Panic selling can decimate a market.
It can put the best growth and value stocks on their backs and turn the most dedicated investor against them.
It can turn love to hate, joy to misery, laughter to tears, and worst of all it can turn experienced buyers into sellers and believers into short-sellers.
So last week, with the markets in Mideast-style turmoil, I decided to pick the brains of many of my contacts who are some of the savviest investors I know.
Some of my contacts are major players on certain exchanges - meaning on certain days, they are the exchange. And I can tell you that many of these players are nearly 100% in cash, out of the market completely convinced we're headed for a meltdown reminiscent of the 1987 crash.
They have recounted to me recent stories of public companies going to banks in an attempt to withdraw their funds from money market accounts, only to be denied.
For these folks, that was the last straw and they rushed the exits.
On the flip side, some of my other contacts are putting money to work, buying on every dip and building huge positions.
And then there's a third group - I call them the "no commitment group." They're playing the market on both sides - selling rallies, buying sell-offs.
With these 3 groups in a battle royal, the market is in the age-old struggle between fear and greed. Nothing has changed.
Déjà vu All Over Again
I've been in the market for the past 14 years. And in those 14 years, I've experienced what I consider 3 genuine market meltdowns:
1) Asian currency crisis:
2) Dot.com bust:
And 3) post 9/11 crash:
In 2 of the three cases - the currency crisis and the 9/11 crash - they were excellent buying opportunities. But the period after the dot.com bull was a classic bust.
Many of the doom-and-gloomers I talk to are comparing the current housing debacle to the dot.com boom and bust.
Their argument is compelling. Here it is...
Internet: During the Internet mania, young kids fresh out of college could go to an investment backer with nothing more than a business plan written on the back of a napkin and get seed capital to go public.
Housing: Between 2003 and 2006, mortgage lenders started offering Stated and Alt-A mortgages. As housing expert Steve Christ has told us on several occasions, if a buyer had a heartbeat, a broker could get him a mortgage. The buyer didn't need to show proof of income... all that was required was that the buyer "state" his income.
Internet: The age of worthless paper: Internet stock.
Remember pets.com? Yeah, brilliant idea - buying a 50 pound bag of dog food and have it delivered to your doorstep by UPS. Sure, the shipping costs were more than the actual product, but who cares. This was the "new economy."
Pets.com raised over $80 million in its IPO.
Seeing the money flow freely, a conga line of Internet IPOs stormed into the market with such ubiquitous names as eToys.com, hardware.com, stamps.com, garden.com, TheMan.com and furniture.com. Everybody was making money. The NASDAQ posted an 84% return in 1998. +84%!!!!
Like all manias, the Internet bull market depended on one, vital thing: A steady stream of new buyers to continue to bid up shares of Internet names.
But on March 13, 2000, it happened. Nobody knows who it was or how it happened, but somebody, somewhere didn't hit the bid for shares of Pets.com. And when that happened, everybody else followed suit. Internet stocks went no bid.
The bull was over.
Housing: The age of worthless paper: Subprime mortgages.
Fast-forward 6 years, and the exact same scenario is being played out in the housing market.
We've all heard the stories of home sellers getting 10 offers the first day their house hit the market... and getting $20,000 above asking price. These are the telltale signs of a market disequilibrium - too many dollars chasing too few assets.
The market responded accordingly - increase the supply of the asset. But then, within a year, it turned from a market adjustment to a mania as home flippers (the stock market equivalent of daytraders) saturated the market.
Again, the housing bull depended on the same thing that kept the Internet mania alive: A steady stream of buyers to bid up the value of homes.
But once you've tapped out the bottom of the barrel for buyers, you run out of buyers. This leads to declining home sales, which leads to declining home values.
When home values are declining at a time when rates of owning that home are going up, it becomes a perfect storm for a bust. Homeowners begin to default. And the buyers of these mortgages run from them as if they were on fire.
Somebody will be left holding the bag... and President Bush hinted last week that the bagholder might be you, the American taxpayer.
That's the bear case in a nutshell.
On Wednesday, I'll present the bull case, which is the camp I'm in. I believe the current mortgage crisis is akin to the Asian currency crisis, and hence, a buying opportunity.
P.S. On Wednesday we'll also publish our Subscriber Bill of Rights.