Too buy or not to buy.

I loved this article Stocks look cheap, but that doesn't mean you should buy. My favorite part is the secondary title "Are stocks cheap? It depends on earnings", then goes on to say that "many market pundits think expectations for 2009 are way to rosy". Imagine the industry that gave us AAA ratings on on mortgage backed securities telling use that earnings are "Rosy"! Who does Wall Street think we are?

Let me lick my finger and put it in the air. Oh, hey, look at that, earnings look like they are going to be down significantly based on job losses and all the turmoil! I don't have any doubt that this is going to get worse. It's already well below where I got out so I'm staying out. I lost way too much in the dot com bust looking at prices and hearing people tell me "how much lower can it go? Just hold it, the market always goes up eventually." While they are probably selling.

Then you hear them say things like "USG Shares Soar on Warren Buffett's "Expression Of Confidence". There is some serious snake oil in that one. Warren is buying special shares and real ownership in the company. If it does go bankrupt, those shares still have value in company assets. The real stock which you and I own turns into vapor. Of course Warren wants you to follow him on this deal, just like he wanted you to follow him a few months ago when he was buying it at 40 last May! Don't do it. If you are wondering how low it can go, it can go to 0! Then Warren walks away with the bag. I really like Warren and think he's a great investor and has a good morality to him, but in all the cases of his current buying spree he's getting real value. All in all markets don't behave rationally, the behave with individual greed.

Most of us suffer when companies like Loral zero out there stock and reissue the next week at the same value. Yes, the SEC let this happen back around 2003. Most people would call this fraud, the SEC calls it acceptable. Yes, I lost some money on that one.

The two significant downturns I'm looking at and comparing this too are the 1929 crash and the 2000 .com bubble burst. Both of those took two or three years to reach their bottom. I've already shown the chart pointing at 6000 for the Dow as the balancing line (the mean) over an 80 year period and over that period there have been a number of times when it's below the line. So do you think it will stay above that line? 4000 anyone? If I'm wrong I'm willing to miss out on all the money you make and get back in when this starts behaving like a long term market again. If I'm right I'll get back in when this starts behaving like a long term market again. Either way, I play the market with a long term mindset, I just happened to take a little breather when payments for fraud and deceit came due.

How low can we go?

All of my positions except for STMP and AMD have sold. I had a sell on the last of my SNE, but it was input incorrectly so it will sell first thing on Monday. I'm not just getting out for no reason at all, I just want to take a breath and look for a bottom. A bottom to me will be when things stabilize and loans start to be issued by Wall street. If Wall street doesn't trust itself to be given a loan between them selves I don't think I should trust them with my investment.

That said, after doing some reading on the 1929 crash a few days ago I again went back and looked at the DJIA chart from max time. This time I held up a pen to see the line that it made if it moved up in a uniform fashion.

Yes, that's my hand holding my pen, taken with my phone. The pen is pointing at 6k. I had previously estimated 7500 so 6k now doesn't look much farther down. Here is a clearer image of the same chart showing the pen replaced by a green line. You should be able to click on it to see it full size.

Not very scientific, but I do think it is reasonable. What do you think? Based on the 29 crash we'll see a few more up days and some more rich people buying stocks to try and stem the red flow, but overall we are going to see a downward trend until the banks start to lend money again. If we start seeing a bunch of bankruptcies in big companies I think it will mean the banks will be even less likely to lend money (since they lost it) and we'll see the next tier of companies failing. Not much different than the housing market drying up. People could no longer refinance their houses and ended up defaulting. Companies will not be able to refinance their payroll and end up defaulting or cutting back. This is not a good place we have come to and I hope I'm wrong!