AABP Award 728x90

Rebound is unpredictable, but bargains are undeniable


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Dear Mr. Berko:

Our broker thinks this stock market downturn will end by year’s end, and he wants us to invest $80,000 in eight aggressive mutual funds (list enclosed) by putting $10,000 in each. His reason for investing in those funds is that they are way down and he believes they will “double in the coming 18 months” as the market begins to rebound. Please give us your opinion.

H.S., Bend, Ore.

Dear H.S.:

Those are excellent mutual funds, and I know the portfolio managers of two of them. However, I’m willing to wager my roll of 1909 VDB Lincoln pennies to a can of Alpo that those funds will not double in 18 months. And I’m willing to make a lesser bet that the Dow Jones industrial average will not begin a true recovery by Christmas. I strongly doubt the Dow will move up enough in the coming 18 months for those eight mutual funds to double or even improve in value 25 percent.

I don’t know how long this downturn will last, but I can tell you with nearly 101 percent certainly that the economy will not recover by year’s end. In fact, there’s very serious concern it will be worse than the 1981-82 period, when the gross domestic product fell by 3 percent and the unemployment rate zoomed to 10.8 percent.

According to two noted and one very highly noted economist, we might experience a depression, which is defined as a 10 percent (or more) decline in per-person consumption. Now I know several families that have reduced their consumption by at least 10 percent (it’s not very difficult for many of us), and I think my family has reduced its consumption by at least 10 percent, too. Such an event has occurred only twice in our country: the Great Depression, 1929-33, with a decline in personal consumption of 24 percent, and the post-World War I years, 1917-21, when personal consumption fell by 17 percent.

Considering the economic slaughter occurring in many of the European Union nations, Latin America, Mexico, Russia and India, a depression with a prolonged recovery is a 50/50 possibility right now. So I can’t give you a hard number like “the downturn will last for one year and seven months” or “three years and two months.”

But I can tell you that I think 6,500 on the Dow Jones industrial average might represent the bottom. And I can tell you that the stock market has been vastly oversold. And I can tell you that if you are a patient long-term investor there are wonderful companies trading at bargain basement prices. I salivate when I see Bank Of America Corp. (BAC) at $7.48; Alcoa Inc. (AA) at $7.91; Pfizer Inc. (PFE) at $13.71; General Electric Co. (GE) at $11.19; Leggett & Platt Inc. (LEG) at $13.60; Sprint Nextel Corp. (S) at $4.41; The Progressive Corp. (PGR) at $13.82; Macy’s Inc. (M) at $9.95; Dell Inc. (DELL) at $10.33; Duke Energy Corp. (DUK) at $14.06; Federal-Mogul Corp. (FDML) at $8.20; Hartford Financial Services Group Inc. (HIG) at $9.41; Sun Microsystems Inc. (JAVA) at $6.56; Principal Financial Group Inc. (PFG) at $10.63; Reliant Energy Inc. (RRI) at $4; Liz Claiborne Inc. (LIZ) at $3.07; and the New York Times Co. (NYT) at $5.26, to name a handful.

I’ve been in this business as a professional since 1962, and I have never seen prices or values this low. If you are a patient long-term investor, I would own at least 100 shares or more of each of these issues, sit on them and wait three or four years for them to hatch.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service

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