Buying Into the Great Unknown

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The stock market is full of opportunity. We’ve heard it from all sorts of great investors, most notably from Berkshire Hathaway (NYSE: BRK-B) Chairman Warren Buffett. The Fool's own David and Tom Gardner are saying it, too.

But could they be wrong?

The bad news just keeps on coming. Automakers General Motors (NYSE: GM) and Ford (NYSE: F) are on their knees, with a Deutsche Bank AG analyst recently saying that GM shares may be worthless in a year. The government has pumped even more money into ailing former insurance giant AIG (NYSE: AIG) to save it from going bust. It’s too late for Circuit City (NYSE: CC), however, as it has already filed for bankruptcy.

Then there are the rumors, forecasts, and predictions. Even Internet giant Google (Nasdaq: GOOG) is seemingly not immune to the economic slowdown; Barclays Capital analysts recently said they expect Google’s growth to slow to virtually zero quarter over quarter.

If you can believe analyst estimates, Google at around $320, its lowest price in three years, trades at a forward P/E of around 15. For a company with a seemingly impregnable competitive advantage in the search engine space, with plenty of room to grow as advertising continues to migrate to the Internet, and one of the very few companies capable of mounting a credible challenge to Microsoft’s (Nasdaq: MSFT) operating system monopoly, Google shares seem like an excellent value.

But are they?

The great unknown recession
We are heading into the great unknown. We’ve seen recessions before, but right now, this one feels different. The slowdown is truly global. To date, it has involved bank failures, governments across the world pumping money into banks to save them from collapse, massive stimulus packages, and the coordinated slashing of interest rates, just to name a few things that have happened.

And you know what? We’re still in the early innings of this recession. More companies will go bankrupt. The automakers will likely receive huge government rescue packages. Housing prices are still falling. The Obama administration is already considering measures to stem foreclosures. There will also likely be a massive government spending package unveiled in the not-too-distant future.

But will it work?

Elephants in china shops
No one knows, especially amateur economists such as myself. The big elephant in the china shop is unemployment. It has just hit 6.5%, its highest level since 1994, with analysts forecasting that it will peak at 7.5% in the latter half of 2009. But "analysts" have consistently been wrong to date during this global credit crisis, failing to predict anything remotely like the reality we’re facing today.

And "analysts" seemingly still don’t get it. According to Bloomberg, the average Wall Street estimate still calls for the S&P 500 to break out of a bear market and surge almost 22% by the end of this year, more than twice as much as the biggest-ever advance to close out a year.

They could be right this time. The market may never have been this cheap at this time of the year. Records are made to be broken. But I suspect many analysts still haven’t downgraded their estimates, and the S&P 500 will likely not rally 22% before the year is out.

If you want doom and gloom, there’s no shortage of ammunition! But there is hope.

Place your economic bets now
Donning my amateur economist hat again, I can’t help but think that low to zero interest rates combined with huge government spending on a global basis will eventually kick-start the economy. What else could happen? Surely in the face of cheap money and a huge government fiscal package, the economy will first stabilize, and then start growing again.

Won’t it?

Nothing is certain. The Federal Reserve is placing its bets. The Obama administration will place its bets. They are hoping that it works. They are hoping that it stems the economic bleeding, caps unemployment, and ultimately, they are hoping that the recession is shorter and not as deep as it might have been had they done nothing.

There will be consequences, some intended, some unintended. The intended might well be higher inflation further down the line. The unintended might be a downward revaluation of the U.S. dollar as we collapse under the weight of the gigantic national debt.

I’m buying stocks
My money is on them getting it largely right, and the measures largely working. I’m buying stocks. The consequences can be dealt with later. Sure, there are some quite scary scenarios -- Japan, for example. But as an investor, there are always scary scenarios -- like the one-third haircut in the Dow Jones Industrial Average so far in calendar 2008.

In the short term, I think it’s safe to assume that we’ll keep getting whacked with negative news. But much of that bad news, and virtually no good news, is already priced into many shares. And even when we do get some good news, like the massive Chinese 4 trillion yuan ($586 billion) stimulus plan, the market overlooks it.

The market can’t see past the end of its nose. Two negatives still make a negative. A positive makes a negative. History has consistently shown that times like these, times of pessimism, have been the best times to invest.

As Warren Buffett said in his recent New York Times op-ed, “… if you wait for the robins, spring will be over.” The robins are almost here.