Buying Into the Great Unknown

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.

Of the stocks mentioned in this article, Fool contributor Bruce Jackson has a beneficial interest in Berkshire Hathaway and Microsoft. Berkshire Hathaway is a Motley Fool Stock Advisor and Motley Fool Inside Value recommendation, and The Motley Fool owns shares in it. Microsoft is also an Inside Value recommendation. Google is a Motley Fool Rule Breakers pick. If you are looking for stock recommendations, try any of our Foolish newsletter services free for 30 days. The Motley Fool's disclosure policy is stimulating.


Read/Post Comments (6) | Recommend This Article (9)

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  • Report this Comment On November 11, 2008, at 2:36 PM, Brettze wrote:

    Bruce

    Be sure to tell all robins to stay away from all fossil fuel producers.. They are nothing but trouble!! They keep on coming back repeatedly to mess up our economy with rising prices. Even though, fossil fuel prices are coming down, most of us are still wary about sticking our necks out again..

    The last thing we need is to see fossil fuel prices rising again until we develop alternate energy in a big and meaningful volume so to better able to buffer ourselves against the disruptive price swings.

    Have we begun to work on it lately? Very no! not much lately! We are still planning far more new electricity capacity based on fossil fuel primarily coal by a ratio of easily over one hundred to one for alternate energy.

    Nothing changes much despite the mind numbing $145 oil barrels and $100 tons of coal. Natural gas at $8 per mcf.

    We are stopping and stratching our heads about whether to resume with alternate energy developments in face of recent falls in fossil fuel prices.. Are we still assuming that they will keep falling and keep there while we keep postponing alternate energy developments that is urgently needed as a buffer against fossil fuel prices.

    If Wall Street thinks like Warren Buffett, It is about time we start taxing those idle fat wallets to pay for alternate energy developments in order to win our own version of energy independence from fossil fuel producers.

    Ask Warren Buffet if he is interested?? I betcha ya , he aint! He is not useful now...

  • Report this Comment On November 11, 2008, at 2:46 PM, Brettze wrote:

    Remember we are spending $300-700 billions of dollars on imported oil.. We are also spending trillions on Big Oil which is destroying our independent way of life with mutating kinds of economic crisises..

    Automakers are working on fuel efficient models to help reducing our oil consumption which is good.

    Cisco is working on TelePresence , an advanced clear view teleconferencing equipments that is growing and help reducing unnecessary long distance business trips by energy hungry jets.

    I dont see Johnson Controls doing much about energy efficient HVAC equipments for homes and office buildings. There is much work to do there.

    We must all work together to suppress Big Oil and its circle of greedy investors including Warren Buffets...

    We must start working now so that we will have more than plenty of energy to continue enjoying family vacation trips in our great new GM and Ford cars!! There is so much sightseeing to do in our ol' US of A!!!

    The greedy bastards of Big Oil can be dipsticks for all we care!!

  • Report this Comment On November 11, 2008, at 2:49 PM, Brettze wrote:

    There is still a gross lack of cohesion among individual investors as well as mutual fund managers who routinely use darts!!

    Even mutual fund managers neglected to get stock certificates to protect our mutual fund portfolios..

    what the hell is going on??

    I aint gonna listen to Warren Buffet wherever he is ...

    He can just get lost@!

  • Report this Comment On November 11, 2008, at 2:50 PM, Brettze wrote:

    Warren Buffet can have his Dairy Queen ice cream with Coca-Cola in other hand all day . I dont care!

  • Report this Comment On November 11, 2008, at 4:08 PM, TLassen wrote:

    Bruce, great article......no lack of 'doom and gloom' scenarios out there these days it seems. Believe it is called Situational Bias.

    May I suggest you read "The Forune Sellers" by William A Sherden, escpecially the chapter on the Financial Analysts and on predicting future events.

  • Report this Comment On November 12, 2008, at 12:25 PM, SteveTheInvestor wrote:

    Bruce:

    I guess you need to define "short term" in regards to negative news. We've been watching "negative" take down the market for the last year or more. If you call that short term negativity, then I guess you are less than 40 years old. Anyone older than that will be hard pressed to recover if they have stayed fully invested. For many months, I've listened to an endless stream of the same old Buffett quotes, espousing buying all these "great" stocks while they are "on sale". Yeah.... right. They were "on sale" then and apparently are still "on sale", for 30 to 80% less than they were when they first went "on sale". I started dumping many of the "on sale" stocks last year, and it's spared me at least a 40% dent in my portfolio. Unfortunately, I was stupid enough to keep some of them, so I'm still down.

    And how do we really know where "the robins" are? Answer: we don't. All we know with any certainty is that there are no bright spots on the horizon in regards to the economy. Some companies may be making money, but the overall trend is down. I'm not about to buy into that. But you have a good time.

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