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When to buy

posted on January 22, 2010 at 5:04 pm
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If this is a correction and if this is therefore a buying opportunity, how long do you wait?

That’s the most asked question I’m seeing in the comment sections of the Jubak Picks today.

My opinion?

I think we’ve got more downside next week. And I’m going to explain why in this post.

That said, I don’t think there’s any reason that you can’t nibble at stocks on your watch or buy lists here. Nothing wrong with buying a partial position in anything that’s down 5% or more. For example, Market Vectors Brazil Small Cap ETF (BRF), a consumer-stock oriented portfolio that I sold in December with an eye to re-buying, was down about 6% from my selling price as of the close today, January 22. Worth a nibble here? Sure. Do I think I will be able to get it cheaper next week? Yes. So make sure you save some cash—if you agree with the reasoning that I’m now going to lay out here—so that you can buy more if this correction has longer to run.

My method for telling if the correction will continue into next week is based on looking at the longevity of the news flow that spooked the market this week.

A lot of this week’s bad news won’t survive into next week as major fear factors.

For example, this week’s earnings reports were dominated by the big banks. The news from JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) wasn’t terrible, but it wasn’t good either. These banks continue to increase their reserves for bad loans but at a slower rate. The overall effect was to mask exactly how strong the economic recovery is for companies in other sectors. Next week, however, the list is dominated by technology companies (Texas Instruments (TXN), EMC (EMC), and Qualcomm (QCOM), for example) and industrial companies (Nucor (NUE), Boeing (BA), Caterpillar (CAT), for instance). That very different list will remind investors of what an earnings recovery looks like.  

The Obama administration’s plan to cut the big banks down to size will be a week older. The way the second week news flow usually develops is that the shock of the first week at what was proposed yields in the second week to wonkish discussions of the details. Much less threatening.

On the other hand, the major driving story this week—China’s efforts to restrain its economy before the train jumps the tracks–will still be out strong next week.

The steps that the Chinese government has taken so far—see my post http://jubakpicks.com/2010/01/21/sentiment-shifting-on-china-is-a-buying-opportunity-ahead/ for the details on what Beijing had done through Tuesday January 19—have been out run by events. These moves were responses to out of control bank lending in the first weeks of January. After those moves, the Chinese government announced that growth had hit 10.7% in the fourth quarter. That just inflamed fears that the country would have to do more of the same to restrict loan growth. And then Beijing announced numbers that raised fears that inflation is about to take off. Consumer price inflation, which ran at an annual rate of just 0.6% in November, jumped to an annual rate of 1.9% in December.

A 1.9% inflation rate is still low. A tripling of the inflation rate in just a month is scary.

Fighting inflation will require more dramatic steps than the government has taken so far. And in terms of the news cycle inflation in China is a fresh story angle that could keep worries about China’s growth on the top of investors’ minds for another week.

At some point after that, stocks will be cheap enough in emerging markets and in global sectors such as commodities that we’ll start to see stories about how fast the global economy—and company earnings– will grow even if China slams on the brakes and slows its economy to just 9% growth.

How many investors do you know that are just waiting for a 10% drop so they can get into the market?

And that, I expect, would mark the end of this correction.

Of course, this correction won’t be the last time in 2010 that markets go into worry mode over China’s growth prospects. We can expect to see the story again and to have the market hyperventilate repeatedly in 2010.

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28 comments

  • DJBarber on 22 January 2010

    It looks almost as if all 3 of your “3 questions for 2010″ video are starting to have the answers fleshed out this week…..

  • DJBarber on 22 January 2010

    China maintains high per day production rate in 10 days of January

    From http://steelguru.com/news/chinese.html

    “Friday, 22 Jan 2010China Knowledge quoted according to the latest statistics released by the China Iron and Steel Association, China’s crude steel output was 16.72 million tonnes in the first ten days of January.

    Seventy six major steel firms surveyed by the association produced 13.21 million tonnes of crude steel in the period. The average daily crude steel output of these firms increased by 3,800 tonnes or 0.29% from late December.

    According to the report, in 2009 China crude steel output increased by an estimated 13.8% YoY to 569 million tonnes. However, the country steel exports plunged 58.5% from the previous year.

    According to statistics released by the Ministry of Industry and Information Technology earlier China steel industry realized profits of CNY 143.3 billion in the first 11 months of last year. The country major steel mills earned a combined profit of CNY 44.8 billion in the period, 67% less than in the same period of 2008.”

  • DJBarber on 22 January 2010

    From

    http://steelguru.com/news/chinese_news/MTI5Njkw/Credit_crunch_to_put_stress_on_Chinese_steel_players.html

    “Credit crunch to put stress on Chinese steel players
    Friday, 22 Jan 2010Economic Reference said in a report that if the banks decide to contract the line of credit, steelmakers and the trading houses will face real risk given relatively high stock.

