A Ticking Time Bond?

By: Bugra Bakan

Q: Why do Economists make predictions to the nearest tenth of a percent? A: To prove they too can have a sense of humor.

This is my fourth calendar year writing newsletters, and second in TABC Blog. Time surely flies If we don’t pay attention to where we are today in relation to our longer term goals, we may find ourselves getting a wake up call rather late in the game. The key question for someone in my position to raise is: do you have a financial plan and how are your current financial circumstances positioned in relation to that big picture? More on this later.

In every bull market regime there are naysayers, who are not convinced. When the market is down, they warn you of a value trap. A value trap is a condition when the price to earnings (P/E) ratio is low, which is usually one of the reasons to actually start investing. Ideally, you’d rather pay less for given earnings and that’s why when prices fall, stock screeners trigger a buy signal to a value strategist. Since it can’t be that simple, what could you be missing? This is where the value trap comes in. Are you getting what you are paying for, a low quality stock? A low P/E may be a warning for deteriorating earnings, which would further push down the price of your investment and that’s when you fall into the trap.

When prices go up, these naysayers will say that the market is overbought, too stretched, due a correction and resembles the last “sucker’s rally.” A sucker’s rally is typically seen just before a peak and a sharp drop after, or will follow lows and attract those who think the bottom is seen only to find out that this was a “dead cat bounce” and there is more room to the downside.