I’ve read a lot of grousing over the years about people who wonder why certain news doesn’t crash a stock’s price into the dirt or launch the value rocketing into the stars. The answer is that people tend to forget that the information may already have been leaked or released and that is factored into the future prices of the stocks. At this stage in the current recession/depression, most companies (I should qualify that and say most large, multinational companies) have already factored their sales losses, their anticipated earning and what they think they might make for the next year based on their current orders.
The questions that we, as investors should always ask ourselves are:
1. Do we feel that the company will make money (or not make money if you are looking for a firm to short)? Shorts, by the way, are pretty dangerous right now and I would advise people to really do their own due diligence before making any decisions. I think for right now, the markets have hit a plateau and stocks and funds will hover.
2. Are the fundamentals of the company good and do you trust the information that you are reading and hearing about? The fundamentals may look good on paper or on the Internet but if you think management has been playing footloose and fancy free with their money and opinions, steer clear.
3. How are you at trying to second guess how people think? Despite items one and two, for the short term, if you want to make money and run, you need to think like the masses might. That being said, there is always the risk of unknown news and events that can either help you or hurt you. An earthquake can damage a factory for a firm that you own and drive down prices but futures for oil might go up if a refinery near by gets smashed.
Everybody is saving money now or sidelining it. The way to make money in an environment like this is to pay attention. You will see a lot of misdirection in the form of bad blogging, bad news and stupid information reporting where people are screaming doom all over the place. It is bad, as I am constantly saying, but for the immediate future, people are aware of this and:
1. Governments are taking action.
2. People are trying to save money where they can.
3. People are out of work. They still need to eat, drink, sleep and keep clean.
4. Other people are working. They also are eating, sleeping, drinking, etc.
Items 3 and 4 mean that there are still people willing to pay money for things that they want. In tough times, they will turn to things to help them escape, like movies, etc, and I think that with all the cash that is being infused into the economy, the stock markets will take off – at least for a bit.
Will there be a test of the market bottom? Maybe. Depends on how fast President Elect Obama and Congress get their economic stimulus programs, their infrastructure programs and how fast we can get businesses running and employing people. I am thinking that the next market bottom or test for it will not be as bad as the one we had in October.
If a company has several billion dollars in cash and they are making several billion income each quarter and write off 1 billion (as in the case of Intel, that I own), I am not worried that they will be broke like a bank which has had a run and billions in bad loans. Keep that in mind when you hear people screaming how some of these companies are doomed.
In the meantime, if you are comfortable doing your own research and investing, this might be a good time to look at getting into stocks. As long as you remember that the stock price reflects what people think the future version of the company is worth, and as long as the bad news you hear isn’t really relevant, you should be able to invest and take things in stride.
If you still are uncertain about the future, you may want to stay in cash and consult a fortune telling machine.
Good luck and be safe.
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Kim Isaac Greenblatt
Future Prices Factored Into Stocks