Don't Hold Your Breath for a Turnaround

For the last week or so, we have looked ahead at the new year and done some looking back at the disaster that was the old one. Now, 2009 is here, and it is time to deal with the reality, not the perceptions, hopes and fears that make up our guesses.

My views are fairly well known. I believe the year ahead is going to be tough, particularly the first half of the year. I believe earnings estimates are simply wild guesses at this point, and for the most part skewed to the high side of reality. I do not believe the stock market can even think about a broad recovery until the real estate market stabilizes. That simply cannot happen as long as thousands of new homes go into foreclosure every month.

A lot of stocks are cheap right now, but many others are rather optimistically priced as well. I believe that far too many people are calling the bottom for the bottom to actually be in place for the long term.

One of my favorite Charlie Munger sayings is "Invert, always invert." I have read that legendary investor Julian Robertson was also big on learning the opposite argument to your ideas and making sure yours was the better argument. Both of these people are far more successful and smarter than I, so I started off the year by considering the bullish position and why my cautious view could be wrong.

One of the biggest arguments for a new bull market is all the cash on the sidelines. The Leuthold report form last week is being widely quoted on Wall Street right now. The level of cash on the sidelines as a ratio of total market cap is one of the highest ever. The theory says that all that cash will get tired of sitting on the sidelines, earning a near-zero return, and will come into the stock market. It might, and that would be an enormous positive. The question in my mind is how much of that cash will come in and when. Near zero can feel pretty good compared with down 40%. The cash argument was around after the Internet bubble popped as well, and it took a while for a significant portion of that cash to come back into stocks.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider L.B. Foster to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.