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True valuation is only part of the puzzle but it's also a crucial part of kicking off the greed impulse that gets people to move cash into individual stocks. For many professional managers the prospects for 2009 and 2010 are looking pretty juicy. It always amazes me how fast things turn around. Hundreds of the "failed funds" of 2008 will probably set up shop in January with a nice new low bar to measure performance against and have valuations that will let them make tons of money.

There's no telling at what price the "bottom" will be put in but I know that when some names start trading close to cash *and* they are generating substantial free cash the greed light glows bright.

EMC hit this point in October of 2002.

market folly

good thoughts and for the most part, my sentiments exactly. i'd also add that what is clear to me is that a massive deleveraging, unwinding, and liquidation will continue to take place until the hedge fund (and even to some extent possibly mutual fund) spaces are condensed.

redemptions and liquidations force the cycle to be repeated as sellers continue to sell down assets. everybody knows this already. but, i think to some extent its underestimated how much of a domino effect there will be. this round of redemptions is over, but what about the next round? the market can't stop going down until the sellers have nothing left to sell. (though you could add in the whole "funds front-running each other" bit into the mix)

i'll liken it to someone standing on the roof and pouring a gigantic bucket of water on your head like a waterfall while you're pinned down. you can't see how big the bucket is so you don't know how long the waterfall will last, but you do know it will run out of water at some point. you bringing up the nasdaq bubble is excellent because the cheap can always get cheaper.

this market makes me want to throw around all kinds of cliches just haphazardly haha. "market can remain irrational longer than you can remain solvent"

Jason Wood

Gregor...I'm talking more about changing the market direction. Once the bubble started rolling over, valuation was an ENORMOUS reason for rampant selling. When estimates were coming down, it didn't matter that stocks were down 50%-60%-70%, they were still expensive. But no one woke up one day and caused the Nazzy to correct because of a certain valuation level.

Same with where we are now. Valuation isn't a detriment to a rally or recovery now certainly. But there's also no reason why it will signal or create the bottom. We need people to discount the weakening of fundamentals [second derivative stuff if you will] and given the duration of this downturn [or at least the likely duration as I see it], that COULD be a ways off.


True enough. And a very good post.

That said, is it not usually valuations--in the midst of horrid fundamentals--that attracts buyers in periods like these? Equally, is it not usually the most dire, most foreboding outlook on the fundamentals (or macro conditions) that creates the values? It seems to me that the best values are captured when fundamentals are terrible. Or, when valuation is seriously misunderstood, during a time of healthy fundamentals.

At our current juncture, I think some yield hunting in resource equities presents risk, but, a decent risk as I look forward to a time when the Cash is King Mantra crashes. Cash and T-Bills and Treasuries are the the most at risk, imo. But, that risk will likely not present itself anytime in the next 2 months. Will take longer.

Best, Gregor

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