The Cub; II

We keep hearing about this bear market and that the bottom is "in" or "very close" so we should be invested in these bargain basement prices to take advantage of the next bull so we won't lose out on the expected huge profits.

This is not a big bear market - yet. What you are experiencing is the cub phase. The full size bear has not appeared. It is going to be one of the biggest, meanest, ugliest Kodiaks the stock market has ever experienced. If you think you have lost money in the last 2 ½ years wait a while as this cub is eating everything in sight as he grows larger each day.

If you haven't thrown your paper down because you think I'm nuts let's try on these facts that the talking heads don't want to discuss.

So far the U.S. is better off than many countries, but the economy is slowing down every day and more and more folks are being laid off. As the American consumer slows his buying that cuts into retail sales which cuts into wholesale sales and then the manufacturer must slow his production so he must lay off workers. The slow down and layoffs at the factory affect at least 6 local businesses who either lay off some of their people or are forced out of business.

As businesses slow and their sales and profits diminish it becomes apparent in their stock price so it goes down. Most stocks are priced to valuations based on company earnings called the P/E ratio, price divided by earnings per share. When you look back upon the P/E ratios for the past 100 years there has a mean (similar to an average) of about 14. Currently the P/E ratio for the stock market is about 31. In order for the mean to be realized you have two ways to achieve it. Either the earnings of companies must double or the price must decline by 50% - from here.

When you have a worldwide slowdown the chance of doubling profits is pretty slim so the market does its thing by decreasing price per share. That is called a bear market. When you think about business slowing more from here you also come to understand that it will take some kind of miracle to get profits up. In fact earnings will continue to decline so the reduction in the P/E ratio is a long way off. The more the stock market goes down the longer it will take to get to a "normal" P/E. It kind of feeds on itself.

If you own any stocks or mutual funds you can realize it is time to sell even at these low prices because the market is going to go lower. One of the keys to being successful in the stock market is to sell with a small loss and not wait for it to get bigger. Unfortunately, the small investor always wants to wait for a rally to get out "even". There is no "even" in this market. The smartest action is to sell before your account approaches zero.

The cub is hungry. Don't wait for him to become a full-fledged bear.

(c) 2005

Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter to receive his market letter for 3 months at www.mutualfundmagic.com to discover why he's the man that Wall Street does not want you to know.

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