James,
I will attempt to provide some additional insight but I have to put a disclaimer upfront, that I am one of the many that try to read the leaves these days as to what is going on and where we are going. So,...
1. You are right about leverage. In the 20's it was the ability to margin more than 50% (than is available today, to folks like us). Today, however, you can create leverage differently. For example, with the same amount of money you can buy/sell options leveraging several times your initial investment. More importantly, professional players, like hedge funds, can leverage themselves many times using derivatives (if they manage to convince the Banks they are dealing with - which they did until now). So in this respect, we are in a situation like the 20's. However, at that time, the Fed was not as astute/cognizant as to waht was going on and did not provide liquidity. I think in today's market, Greenspan will, walking, though,a very fine path between making it expensive for the leveraged guys and protecting the system. Hence my view, that we will not have crash.
2. As liquidity is drying (and it will continue, because of the desire to "take-out" some of the leverage from the system), it leaves first the outskirts of the system, that is, Asia, Russia, and possibly Latin America, returning to metropolis - the US markets and to some extent the European markets - which are the largest, deepest and most liquid markets in the world. This is the second reson that I think the US markets wil not crash. They almost act as "safety heavens" of the world. And that is why I think the $ fall is temporary.
3. All these developments are taking place in the financial world and have not affected (yet) the real economy in the US. So, the Dow Jones non-financial components which earn most of their money domestically, should not be affected by all of the above. In fact, the more domestic the more insulated they should be. Of course when," the market" falls, everything moves in sympathy because of relative valuations.
4. As to our "favorite" stock, it seems to be suffering from all of the above, i.e., general market downturn, negative expected impact on networkers from the fact that banks - big spenders on IT - will cut their IT expenses, and from shooting itself in the foot with the preannouncement. But things have reached the point where, rational thinking has to prevail. 1.5 x revenues as a valuation is irrational, unless the market expects that FORE's revenues will collapse in the future, or the other firms (CSCO, ASND, COMS, XYLN, etc.) will come off significantly, as wel. Since FORE is not (yet) an opinion or trend former, the bet is really whether their future revenues will go up or down. I am comfortable in taking this bet, that is why I have increased and will increase further my position. The question that I have not answered yet satisfactory to myself, is whether this is the best place to park my money for the next few months, given the abundance of many other bargains. That is why, some of my buying has been in the form of longer-term puts (sell) and calls (buy). In my view this is a betterway to leverage!!! my view...the last famous words!!! I hope it does not come and bite me in the ..s
Regards
Tavros |
