Wednesday, February 28, 2007

Take a Deep Breath

Hedgehogs always win the long-term race against foxes. Isaiah Berlin wrote this many years ago, and the thought can be applied to today’s stock market.

Fortunately, prices opened higher this morning after yesterday’s 3 ½ percent across the board correction.

What happened yesterday was that the U.S. and other world markets caught a dose of the Shanghai flu. Much of the selling was based on rumors that the U.S. Treasury and the IMF are messing with China’s free market boom.

However, it is doubtful that any of these rumors will ultimately pan out. The Chinese like prosperity, and they are trying to deregulate capital controls and develop a true functioning banking system that can accommodate currency convertibility.

Here at home—surprise, surprise—the usual round of doom and gloom pessimists jumped all over yesterday’s correction. The permabears exited their caves, heralding the beginning of the end. Only problem is, these guys have been wrong all throughout the Bush Boom.

The fact remains that profits are high and interest rates are low. This means that U.S. stocks are undervalued somewhere between 10-25 percent, even after a fabulous four-year run up.

So long as President Bush vetoes any anti-growth tax hikes, or union assaults against business, our strong and resilient free market capitalist economy will continue to do very well. Ditto for the stock market.

Periodic corrections are healthy. They represent good buying opportunities. As the late, great financier J.P. Morgan told a Congressional hearing a hundred or so years ago -- prices fluctuate. That’s why corrections come and go.

Yes, I still believe it’s still the greatest story never told.