Bad stock market news reports have repeatedly driven prices down in recent days. Investors are concerned that the European Community will not be able to escape from its debt dilemma. The US economy continues to languish in a barely noticeable recovery. Bad stock market news is typically considered bad news for long term investors. However, bad stock market news reports often precede a turnaround in stock prices. There are serious investors who say that when the headlines are the worst it is time to buy stocks as the recovery is about to start. We wrote recently about bank stock analysis in regard to another piece of bad stock market news reports. The US Federal Housing Agency is suing Bank of America – BAC, JPMorgan Chase – JPM, HSBC Holdings PLC – HBC, Deutsche Bank AG – DB, Credit Suisse AG – CS, and others. The federal agency alleges that the banks charged in the suit intentionally mislead both Freddie Mac and Fannie Mae, the government backed mortgage lenders when selling them some $200 billion in mortgages. Although in this bad stock market news reports set bank stocks down it remains to be seen how the situation will eventually play out and where the profits and losses will lie.
The basis for successful long term investing is still to find and buy underpriced stocks with strong earnings expectations and a margin of safety in the form of cash and unencumbered assets such as property and production facilities. Fundamental analysis of this sort has typically paid off in the long run. However, a problem for long term investors today is sorting out the truth of the matter from seemingly continual bad stock market news reports. Will the EU survive, will a debt default by Italy or Spain send the credit markets into a panic. Would such a situation be contagious with global consequences? The fear of the Euro and dollar continually falling drove the price of gold at the London gold fixing from $1,620 an ounce at the start of July, 2011 to $1,880 an ounce by August 23 before falling to $1,730 on August 25. Then, as Euro worries filled the news the London gold fixing has risen again to $1,888 on September 5 and 6.
Gold bugs expect to see further bad stock market news reports and commonly predict a gold price of $3,000 per ounce. Investing in gold certainly seems attractive in light of all the bad news. However, investors should be reminded of the panic that sent gold up in 1980 before it crashed, taking investor assets with it. Anyone who has invested in gold stocks and ridden them to profits might be thinking of buying puts on their stocks in case of another, more significant, market correction. Although gold stocks tend to rise faster than the price of gold in a rising market they also tend to fall faster when the gold market corrects, or collapses. It turns out that what might be bad stock market news reports for some might be good news for others to which investors in gold bullion, gold stocks, and gold ETF’s can currently bear witness.