Stock Pullback Is Buying Opportunity, Not Meltdown

Uh, not exactly. Just five weeks ago stocks were at all-time historic highs. And now, as of Thursday's close, they're about 6% off those highs.

Meltdown? This hardly qualifies as a correction. Even at the worst of it last week, the S&P 500 never closed even 10% below its highs. If this market move has you freaked out, then you need to find something else to do with your money other than investing in stocks. Ever consider taking up stamp collecting?

Everyone's saying that the financial system is "broken" thanks to losses in subprime mortgages, and the collapse of exotic loan securitization structures like collateralized debt obligations, or CDOs. So how come the financial sector of the S&P 500 has performed better than the overall market during this alleged meltdown?

Guys and gals, take a stress pill and count to 10. This is nothing. At least for most investors.

Don't get me wrong. If you're a hedge-fund manager stupid enough to buy CDOs at 10-to-1 leverage, you're probably considering a nice new career in taxi driving right about now. That's real.

And if you bought a new home you couldn't really afford based on a teaser mortgage rate that you were sure you could refinance before the rate reset — but now you can't, because there aren't bargains in mortgages anymore — that's real, too.

This is like Hurricane Katrina. If you lived in New Orleans when it hit, then it was a profound personal tragedy. Thousands of such personal tragedies added up to lots of money, call it $100 billion plus. But in the grand scheme of things in the overall economy, it doesn't even register on the radar.

To paraphrase Humphrey Bogart in "Casablanca," the troubles of a few thousand little people don't amount to a hill of beans in this crazy economy. And if you're an investor, that's the way you have to think about it. That's why stocks really haven't been hit all that hard, despite the horrific economic scare stories that fill the headlines every day.

If things are so bad, then how come people aren't being thrown out of work? Weekly unemployment claims have been steady as a rock throughout this purported crisis.

If things are so bad, then how come corporate earnings aren't imploding? Just the opposite. Consensus earnings estimates have moved to new all-time highs, even higher than they were a month ago when stocks were at all-time highs. And that goes for the supposedly "broken" financial sector, too.

Are you beginning to see why I wrote here two weeks ago not to let the panic-mongers stampede you into selling, but instead look for opportunities to buy stocks cheap?

The really smart investors are buying, not selling. Goldman Sachs (GS) invested $2 billion of its own money in its troubled hedge fund last week. And this week, Bank of America (BAC) invested $2 billion in the troubled mortgage firm Countrywide Financial (CFC).

Trust me, when these players are buying, you don't want to be selling.

Goldman and Bank of America aren't the only smart players keeping their cool right now. Thankfully, Federal Reserve Chairman Ben Bernanke is, too.

It would've been so easy for Bernanke to cut the federal-funds rate by now. Alan Greenspan did that in 1998 during a similar financial crisis. He cut rates three times — and once he did, the crisis had actually already passed. But everyone was freaked out just like they are today, and they were demanding rate cuts. Ever the politician, Greenspan cut rates. It got him on the cover of Time magazine as chairman of the "Committee to Save the World."

Bernanke is no politician. He's an academic, and a serious student of monetary policy. He's not thinking about the cover of Time. That's why he hasn't cut the fed-funds rates, and why he's not going to.

He's not perfect. In fact, that he made interest rates so low for so long is part of what got us into this mess in the first place, by making it so easy for people to borrow money for mortgages that they couldn't really afford.

But now Bernanke gets it. He understands that lowering rates across the whole economy isn't what the markets need right now. Instead, markets need a little liquidity to help the supposedly "broken" financial system repair itself as quickly and painlessly as possible.

That's why last week Bernanke lowered the discount rate, not the fed-funds rate. The discount rate is the rate banks pay for loans directly from the Fed, to help them meet short-term liquidity requirements. That's just what the banks need right now, and it's already started to restore confidence in the financial system.

So here's the play: Buy stocks on dips. There will plenty of dips while the panic plays itself out. But the bottom is in, and I think you can buy with confidence now.

And get out of Treasurys. They've been bid up as a "flight to safety" and as a bet that the Fed will cut rates. Now, with each passing day, confidence will creep back into the market a little at a time, and safety won't be so important. It'll become increasingly obvious that the Fed won't be cutting rates and doesn't need to.

Remember, as an investor, panic is your friend. Let it make the bobble-heads on TV and all the fools willing to listen to them sell everything at rock-bottom prices. Be there with your own strong hands, buying 'em up.

Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.