    The paper learned from Mr Wang Jingyu with a Beijing based steel trading house that he has been called by several banks asking about stock and sales condition and has arranged to control the stockpiles at normal levels.

    As Mysteel has reported, China Banking Regulatory Commission issued a document reportedly on January 6th reminding the banks of credit risk in steel industry and asked them to find out real operating situation of the steel enterprises. After that the central Bank hosted a forum especially discussing the credit risk brought by lofty steel stocks.

    Economic Reference also learned from some merchant banks that they’ve held meetings to study into steel inventory. And it’s possible that the steelmakers will face tightened credit compared with before.

    As shown by Mysteel data a Tianjin based trading house revealed that he often takes loans pledge by the inventory, buying steel products with the loan and repaying the bank pro rate after selling each batch. Additional cost arising from the loan is some CNY 50 per tonne which is easily covered when the market price increases fast. But the stock has been quite high, gathering risk for the industry. By January 15th steel stocks in the nation major cities reached 12.45 million tonnes up by 100.6%YoY.

    Mr Xu Xiangchun chief consultant with mysteel.com said the steel market shall welcome in brisk sales in the Q2 but before that, the trading houses may bear heavy stress once banks crunch the credit. The trading houses are believed to destock at low offers, possibly to drag down the market prices.

    More importantly, speculations by the trading houses may lead to false boom of the demand, thus stimulating production afterwards and subsequently pushing up the materials prices too.

  • DJBarber on 22 January 2010

    From

    http://steelguru.com/news/raw_material.html

    “Indian iron ore FOB prices weaken by 3 to 7 pct this week
    Friday, 22 Jan 2010The Chinese imported iron ore market exhibited weakening trends in last few days, with lower grades seen more downslide.

    Transactions continued to be scarce in the physical iron ore market as traders stood on the sidelines. A few traders said some steel mills have stopped purchasing to prepare for more softening in iron ore prices.

    Last weeks announcement for credit squeeze resulting in down trend in Chinese domestic prices is attributed to weakening of spot prices of Indian iron ore fines this week

    But market players see this as a temporary phase and expect recovery to take place soon as Chinese steel production remains unabated pushing for higher volumes of iron ore. Moreover Chinese buyers are expected to secure tonnages before their incoming holidays”

  • sheba668 on 22 January 2010

    Jim, you envision a number of market corrections this year. Is this the year to “sell in May and return later in the year”?

  • tostoryteller on 22 January 2010

    Good advice, Jim. I would simply add that I think this is the time to really focus on investment strategy – not yours, but the one being pursued – and know why you are holding each of your investments.
    If you understand the reason for your investment then in dips like this it is important to nibble and add more to your positions. If that doesn’t make sense or you are afraid to do so, then selling might be the best thing to do right now. And, there is no shame in selling because you preserve your capital and the chance to come back into the market later. Enuf said.

  • GreatDoctor on 22 January 2010

    Great post!
    I like to see fear rather than bad news drive the market down.
    Long term it makes sense for China to try to pull back on the growth rate and fend off those pesky bubbles.
    If that makes you panic, then sell me your stocks and buy gold or treasuries or something…

  • francolargo on 22 January 2010

    Considering the steep selloff in the tech issues within Jubak’s picks, my gut tells me that they have less far to fall. With MRVL down about 9% just Thurs. and Friday – I couldn’t help myself and more than nibbled. Time will tell…

  • waylon01 on 22 January 2010

    Took a nibble on TXN this afternoon.

  • L943973 on 22 January 2010

    On the daily chart, the Dow index has already made its dip on the 26 day EMA and also on the 50 day EMA. The next logical dip would be at the 100 day EMA before a rebound. That would put it around 10,092. We need another good 80-100 point drop.

  • nukeage on 22 January 2010

    Thanks, Jim!

  • Skeet12 on 23 January 2010

    So, was it a mistake to buy Intel and Marvell last week on your buy recommendation? Wish I would have waited and taken advantage of this correction. Oh well, can’t win them all.

  • Shameus on 23 January 2010

    Thanks, Jim, for responding to concerns posted here about timing. I have begun the nibble, even into china with CTRP and DWG, and soon with BRF again. I wonder too if you could post on your Jubaks picks page how much that portfolio keeps in cash (as a percentage). That might be a useful reminder to the rest of us when to keep some around!! Thanks

  • bsorge on 23 January 2010

    What I like best about Brazil investments is that they are not dependent on the USA for success. We just are not major trading partners for them.
    As for sell in May and buy in October I don’t think that may work this year. Keep in mind that the tax rate on is going from 15 to 20% on capital gains so their will be heavy selling pressure in locked in gains at the end of the year.

