Sell Your Stocks

A lot of my friends view the current state of the Dow Jones Industrial Average at 8,451 as a great opportunity to buy. And, it may be. But, I do not share that view. Here is why…

Not only are buyers of stocks conspicuously absent, but much of the selling is forced.

“Off a Cliff,” The Economist

Stock markets are based on fundamentals when they operate rationally. Today, fundamentals are irrelevant. Stocks are trading on the ratio of buyers to sellers, and sellers far outweigh buyers with no tipping point in the foreseeable future. Where might the needed buying power come from?

First, the average American consumer is facing painful losses across all of their asset classes: real estate, bonds, equities, commodities, etc. Keep in mind that average American is already highly leveraged / debt laden, so a lot of people are facing margin calls, increased debt servicing fees, and, in some cases foreclosures. The small amount of American savings, which is normally leveraged, has been halved in the last few weeks. They are certainly not buying stocks.

Second, the many foreign governments and sovereign wealth funds that have traditionally invested in the dollar and the safe American equities are facing staggering losses and the need to focus locally to stop their own regional hemorrhaging. America isn’t looking so safe with the Fed and Treasury making the rules up as they go along and partisan battling over the details. If anything, large foreign investors are looking at ways to pull out without causing further collapse using programmatic sales. Keep in mind that most global equity markets are collapsing. They are certainly not doubling down in America on the trillions they already have over-invested here.

Third, the traditional market makers for many stocks, derivatives, bonds, and other assets, the “investment banks,” are all on the verge of collapse. It’s irrational to think that Japan will pull out of the $9 billion deal to buy around 20% of Morgan Stanley, since the whole company is publicly valued at $11 billion, so the Fed / Treasury is going to have to step in somehow. Taking over this type of firm that has never been carefully overseen by the government will be a mess: these are seven figure a year “young gun” bankers, not DMV employees. These market makers would buy any stock if they thought they could sell them a little later for a profit, and this behavior backstopped fast market declines. No more. Bear, Lehman, and Morgan are soon to be distant memories, and I can’t imagine that Goldman will survive, either.

In a market where (1) sellers far outweigh buyers and (2) you have extremely hampered global buying power, I see a bottom much lower. From my view, the Dow Jones Industrial Average may hit 6,500 to 6,800 in intra-day trading over the next two weeks, and recovery will take months.

My advice would be to sell now. If you see some fast movement upwards, you can always jump back on the gravy train, but don’t lose another 20-25% on the way down.