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8:30 AM EST Tuesday, January 22, 2008: India and Hong Kong are down by over 10%. Japan and Australia slightly less. Most European exchanges are lower, especially Germany. Futures on American exchanges indicate a 5% opening drop. This is called panic. The baby and the bath water are being thrown out.

The panic is overdone. But it will continue. Fortunately most of us are out of most equities and safely in cash. We should be singing three mantras:

1. When in doubt, stay out.

2. Cash is king. Long live cash.

3. Watch and wait. All this will pass.

Two concerns:

1. No one still knows the extent of the capital markets contagion. Virtually all previous financial crises could be solved by writing a check. Not this one.

2. The media isn't helping, e.g. The Wall Street Journal ran a story yesterday with a headline, "If Recession Comes, It Likely Will Hit Hard." The Journal argues, "The combination of heavy debt loads, still-high energy and food prices and a weakening job market has households tightening their belts. Consumer spending, long a bulwark of the economy, is faltering."

There is GOOD news:

1. The markets have already taken a huge haircut.

2. The U.S. economy is remarkably resilient. Every executive and his uncle is scurrying around fixing his own disaster. That may involve scrounging money from the Arabs or the Chinese. It may involve firing young lawyers who were involved in securitization of bum mortgages. (Yes, it's happening.) It may involve dropping prices, running sales, etc.

3. Oil is dropping. It's down to $87.

4. There remain massive monies on the sidelines, ready to pounce on perceived bargains.

5. This morning, the Federal Reserve cut its fed funds rate by a huge 0.75% to 3.5%. In doing so, it said:

The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

My oil guru friend Jim Kingsale summed it up in an email to me this morning:

Oooops.

Here's the deal: today will start off very bloody. That part is already dialed in because of the foreign markets' action. The more interesting development will be how it ends. If the market happens to hit a low point and then rebounds to a higher start than where it ended Friday, it might mark the bottom for this current downturn. That's possible, but I think the likelihood of that is very small. So my judgment is that it is better to sell all non-core positions to mitigate losses in case today is just another day in a downturn that may last for more months, which is a greater likelihood than that today is the bottom.

While the opportunity to buy great companies at much lower prices will be a powerful temptation for investors to try to pick the bottom, the better part of valor will be to continue to stand aside until the stock market itself demonstrates some real optimism about the future.

Of course, no one knows what will happen. But I did love these two forecasts I read over the weekend. Presently the Dow is 12,098:

+ David W. Tice, a renowned bear, said Friday that the Dow would sink 50% to 6,000 by the end of the year as the country slides into a recession.

+ Abby Joseph Cohen, the superbull at Goldman Sachs, maintained that the Dow would roar back to finish 2008 at a level 22% higher — 14,750 is the number — as the economy perks up later in the year.

While their views diverge, both agreed on one point, according to The New York Times: The wild ride is far from over. In whiplash trading, the Dow has fallen 14% from its peak in October. While the market has taken deeper dives in the past — it plummeted 37.8% from January 2000 to October 2002, for example — volatility is approaching its highest levels in several years.

What happens to stockmarkets during a recession? The Times addressed it in a piece called "A recession's impact is all in the timing." Here are the main findings (published before today's big rate cut):

If the economy is already in recession, the Fed will probably have more impetus to cut short-term interest rates to fuel economic activity. And as Nick Raich, director of equity research at the National City Private Client Group in Cleveland, said, “if the Fed is going to get aggressive from here, it could give a boost to stocks later in the year.”

Aggressive rate cuts could also shorten the duration or severity of a slowdown.

In most cases, stocks tend to rebound as the economy emerges from a recession. The S.& P. study found that after 10 of the last 11 recessions, stocks soared in the ensuing six months. On average, the S.& P. index gained 12.1 percent.

If you measure the market’s performance from recession lows, rebounds are even more compelling. Ned Davis Research looked at the last 10 recessions and found that stocks rose 24 percent, on average, in the six months after hitting a recession low. That is why Tim Hayes, chief investment strategist at Ned Davis, said that while a recession could continue to pressure the stock market, “it could also lead to a great buying opportunity.”

Of course, there are no guarantees that the market will hit bottom in the middle of this slowdown. For instance, after the last recession ended in November 2001, stocks fell 18 percent over the next 12 months.

Still, there are reasons to believe that this will not be a repeat of the bear market of 2000-2.

For starters, Mr. Stovall said, “valuations in the market lead me to believe that this market decline will end up being either a correction or a very light bear market.” Although the price-to-earnings ratio of the S.& P. 500 approached 40 in the final stages of the 2001 recession, the ratio today is only around half of that, indicating that stocks aren’t nearly as pricey.

Moreover, Mr. Raich noted that while profits were likely to take a hit in an actual recession, the weakness in earnings in the third and fourth quarters of 2007 would make for relatively favorable comparisons in the second half of 2008. “So there are some bright spots for the market,” he said. “They’re just being overshadowed right now by all this recession talk.”

Rye Bread:
Two old guys, one 80 and one 87, were sitting on their usual park bench one morning.

The 87 year old had just finished his morning jog and wasn't even short of breath.

The 80 year old was amazed at his friend's stamina and asked him what he did to have so much energy.

The 87 year old said "Well, I eat rye bread every day. It keeps your energy level high and you'll have great stamina with the ladies."

So, on the way home, the 80 year old stops at the bakery.

As he was looking around, the lady asked if he needed any help.

He said, "Do you have any rye bread?"

She said, "Yes, there's a whole shelf of it. Would you like some?"

He said, "I want five loaves.

She said, "My goodness, five loaves..by the time you get to the fifth loaf, it'll be hard"

He replied, "I can't believe it, everybody in the world knows about this stuff but me."

Racial discrimination.
A class of five-year old school children return to the classroom after playing in the playground during their break time.

The teacher says to the first child "Hello Becky, what have you been doing this playtime?"

Becky replies "I have been playing in the sand box".

"Very good," says the teacher. "If you can spell 'sand' on the blackboard, I will give you a biscuit." Becky duly goes and writes 's a n d' on the blackboard.

"Very good," says the teacher and gives Becky a biscuit.

The teacher then asks, "Freddie, what have you been doing in your playtime?"

Freddie replies "Playing with Becky in the sand box."

"Very good," says the teacher. "If you can spell 'box' on the blackboard, I will also give you a biscuit."

Freddie duly goes and writes 'b o x' on the blackboard. "Very good," says the teacher and gives Freddie a biscuit.

Teacher then says, "Hello Mohammed, have you been playing in the sand box with Becky and Freddie?"

"No," replies Mohammed, "I wanted to, but they would not let me. Every time I went near them they started throwing sand at me and calling me nasty names."

"Oh dear," says the teacher. "That sounds like blatant racial discrimination to me - I'll tell you what, if you can spell 'blatant racial discrimination' I will give you a biscuit."

Apologies for today's late posting:
My web hoster -- a miserable company called web.com -- screwed up yet again. I sat for over half an hour on hold with them. It's time to find a new web hoster. Once upon a time they were fine, then they merged. Today they told me they upgraded their server and "it's a "bug on the server, we're calling Microsoft."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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