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Articles
Further To Fall
by
Jason Kelly
08/26/2002
The buyer's paradise that I wrote about on August 2nd
is no longer with us. That does not mean you should stop your dollar-cost
averaging programs, but it does mean that you should be careful
about moving large sums of money.
I mentioned that Microsoft was looking good in the mid-40s and that I had
placed a limit order to buy more shares at $40. The first batch came into
my portfolio at $50. Now, the stock is at $52.
At $42 I was quite sure you couldn't go wrong with Microsoft. At $52, I
think you can. The pressures we face in the economy are not small, and
they're not over. The newsworthiness of the "Plummeting Stock Market"
story is behind us, but the plummeting market might not be. There seems
to be a war on the horizon and it happens to be scheduled in the most
economically vital part of the world, namely, where the oil is. If
Iraq explodes and oil prices crash, stock prices will probably follow.
It was encouraging to see Warren Buffett buy shares of Level 3 last
month, and then to acquire food processor CTB International on
August 19th for $180 million. That was an all-clear signal if ever
there was one. Or was it?
The initial excitement over Level 3 might be leveling off. The shares
rose to almost $7 and are now back down to around $5. The company is
still losing money. Personally, I'm happy to see the shares dropping
because I have been patiently waiting for a better entry price.
But, the effect of happiness wearing off is the real lesson here.
After six weeks of wishful thinking, the market might soon decide
that a few tough words from President Bush, a few bad executives
in handcuffs, and a few positive earnings reports do not a healthy
market make. It might also recall that, historically, a strong
August is frequently followed by a weak September.
Mr. Buffett's own actions might be worth considering. Are they
truly a positive sign? Yes, but perhaps not extremely so. There's
evidence to suggest that he's anticipating cheaper prices around
the corner, as reported by Forbes.com:
The modest size and scope of the CTB purchase suggests Buffett's
Berkshire Hathaway is waiting for a further market dip before
making a major deal. Other than the Level 3 investment, Berkshire
has invested about $2 billion in recent months, with other deals
in gas companies and gas-pipeline acquisitions.
Though the quantity of deals would be seen as major for most
companies -- especially with the dearth of acquisitions of late -- it
is paltry for Buffett's battleship. Berkshire saw sales increase
by 2% to $19.1 billion in the first six months of the year, with
income rising 42% to $1.96 billion. As recently as May, the firm
was said to be sitting on as much as $37 billion in cash to invest.
Buffett has always considered patience one of his best friends as
an investor -- no matter how much money he has in his change belt.
Buffett's restraint so far -- despite the fall in market valuations -- may
be an indication of his belief that shares have still further to fall.
I've noticed that market technicians aren't thrilled yet. The
popular Walker Market
Letter hasn't budged from its market signal strength of 8 on a scale of
0-20, with 20 being the most bullish. This doesn't mean much by
itself, but the letter is read by many people, has a good track
record, and does as good a job as any at showing what the
technical indicators are indicating.
All in all, I'm sticking to my advice to use limit orders to
acquire shares in quality companies at bargains you once thought
impossible to obtain. If the market takes a nosedive soon, snapping
up cheap shares is a great way to feel good about it.
In the meantime, long-termers would be wise to see the market
as generally down and to continue trickling money in each
month. For instance, this would be a swell time to start my
Kevlar 500/400 portfolio.
We may have come a long way over the past five weeks,
but the market is still down.
For current quotes on Microsoft, Level 3, and CTB International,
click here.
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