When to Buy When Cheap Just Gets Cheaper

Last week I was reading plenty of research advising of compelling equity valuations. You know the skit. At these levels of profitability price/earnings ratios should be 18-times rather than 11-times and if you like the company at 18 then you should love it at 11.

Well, that's just fine for value investors with time on their hands, but I think most of us would be reluctant to call a bottom at this point. What if 11 goes to nine or maybe even seven-times earnings, then you'll feel a chump for having missed the better price.

There are also few things more dispiriting than watching something you have just bought fall in price.

This is not a time to be brave or hasty.

Steen Jakobsen, chief investment officer at Saxo Fund Management, thinks we have to see the average 25-percent peak-to-trough move down in a recession-like environment before markets turn. If he is right we are only half way there. And some sectors like commodities, he suggests, have yet to adjust to the recession scenario.

So how does it play from here? Fear has clearly gripped the market by the throat, and yet this move appears too fast and too painful to be sustainable for long. The credit train wreck may roll on with the financials rebuilding their balance sheets through asset sales and SWF money, but that doesn't mean the markets don't turn.

The strategists keep saying "first half bad, second half good." It just doesn't look that clear cut. At what point does the market base? February? March? When do investors ask what kind of recession in the States takes hold with 5 percent unemployment?

Have you noticed how many corporates are delivering close to consensus, but then giving cautionary guidance? Are they saying it because they believe it, or saying it because that's what the newspapers, their bankers and the retail indicators are encouraging them to say it?

Yes prices can get cheaper from here, and picking bottoms is a mug's game, but every daily fall is tightening the spring for the rebound.

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