Here come the suckers

In every bear market, there comes a moment when reasonable people say “Enough is enough. Let us take a stand. Prices are now 20% lower than they were a month ago. The market is cheap. We will buy and show that we are wise.”

These reasonable people are called suckers. They mistake “cheaper” for “cheap.” They’re trading the market looking in the rear view mirror. Watching the sunny day behind them, they don’t notice the tornado just ahead.

I write this because stocks are up in overnight trading because IBM’s Q3 results were good and IBM projects strong numbers going forward.

I.B.M. said its third-quarter net income rose 22 percent, to $2.05 a share, which was 3 cents higher than analysts’ consensus estimate, as compiled by Thomson Reuters. …

I.B.M. went beyond saying it did well last quarter. It also reaffirmed its previous guidance for its profits for the entire year, despite the weakening economic outlook in the United States and elsewhere.

The company expects to earn $8.75 a share for 2008, a 22 percent increase over 2007.

Just what the suckers need to hear.

“Valuations look attractive,” said Espen Furnes, an Oslo- based fund manager at Storebrand Asset Management, which has the equivalent of $48 billion. “It’s time for a rebound, the stock market has just fallen too rapidly. IBM’s numbers show that it’s not all doom and gloom out there.”

No, Oslo based Espen Fumes IBM’s numbers show that Q3 was OK and IBM economists and treasurers haven’t absorbed (or can’t yet admit to themselves) that things have changed.

See Espen, it’s like the seasons. Plants that grow in the summer doesn’t grow in the winter. Animals that eat those plants either hibernate, migrate or die. Espen doesn’t know it yet, but it’s now officially winter. Winter, Espen, is a silly time to plant seeds or buy swimming suits. And its a silly time to buy stocks. Even if the market does rally 10% in the coming week — and it easily could — the downside risk is still far greater than the upside.

We still do not know — and IBM forecasters certainly do not know —

Plenty of folks bought Lehman Brothers at $20 a share in August because “Hey, it’s trading at a 60% discount to its price in May, this is crazy cheap!” They discovered crazy cheap can, in hindsight, be crazy expensive when shares are headed in a matter of days to $0.17.