The market should drop between now and year-end. Watch for the telltale signs of margin call, which creates downward pricing trends in otherwise orderly markets, near the end of day’s trading, as margin call trades are put in between 2PM EST and closing. Stocks that have downward price moves, with little or no news or industry data to justify such moves, it’s just continued redemptions in hedge and mutual funds and wind down of highly leveraged stock positions.
What is the next step? It’s likely that stock buys made at the end of the year may see significant upside once the tax sellers, redemptions, release of shares in Lehman bankruptcy custodial accounts in the UK are finished. If you establish a position in late December, you might see a long term capital gains treatment of a good investment. There’s no doubt that the economy is facing some serious perils, but there are historical precedents that would indicate that the market will survive all this.
Goldman Sachs, Apple and Berkshire Hathaway are well run, well established brand leaders, General Motors might surprise a few if they can stem the bloodflow and get an orderly markets into which to sell cars, Bank of America is well run and has a strong balance sheet, and there are half a dozen companies in healthcare, infrastructure rebuilding and military contracting that warrant investigation as they move into 2009. Funny thing is HP announces results that beat expectations in the face of the fire, so as bad as it is, there is value if like Buffet says, you stick to what you know and hold on for the long term. It’s a bloodbath out there, which is usually the best time and place to make strong returns. Do your homework, invest in what you know well, and don’t leave all your money in a bank earning negative real returns. If all else fails, buy a laundromat, people will wash their clothes if they can’t afford new ones.
Be careful, be watchful and good luck!