  • javos on 23 January 2010

    Let’s see now…how many web-sites have I visited that have cited upcoming earnings comparisons as a reason to buy, particularly now since we’ve had a 5% correction, with maybe more to come. Do you not think that the market price ALREADY reflects this expectation, and selling will occur on the news? The market is now signalling a second-half deceleration as stimuli morph to drag. China is next week’s fish-wrapper. The real (mostly ignored) news is an over-leveraged and strapped consumer, scared of losing what jobs it still has, and now, after weekend media harp on a 5% loss in just 3 days, is wetting its pants for fear of more 401K losses. Whatdya think they be doing next week? Whistling a happy tune?

  • javos on 23 January 2010

    And don’t forget, you can make just a much money in a down market as in an up market. The speculators clearly moved to the short side last week, and volume signalled far more enthusiasm for the downside than we’ve seen in months for the upside. Why do you think the “10% short rule” is now imminent?

    If you’ve got cash, wait for the really “fat pitches”! Better yet, dip a toe into the “short” pool (SDS, TWM, TZA, etc.)

  • doydum on 23 January 2010

    I share javos’ pessimism. If you look at the market charts, you will see that whatever happened so far qualifies as correction. People are selling with the hope of re-buying at a lower price soon after, not that there is anything wrong with the fundamentals.

    But, if this selling continues next week, it will be bad omen because it will mean people are preparing for the 2nd half of 2010. (Jim and us are not the only people in the know of Big Bad 2nd Half.) Considering that stock market normally tries to anticipate 6 to 7 months into the future (not 3-4 months), people getting ready for the Summer months is a strong possibility. This is for the US.

    I am not sure how the weather be in emerging countries. To the extent that we believe in decoupling, we may invest in those countries but we should bear in mind that when investors get spooked here, they pull their money everywhere regardless of the performance of individual economies.

  • javos on 23 January 2010

    Finally, if you don’t understand that Wall Street will now be out to castrate Obama in November (by escalating OUR “misery index”), then you don’t understand what game you’re in.

  • viwi on 23 January 2010

    I share general opinion, that the market needed correction. It was simply overbought considering the state of the overall world economy. Even for China, where things are not as bad as in the US, P/E is skyrocketing for no particular reason other than government stimulus.

    It was obvious (for me, at least) that this correction is about to come, so “invested” heavily in all types if UltraShort funds.

    How long it will continue? I am with Jin on this one. I think next week it will continue to be bad. I think unemployment rates for January will look bad as well. My guess is that the major dip will happen just around second week of February. By that time, I will get rid of all my UltraShort purchases with an average return enough to make me happy, and I can purchase good quality stocks, which will be selling at bargain prices.

    Bottom line: buy low, sell high, and you do not have to buy at the very bottom and to sell at the very top to make enough money.

  • georic on 24 January 2010

    Like Shameus, I would like to know how much you consider smart to keep in cash (or short for that matter).
    Regardind bsorge’s contibution, Brazil sells to China which sells to the States, looping the loop.

  • doydum on 24 January 2010

    Politics of Investing by Barry Ritzhold:

    Look around at who made money during the “Obama Rally:” I know a disproportionate number of the people who missed this 70% market spike leaned Republican. But stupidity knows no party affiliation, and after the 2003 George W. Bush trillion dollar tax cut was passed, there was also a huge rally — and many of the ones who missed that one leaned Democratic. This is no coincidence — it is a function of bias and selective perception and an investing strategy co-opted by politics.

    http://www.ritholtz.com/blog/2010/01/what-balanced-market-reporting-looks-like-ft/

    What will happen next? Your political views will tell you. :-)

  • lanebieler on 24 January 2010

    If China unpegs the renminbi from the dollar, will Hong Kong follow? If not, would securities listed on the HK exchange reap any benefits from a subsequent rise in value of the yuan?

  • doydum on 24 January 2010

    Houston, we have a problem:

    The $700 Billion U.S. Funding Hole; Desperately Seeking A Very Indiscriminate Treasury Buyer

    http://www.zerohedge.com/article/700-billion-us-funding-hole-desperately-seeking-very-indiscriminate-treasury-buyer

  • DJBarber on 25 January 2010

    “China Data May ‘Under-Represent’ Bubble Risks, World Bank Says ”
    From:

    http://www.bloomberg.com/apps/news?pid=20601068&sid=ae3br1w84kS4

  • BenWobbles on 25 January 2010

    I absolutely donkey punched more shares of MRVL at 19

  • Jim Jubak on 25 January 2010

    Just becasue you asked, the Jubak’s Picks is roughly 30% to 35% in cash right now. It got lower in November when I made more buys than sells. Went back up in December when I sold more than I bought and then dropped again with my buys in January. I too would have preferred to by MRVL aznd INTC lower. But as some put it so well in this string, I know why I bought them, the long-term reason for buying them is intact, and I don’t have any significant buyer’s remorse at this point.(Talk to me if we drop another 10% or more, though.)

  • elnormo on 27 March 2010

    Hi Jim,

    Should we hold off on Brazil until after its central bank raises rates, maybe in April?

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