last year. It's generally thought to be important to have an entrance and exit strategy for stocks, as otherwise you get wrapped up in the immediate emotions of the market. One can read almost anything this week, from predictions that we've already passed the bottom (maybe, but I doubt it), to predictions that the S&P will sink to 800 (maybe, but at that point unemployment in the US would be about 15% and we'll all be more interested in the price of potatoes than in the price of stocks).

I bought the S&P at 1170. If it drops more, I'll buy more and lower my cost average. The Chinese market was in a bubble, in my estimation, so my buy bands for China was a drop of 50% - 60%. We briefly hit about a 53% drop last week, but the Chinese government stepped in and threw money at the market before I bought. China is currently having a serious slowdown coupled with 9% or so inflation, so I'm not in a hurry to buy their stuff - I think better prices will be available in a month or three. GM has traded at $43 within the last year, so the current price seems to me to be to be a fire sale. I think people have a very unrealistic view of GM's future - I don't see them as anywhere near bankruptcy. I don't currently have an exit strategy in place for any of this.

Microsoft issued a press release announcing a $40B stock buy-back program. I briefly thought about buying some of that. However, microsoft stock has languished between $25 and $38 for the last seven years; they're under attack from Apple and Google; they just failed to buy Yahoo; Vista is widely hated; and here we have a company in a fast moving highly competitive high tech field, and the best investment they can think of for $40B is to buy their own stock? This is a company in long-term decline, I decided I want no part of it.

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