Do I enter now?

Do I enter now?This is the question that is bogging the people irrespective of whether one has lost a fortune in the Jan-Feb correction or one who is sitting outside the market. They would be very few, one in a million, who might have sold in Jan08. He (or She) might be laughing away to glory and I salute him for the foresight. It needs guts to sell when everyone is making money by the loads or atleast that is the perception. However, for not so lucky, the fall has been immense and gave no time to exit.

Coming to the more important question of whether one should enter now. There is no easy answer to this but I believe that there is more pain in left in US economy and as we are coupled with US it is relevant for us. Here are my arguments:

First: It was initially the banks that announced write downs. Now it is the insurers. Just about $200bn have been announced in write downs and there are indications that the figure may be less than half of what we will eventually see. We could hear more from hedge funds across the globe and banks from other countries like Japan and China.

Second: When a finance minister of Germany says that his estimation of write downs is over $400bn I would take him very seriously. Infact he might just be understating.

Third: When Fed is cutting rates so aggressively, one can clearly see that they believe that the pain in US is immense and I think one should respect that. When the President is putting money into tax payers pocket, one can understand the magnitude of the problem at hand.

Fourth: It will take a couple of quarters before the effect of monetary policy is seen in the release of economic data. Unless we see the change in trend of retail sales, housing sales and GDP growth we have no reason to believe that the health of the US economy has improved. Remember, the average of a US recession is about 10 months. In 2001 and 1990 it was 8 months and in 1981-82, it was 16 months. As economists put it, US is still not into a recession but on the verge of going into one.

As Benjamin Graham would suggest, in these kind of markets, one should have 25% of networth in equities and the rest in debt instruments or gold. For those invested in the markets, one strategy is to sell unconvincing stories on rallies to bring the equity level to 25%. There will be enough data points in the course of time to suggest which ones are the screaming buys. When any stock reaches that level, it is the time to make staggered buying. That’s the way to make money.