Saturday, October 18, 2008

Investing, Time To Buy Stocks

The recommendation in the last blog was that stocks are on sale now and get ready to buy. After 1 week of investing it looks like now is the time to buy stocks for mone with a time horizon of at least 6 months. Sell money market funds, short term bond funds, CD's, etc... to get money to invest.

The first reason is the Warren Buffet factor who currently has the most influence in the stock market, even more than the Fed Chairman, Treasury Secretary, President, etc... Below is an article that was published yesterday. Enjoy reading it.

Warren Buffett: Buy Stocks! Cash Is Trash! Posted Oct 17, 2008 10:42am EDT by Aaron Task

"I don't like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: 'Put your mouth where your money was.' Today my money and my mouth both say equities." Or so declared Warren Buffett Friday in an extraordinary op-ed piece in The New York Times. Buffett's call to stocks amid an ongoing financial crisis could help restore investor confidence, a crucial ingredient so far missing from the government's turnaround effort.

Buffett's optimism is based primarily on the following:

"Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors." Cash is trash. "Today people who hold cash equivalents feel comfortable," he writes. "They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."A few caveats to Buffett's dramatic call:


By his own admission, Buffett is making a long-term call. "I can't predict the short-term movements of the stock market," he writes. "I haven't the faintest idea as to whether stocks will be higher or lower a month -- or a year -- from now. In the short- to intermediate-term, there's still the issue of reviving the banking sector, and key bank CEOs like JPMorgan's Jamie Dimon have expressed little optimism for the Treasury's program of capital injection. Nobody, not even Warren Buffett, is always right.

The second reason is the low interest rate environment. No long term investor will keep money at an interest rate below the inflation rate very long because they will lose money. When some sort of sanity comes back to the stock market this money will move back to the stock market fueling a rally.

Thirdly, sanity is coming back into the financial sector. Banks are starting to lend again as indicated by the over night, Libor rate, that is the lending rate between banks, has come back to a normal level. Also the Fed has added $600 Billion into the banking system and lowered the Fed funds rate. If the reason for the crash was tight credit then as credit loosens and money begins to flow this should have a positive impact on the stock market.

Lastly, the lower cost of gas and oil will stimulate the economy and increase stock prices. Friday's gas futures price for November delivery was $1.66 per gallon and if you add $0.60 per gallon for taxes and delivery it says that gas will continue to come down to below $2.50 per gallon in most parts of the country by Thanksgiving. This is the financial equivalent of having another $700 Billion infusion into the economy.

Bottom Line: The business cycle of what happens in an economy is acting normally. What has not been normal has been the credit crisis that crushed stock prices. As the credit crisis ends stock prices should recover with time. The rate of recovery is fueled by lowered interest rates and lower energy cost. This means that stocks are on sale now and with money that is not needed for at least 6 months it is time to shop.

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