Double Dip? The Question Surfaces Again!

Hello All!  As you may have noticed, the frequency of my posts have dropped drastically over the past few weeks.  That was due to my move to our new house!  Almost all of my free time has been consumed with unboxing, unpacking, cleaning, assembling, etc.  The recent action in the market has prompted me to pick up the pen, so to speak.  As well, I am currently on a business trip and have some free time in the evening to write.

Market Turmoil
To recap, the US Congress took its sweet time and waited until last minute to pass a bill to raise the debt ceiling last week.  The bill was a compromise, something no one really liked.  Not only did the market not rally at the news, it actually shed a couple of hundred points within a few days.  To add fuel to the fire, S&P downgraded the US debt rating to AA+ from a perfect AAA last Friday, after market close.  As expected, a huge selloff happened today, Monday.

Now, it is fair that the question regarding the possibility of a double dip resurfaces.  I wrote about the same double dip issue last year.  I focused more on the market double dip rather than an economic double dip.  I did not believe the market would dip back down to ~700 pts (S&P 500), simply on the assertion that it took the bankruptcy of Lehman Brothers and the near insolvency of many big banks to take the market to those levels.  Today, companies are stronger than ever.  Even the worst offenders in 2008 are making money, companies like Citigroup and General Motors.  We are actually not in too bad of a situation.  This is a market correction...I repeat...this is a market correction.  My guess is that the S&P500 index will bottom out at around 1050 pts +/- 50 pts.

The pessimists will have you doubting these numbers.  The companies are making money, but they're not spending it, they say.  The companies aren't hiring and there is no job recovery.  Last I checked, initial jobless claims were down in the low 400s and the US added 117K jobs in July.  They may not be huge numbers, but they are positive numbers nonetheless.  Unemployment will not go away overnight.  As corporate balance sheets strengthen, companies will start to spend and hire.  Imagine that you are the CEO of a company.  You are making good profits and so are your competitors, and things have been well for over a year now.  What do you do?  Do you keep hoarding cash?  Of course not!  You're probably thinking that you need to invest in the company lest your competitors start taking market share.  So, you begin hiring and spending money.  When companies do well, the economy does well.  Why?  The companies are the economy (or at least a big part of it).

Is there a chance that I'm wrong?  Absolutely!  However, I'm willing to place a bet on my hunch.  You don't sell after the market has already sold off!  The market has already fallen from 1370 to 1120 pts.  If my prediction holds true, we are closer to the bottom than the top.  It's time to start buying.

What About All This Debt and Deficit?
I wished I could tell you the answer to this question.  I'm not an economist and will most definitely not pretend to be one.  (I did buy a macroeconomics textbook recently...hoping to get to it soon.)  Look, the US did not default on its debt.  It simply got downgraded by S&P, which coincidentally is also a rating agency that gave toxic mortgage backed securities AAA credit rating a few years back.  Even if the US did default on its debt, it would not be the end of the world.  Many countries have defaulted on debt before, and they're still around.  Obviously, a default by the biggest economy in the world would send ripples throughout the world, but it didn't happen after all.  It wasn't even close to happening.

I don't know how the US government will solve the debt issue, but I am sure it will.  But even if it doesn't, will the world end?  It surely will not.  Will all of the awesome companies all of a sudden forget how to make money?  I doubt it.

What to Do
There isn't much to investing.  Pick good companies and buy them at excellent prices.  This works whether the economy is doing well or poorly.  It works especially well when everyone is selling.  And this is the time.  Looking at my portfolio, I see First Solar (Ticker: FSLR) at $99.  I bought some at $102 on Friday.  If it falls to $95, I will buy some more.  This price is absolutely not justifiable; it is worth at least $140, if not more.  The same argument goes for the other companies that I own.  So, run your analysis again on your own stocks, and see what the entry or MOS price is.  Remember that famous mantra, "be greedy when others are fearful..."