When is sentiment fully reflected in market prices? Who knows? Today provided some interesting examples.
Housing Effect
CNBC featured guest analyst Jim Bianco, whose work we respect. You can check out the video of his brief appearance, where he took the position that the market would not bottom until the housing market did. His time frame for this was late 2008 or 2009. He also cited the fact that there was a problem with bank lending.
We disagree in several respects.
- Markets will anticipate a bottom in housing. Anyone waiting to see this will be far too late.
- It is not completely about housing. Issues related to spillover effects are quite relevant.
- Bank lending is already improving from the Fed's TAF initiative.
- Government policies take time to develop and market participants lose confidence. Some of these proposals will be enacted and will help.
Many analysts are saying just what Bianco is. It always looks good to highlight what has been happening. Investors need to look forward. Solutions are more difficult (and more profitable) to see than problems.
Specific Stocks
Jim Cramer today commented on Hewlett Packard. He said that the PE growth was 13 and the PE was 13. This is a nice PEG ratio, but he noted that "No one wanted to buy it." This is the essential definition of sentiment. It tells one when to act -- when no one else does.
We noted similar comments today concerning Apple Computer Inc. (AAPL), Research in Motion, (RIMM), and Google (GOOG). (Full disclosure: We own AAPL and RIMM and we are buying more. No position in GOOG or HPQ).
The idea is that everyone is piling into the "recession trade" and mutual funds are selling top holdings to satisfy the redemptions of individual investors, notorious for late reactions to market moves.
Conclusion
It is always difficult to step up when things seem the worst. One always appears smarter and better-informed by discussing what has recently happened. Despite this, it is more profitable and helpful to stick to fundamentals and the future, rather than history.
