Panic 2008: A Little Perspective

Fools, as I write this, the market is down around 40% from its year-ago high. Last week was the S&P 500's worst since 1933; it was the Dow's worst week ever.

Still, we know that although it will take some time, this, too, will pass. Let's take a look.

There's no question that at 14,000 or so, the Dow was overpriced. The economy was falsely propped up by the huge growth in subprime liquidity. Massive numbers of borrowers had little -- if any -- chance of fulfilling their loan agreements, which in many cases were granted for a number of illegitimate reasons including greed, poor documentation (or in some cases, none at all), and outright fraud. And it was temporarily sustained through the illusion of creditworthiness.

There were the implicit endorsements by Freddie Mac (NYSE: FRE  ) and Fannie Mae (NYSE: FNM  ) , which continued to buy this paper at Congress's urging. The rating agencies, like Moody's (NYSE: MCO  ) and Standard & Poor's, misunderstood the complexity of the risks, assigning inflated ratings to mortgage-related securities. And the big financial institutions -- nearly all of them, from Citigroup (NYSE: C  ) to Morgan Stanley (NYSE: MS  ) -- failed to account for counterparty correlation. They were wrongly comforted by sophisticated risk models and hedges like credit default swaps.

These were the dominating root causes of this pervasive panic. So we know the Dow was overpriced at 14,000, but do we really think that 9,000 or so properly reflects the value of the stock market now?

I don't think so
The market has been beaten down by several factors:

  1. Subprime correction (see above)
  2. High oil prices
  3. Cost of stabilizing the global financial network
  4. Massive crisis of confidence

Oil prices are already back below $100 per barrel. Moreover, there is more intensity than ever around developing more sources of energy.

The cost of stabilizing the global financial network is huge, but it's a one-time event. Ultimately, it will not factor significantly into stock market valuations, which arise from the aggregated estimations of future growth and the application of P/E multiples (among other future-oriented approaches).

We are keenly aware of the long-term progress of free-market capitalism, not only in the United States, but increasingly globally. We see that governments around the world are not only taking their own measures, but also cooperating to confront the brutal reality wreaked by subprime abuses. We know that in the long run, our equity markets will prevail -- as they have time and again.

Confidence differentiates Fools from the crowd. Consumer confidence is understandably low; it bottomed out around 50 (100 is normal), the lowest since the early 1990s. However, confidence is a lagging indicator, while the stock market is a leading indicator -- more simply, consumers typically look backward, while investors look forward.

Fools, look forward
None of us can quantify the exact contributions of each of these factors in driving down the market. However, we are aware that the subprime correction is only part of it. As for the rest -- well, like I said, it'll pass.

The credit crisis will be resolved. The intensity behind alternative energy will mitigate geopolitical risk and the volatility associated with oil prices. The P/E multiples of countless blue chip non-financial companies are hovering around Buffett’s Magic Number. Now may really be the time to buy.

The market is significantly undervalued because it is unstable and underconfident. This is an awesome time to be picking your spots as an investor, and The Motley Fool is here to help.

Further Foolish crisis coverage:

What now? The Motley Fool is here to answer your questions about this financial crisis. Send us an email at AsktheFool@fool.com, and check back at Fool.com as we answer your questions and cover the latest on the Panic of 2008.

Moody’s has been recommended by both Inside Value and Stock Advisor. Try any of our Foolish newsletter services free for 30 days.

Motley Fool President Scott Schedler does not own shares of any companies mentioned. The Fool is investors writing for investors.


Read/Post Comments (4) | Recommend This Article (13)

Comments from our Foolish Readers

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  • Report this Comment On October 14, 2008, at 6:00 PM, aussiewatcher wrote:

    Good insight - however 2 key issues remain.

    Will the world markets accept that more stringent regulations and control have to be put into place, to ensure this does not happen to this degree again?

    The second, and right now more important issue is - who is to blame?

    I don't say that rhetorically, what I mean is I have not seen any top level executive heads fired at our financial institutions.

    The subprime crisis could be foreseen, what efforts did CEO's, CFO's and the rest take to ensure they weren’t so exposed. Why now are they still lining up at the trough to get bonus pay for guiding their insto's into such troubled waters?

