Never Try to Catch a Falling Safe
by Stephen T. McClellan, author of Full of Bull
This bear market is like a falling safe. Don’t get under it and think you can catch it at the bottom. You’ll get flattened. None of us know where the bottom is. If you read my recent blogs you’ll see they indicate my view that this market is likely to fall a lot farther. The current lull is merely a teaser to keep you sucked in. The stock market bubble was pricked starting in October and has lost some 20 percent of its air. It’s not done deflating yet.
The latest bubble to burst appears to be oil; the price of crude is 14 percent below the peak of $146.50 less than two weeks ago. Another area that has been punctured is the previously sky-high, over-inflated solar energy sector that ran up to speculative bubble-like heights. The bellwether name there, First Solar, has dived 16 percent to $261 after reaching $311 (a PE ratio of merely 105 times!), but still is a long way from the $176 level back in March. These are falling safes to similarly dodge.
You might think a stock is cheap after its price has been sliced to a fraction of its former high. It’s not. Collapsing stocks always descend farther and longer than you can ever imagine. It happened with Internet.com boom-busts. Now it is happening with financials and homebuilders.
I constantly hear and read media stories, and notice Street analyst recommendations proposing that the time is right to “bottom fish” in these sectors. I remember in spring 2007, as sub-prime mortgage lending firms were imploding, a notable Street analyst who hadn’t heard about falling safes, upgraded one of these stocks that had been cut in half during the prior three weeks to $15. It was deemed cheap, oversold, and downside risk was limited. A couple of weeks later the shares were selling for less than $1. He got crushed. He was “Full of Bull.”
Financial firms and homebuilders are unanalyzable. You can’t assess the value of their assets. We don’t know how much worse conditions will become. There are other Bear Sterns and Fannie Mae’s lurking out there.
Some homebuilders will declare bankruptcy. Notice I’m not even mentioning airlines and automobile companies – they’re in this same category.
Bubbles are bursting. Sectors are deflating. Things are fluid. There’s a lot we don’t know. It’s still early. Step back, be cautious, and be sure your investments are bear-proofed. This is not the time to catch any falling safes. It’s not the time to expect investment gains. It’s time to protect your capital and avoid losses.
©2008 Stephen T. McClellan, CFA
Stephen T. McClellan CFA, author of Full of Bull , is a former Wall Street investment analyst with 32 years of experience covering high-tech stocks. He spent 18 years as First VP at Merrill Lynch and eight years as VP at Salomon Brothers. McClellan has ranked on the Institutional Investor All-American Research Team for 19 straight years and on the Wall Street Journal Poll for seven years. He is in the Journal's Analysts Hall of Fame.
McClellan is former President of the Computer Industry Analyst Group and the Software/Services Analyst Group. He has been a guest on CBS, CNN, CNBC, and Wall $treet Week and has presented to many leading technology companies including IBM, Apple, ADP, and EDS. He is the author of the national best-seller The Coming Computer Industry Shakeout: Winners, Losers, and Survivors, and his work has also been published in The New York Times, Financial Times, Forbes, and other leading publications.
He holds an MBA in Finance from George Washington University and resides in San Francisco with his wife, Elizabeth Barlow, an artist.
Permission to publish courtesy of the publicist.