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Friday, January 18, 2008

"Are we there, yet, Dad?"

The stock market seems to be finally reflecting economic weakness. The bond market reflected it some time ago, but the stock market only now seems to be coming around.

The question now is: how much farther do we have to go?

I'll be the first to admit, I don't know. But, I do have an opinion on whether we've reached bottom, yet, or not.

It seems hard to imagine that the fallout from a steeply declining housing market and the seizure of credit markets will wash out in less than a year.

Remember the wash-out that resulted from the dot.com bubble? It took from 2000 until 2003 to really hit bottom and turn back up.

Does it seem reasonable to expect the stock market to hit bottom so soon and with so little damage when housing and credit markets are much bigger pieces of the economy than technology? I don't think so.

No, I think we still have some way to go.

First, the subprime mess will continue to spread. A lot of floating interest rate mortgages will reset, and a lot more people will punt their homes to lenders. Credit card debt, auto loans, etc. will also fall apart as credit markets further reflect housing turmoil. That, by itself, will take another year or more to work out.

Next, credit markets will have to absorb all those losses and downwardly spiraling asset prices. That will take another year or so.

Then, a bunch of politicians and lawyers will ride to the rescue, further highlighting the misdeeds of the housing and credit markets. That will take another year or so, too.

In my opinion, we still have at least a couple of years to go on this.

That doesn't mean stock prices won't hit bottom beforehand. They usually do.

That also doesn't mean there aren't good investments to be found. I'm finding some outstanding bargains now and expect that list to grow over the next year or two.

My goal is to be greedy when others are fearful and fearful when others are greedy. The latter kept me out of the housing and credit down-spiral. The former is what I'm looking forward to, but I don't think others are quite fearful enough, yet, to call the bottom.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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