Saturday, January 3, 2009

You can't predict ignorance.

Last summer, I had to sit back and watch helplessly as ignorant people poured billions of dollars into the financial sector sending stocks sky high and costing me a fortune. I was eventually vindicated, but it was so frustrating to see so many people so ignorant -- and to have that costing me so much money. This was AFTER all the bad news was coming out, but you go to CNN or CNBC or the Wall Street Journal or any other permanent bull and all you would read is all the reasons why the credit crises is over. Note the date of that article -- and there are thousands just like it.

Today, I do the same thing I did last summer; I sit dumbfounded that there would be enough ignorance with enough dollars left to send stocks up 25% since November 20th. 25% because Obama won? Everything that happened in 2008 will happen again in 2009 just with a different name. This time it is commercial real estate and alt-a mortgages.

Consider this graph of ALT-A mortgages Tilson recently sent out in an e-mail. ALT-A mortgage ratess start resetting in 2009.

ISM just released the worst manufacturing report it has ever seen in its existence. Far worse than economist expectations. And stocks went up 3% on that same day. More ignorant people will justify this by saying the markets already priced it in. Really? Were they pricing anything in last summer when the sent financials sky high? The market isn't pricing anything in. It is setting itself up for enormous losses. It is pricing in that Obama will save us all, even though he can't.

How long it can last I have no idea, as I can never predict the timing of human emotion and certainly don't try to when investing. I can only invest according to the fundamentals and wait. If I had to guess, earnings season starts around January 12 with Alcoa. Then most other S&P 500 companies follow suit shortly after. The market will soon learn how silly analyst predictions are of $82 per share S&P 500 earnings! Try $50 per share.

I pulled S&P's estimates for the 500 off their website again yesterday. Would you believe they expect earnings to actually be higher for Christmas season this year compared to last? Not just flat, or a slight decline, but higher than a year ago. By this stage, I do believe it. Nothing surprises me anymore.

It seems to me that ignorant people send stocks much higher during lulls in the earnings reports, only to have earnings season slap them in the face with reality. Wash, rinse, repeat. Some day they will be right that the recession is over and they will have bought at the bottom, but not before losing their money over and over and over again. I'm thinking this earnings season will do the same thing as the last one, although we have an Obama inauguration to contend with, so who knows how long people can continue to ignore reality.

All I know is that this is the time to profit if you can get your hands on a little extra cash. This is where you dollar cost average in. Last summer in this exact same situation is where you could buy $7.5 ALD puts for $0.15 each...which now sell for $6.

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