    If a normal Joe made mistakes at his company that cost money and jobs, they would be fired - with cause.

    When will sackings take place at this level?

    My fear is that if these so called leaders survive, what stops them from thinking they can take any risk they want, because in the end Governments and tax payers will bail them out.

    Just my views

  • Report this Comment On October 14, 2008, at 6:40 PM, rdotson310 wrote:

    You paint a rosey picture. I like rosey pictures. I picked from that garden of advice about two dozen times this year but found it nothing but fertilizer. Im not sure where all this fertilizer is coming from but can say its not coming from the fertilizer companies as there shares have not been spared.

    Where is all this money going to come from. While Im sure not everyone ran back to there savings to put more into the market after reading simular if not the exact same article as this one, but again I like rosey pictures. I do more research than anyone I know, PE Ratios, how much cash the company had, potential growth, not of it mattered. I still lost 80% of it.

    I realize that I am angry and a little bitter right now, and I hope understandable, what has taken me thirty years to build has been whiped out in six months. While we all know that yes eventually your right the market will come back. You will get to point out your article about how you said this back on bla bla bla... and maybe if I waited and didnt listen to these articles until just right now I would be happy. Why cant you say keep your cash this rollercoster ride isnt over? and we know its not, but instead we hear dollar cost averaging, buy dogs of the dow, or buy these stocks in a downturn or my favorite dont panic! after loosing all the money that I have tried so hard to build. When should I panic once you lost all your money?

    When the market has lost a trillion in a day from where is this trillion giong to come from? Except over many years, and yes you might miss some of the very best jumps in the market if you where out right now. Personally It could double every day for a week and I still would not have half of what I put in little long any gains that at one time I may have made over the last thirty years. It dosnt matter how well you did it only matters what you have at the end.

  • Report this Comment On October 15, 2008, at 10:01 PM, SteveTheInvestor wrote:

    Rdotson:

    I must say that your bitterness is understandable and you truly have my sympathy. Personally, I'm down about 25% overall and that's bad enough.

    I also agree with you to some extent. The downside to staying fully invested is the real possibility that you will get hammered.

    I also agree that MF articles are too optimistic in many cases. I also think they often fail to find a balance between optimism and caution. I took it upon myself to move to cash as the market sank. The more it sank, the more I went to cash. Had I listened to most of what I read here, I would have thought myself an idiot. Fortunately, I didn't listen and saved my 25% loss from becoming a 50% loss (or more).

    It is rare that you see a recommendation to cut your losses and run, and I think that is quite unfortunate. I fully believe that some stocks go down so much that it is unlikely you will ever recover your losses, yet some of these stock remain as "recommended".

    In fairness, Motley Fool articles do point out some stocks that are worth holding on to, even in down markets, but too many "recommended" stocks are disasters that should have been dumped long ago. At the very least, these stocks should have been labeled with a "hold at least 10 years" warning so that only youngsters would buy them.

    Good luck with your investments. I hope you are able to recover a big chunk at some point.

  • Report this Comment On October 16, 2008, at 2:24 PM, wuff3t wrote:

    With respect to the posters above, there is absolutely no need for TMF to label any of their recs as "hold at least 10 years" as their entire investment philosophy is based on holding for at least five years. They make it clear repeatedly that you should not expect to make quick profits, and that if you want to you're in the wrong place.

    Any money you invest should be discretionary, ie you must be prepared to lose it. It's cruel sometimes, but those are the rules of the game. If you need the money for something else you should not invest it - period.

    Have you actually lost it? Have you sold? If you haven't sold you've lost nothing yet. TMF say to hang on during bear markets as you may well find you make stellar returns when the optimism returns. We cannot judge whether or not they're right until much later (ie if you've invested for a minimum of five years you can't judge until at least five years have passed).

    Most of my stocks are TMF recs, and I'm down 18% or so overall. But I know what I signed up for - long-term investing - so I'm not going to panic for at least a few years yet. Only if we're well into the next bull market and I'm still way down on all my Fool recs will I think I was wrong to trust their advice.

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