Sunken Treasure?

If stocks are finally near the bottom, which is the emerging consensus, a lot of market truisms fall neatly into place. Sure enough, in the end bear markets leave no places to hide. "Safe" havens like Coca-Cola and Philip Morris crashed more than 20% as the Dow plunged in June and July. Sure enough too, the collective wisdom of the market understands recessions better than the economists. Last week's revised figures show the economy contracted in not just one but three quarters last year. That deep pullback helps explain why the market began tanking in 2000, when economists were insisting the R word was overblown.

And, it turns out, we really do sell when we should buy: more than $30 billion flowed out of stock funds in July, the biggest one-month exodus since the 1987 crash. Selling stocks when prices are so low is "insane," says Morgan Stanley global strategist Barton Biggs. That scared money missed the Dow's 1,000-point rebound.

Throw in unusually high levels of short selling (a bet that stocks will fall) and frenzied institutional selling that drove the Dow to its closing low of 7702 on July 23, and you have a classic snapshot of how bear markets are supposed to end. Some market gurus now say the average stock is undervalued by 20% or more. Even if the major indexes haven't hit rock bottom, individually "many companies likely have hit their low," says Donald Straszheim of the economics firm Straszheim Global Advisors.

The analysts don't always get it right, of course, and many stuck far too long with stocks that plunged. This could be yet another false bottom. Three times since the Dow's descent began in January 2000 the market appeared ready to turn higher, only to suck in investors and saddle them with more losses. And a bottom does not signal an uninterrupted ride to higher ground. "After 20 years of a bull market, the bottoming process could take a long time," cautions Wallace Weitz, manager of Weitz Value fund. "The Dow could trade in this range [7700 to 10,000] for years."

Still, optimists are getting easier to find. Investors generally are encouraged by tough new laws on corporate fraud. Widely admired General Electric gave investors reason for hope last Wednesday, when it joined a growing list of companies that plan to treat stock options as an expense. Accounting rules don't require this, but not doing so has helped executives hide the truth about their companies' profits. And Stanley Works has scrapped plans to relocate in tax haven Bermuda. Though the decision sent its stock lower, it's likely to lead other companies to reconsider that ethically shaky strategy and is a sign that pressure on ceos to do the right thing is starting to work.

Want to put a face on the case for investing now? Try Warren Buffett's. In the past few weeks the fabled Omaha, Neb., investor has provided hundreds of millions in financing to telecom firm Level 3 Communications and energy firm Williams Companies. He bought a jewel of a natural-gas pipeline from Dynegy at the fire-sale price of $928 million. More illuminating: Buffett advertised himself as a buyer, telling the Wall Street Journal that "if I got a call this afternoon and somebody offered me A, B or C--securities, assets or a business--and it looked like a good idea, we could sign up a deal tonight. We move fast, and we always have cash."