As Of: December 5, 2001

OLD HABITS DIE HARD

Greed still supercedes fear.

    Not much has changed in the past few weeks, except perhaps some of the shock from September has worn off and given way to better spirits as we approach the holidays (excluding those who have lost their jobs). A good investor needs to separate emotion from fact. Just because we might feel a little better doesn't mean that the economy is doing any better. To the extent that the economy might be turning the corner toward improvement, one could argue that the stock market has already anticipated the possibility and priced it in. (Please refer to the prior article titled: "Mini-bubble".) This leaves us positioned for disappointment.

    If, by some chance, the economy fulfills the hopes of the optimists, the stock market has little cause to continue upward until actual earnings start to catch up to stock prices. But if the economy only sloshes sideways or continues down, the rosy projections for 2002 earnings (that currently support tech stocks with price-earning ratios in excess of 100) are likely to evaporate and cause a price implosion.

    It would be terribly boring to list all the problems and uncertainties that overhang us right now. I do not believe any of them signal catastrophe. However, there are significant issues, and denial is not a constructive approach. The simple reality is that it is going to take time to work through all of the economic imbalances. (I refer you to The Mortgage Time Bomb, Educating The Consumer, and Velocity.)

    Consumers are going to spend for the holidays simply because there is an enormous traditional pressure to do so. January through April will then be spent anguishing over how to manage all the debt that has been accumulated over the past few years. While dissatisfaction with low interest rates (the greed factor) is pushing people into bidding stock prices as much as 50% to 100% (and more) higher than the lows in September, fear will enter the equation at the first unexpected international event, or during the dark, depressing winter of a continued economic slump. When fear raises its ugly head, stock prices are likely to experience a rapid sinking spell.

    We are all subject to feelings of greed and the desire to stay in the race, but my advice is to play for the long run and act like a vulture. Do not succumb to the habits of the last decade and chase over-valued stocks. There will always be opportunities in the future to purchase for less.

PS
This truly is a case of deja vu. Read the article of May 21 and think about how the market sank in late summer and September.