Editor's Note

08/09/2007 12:00 am EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

August 9, 2007

Up one day, down the next.

So, when will this correction be over?

The nasty sell off that hit like a tornado on Thursday, July 26th has certainly spooked investors and spurred endless hand wringing in the two weeks since.  Fear reached a crescendo last Friday when the Dow Jones Industrial Average plunged nearly 282 points on massive volume.

Earlier this week, however, the storm appeared to have broken: the Dow moved up smartly on good volume and a widening spread between advancing issues and declining ones, which technicians use to gauge the health of a market.

On Wednesday the Dow surged nearly 154 points, as a hefty 2.6 billion shares changed hands on the New York Stock Exchange. The Standard & Poor's 500 index rose 1.4% rose while the NASDAQ Composite index surged 2% on a strong earnings report from Cisco, that great market bellwether of the dot.com era.

But then reports that French bank BNP Paribas would freeze three funds invested in-you guessed it-US subprime mortgages sparked panic selling that drove the Dow down by 240 points Thursday before it had clawed back by mid-morning.

What's going on? We're in the midst of a tug of war between fear about the unknown (how far the current credit crunch may spread) and what investors can actually see (a strong global economy and plenty of money to go around).

On Tuesday the Federal Open Market Committee announced that the US economy was in good shape but that it was monitoring conditions in credit markets and remained on the case about inflation. Translation: don't panic.

But it is August, when, as I've pointed out here you can't count on anything, least of all your lying eyes. As real people go to the beach or the country, speculators take over, pushing the market up and pulling it down at their whim, as Ben Stein admirably described here.

And something really is different this time: The credit markets are partially shut down amid what's been described as a "buyers' strike" against riskier paper. This is definitely a Good Thing in the long run as weak players get shaken out, but it could create a lot of agita until the fall, when push comes to shove on certain big buyout deals.

So, to repeat my first question: When will this correction be over?

Unlike the handful of truly great market timers who claim to call short-term market turns reliably, I don't pretend to be able to do that. But consider this:

The two earlier selloffs this year-in March and June-fell far short of the textbook 10% correction in equity prices the pundits insist we need. Even last year's "sell in May" slide took the S&P 500 down 7.8% from peak to intraday low.

If the worst of this correction is over, then the S&P will have fallen 8.3% from its intraday peak of 1555.9 to its August 6th intraday low of 1427.39. The Dow will have fallen 7.2% from intraday peak to trough just below 13,100.

That looks like a real correction to me.

To get to the magic 10% number, we'd have to fall to 1400 on the S&P and 12,600 in the Dow. It's possible, but don't hold your breath. Markets don't accommodate human beings' desires to tie things up in neat packages.

And as the Nobel Prize winning writer V.S. Naipaul once advised: "Never become hypnotized by the beauty of numbers,"

But the bigger question is, what's down the road?

As I've said here, I think we're in a correction, not a new bear market. At some point-maybe after the Beijing Olympics and next year's US presidential election-the bull may run out of steam.

But barring some big credit problems that threaten a major bank or Wall Street firm, I don't see anything that can keep stocks from reaching new highs.

Again, I come back to the strength of the world economy. And even the much-maligned US consumer, supposedly tapped out by mortgage debt and squeezed by high gasoline prices, isn't down for the count: a recent Conference Board survey reported consumer confidence at a six-year high.

Another untold story: business spending is rising and companies are in great shape financially.

Businesses' capital spending has picked up, and "business construction surged 22%, the largest quarterly advance in 13 years," reports James C. Cooper in BusinessWeek.

Meanwhile, Cooper continues, "cash on the balance sheets of nonfinancial companies was running at a record $1.2 trillion" and "the ability of profits to cover interest is at record levels."

That means America's leading companies have locked in enough low-cost, long-term debt that they can stay away from the credit markets until the current storm blows over. .

And The Blackstone Group (NYSE: BX), whose ill-fated initial public offering allegedly signaled the top of the market, just raised $21.7 billion for the single largest buyout fund ever. Although much of that fund was presold, somebody must think deals will get done again soon.

I believe pundits and the media have exaggerated the extent to which the current market has been driven by deals, buyouts, what have you. The real story is simply the great global economy. Liquidity is created not just by hedge funds and buyout shops but by the emergence of once-struggling economies as engines of growth. And that's real wealth they're creating, not funny money.

As I said, it's August and the market may act like a roller coaster for a while, but if it tests its lows again, those of you who are still around may find good buying opportunities.

I won't be-at least next week, when we head off to the shore for vacation, and I plan not to pay much attention to the markets if I can help it.  Nancy Zambell will fill in for me, and I'll see you after that!

Comments? Please email us at TopProsTopPicks@InterShow.com

Howard R. Gold is editor-in-chief of MoneyShow.com. The opinions expressed here are his alone and do not necessarily reflect the views of InterShow.

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