Stocks: Bargain or trap?

When the stock market goes on sale, smart investors are supposed to seize the opportunity.

But Wall Street's decline of the last three weeks has been so drastic, it has left even veteran money managers too afraid to step up.

Aren't stocks cheap yet? Nearly everyone agrees that, on paper, they are, with major indexes such as the Dow Jones industrials now at five-year lows and down more than 40% from a year ago.

Yet instead of attracting bargain-hunters, lower prices have had the opposite effect: Stocks have crumbled so quickly recently that many potential buyers have been driven back to the sidelines.

"A lot of things looked cheap a week ago -- then they cratered in your face," said Mark Foster, chief investment officer at money manager Kirr, Marbach & Co. in Columbus, Ind.

Charts of stock prices "all pretty much look the same," Foster said: The trend lines simply drop straight down beginning in late September.

Shares of machinery giant Caterpillar Inc., for example, had dived to $43.13 by Friday from $64.13 on Sept. 26. Retailer Nordstrom Inc. fell to $18.38 from $29.19 in the same period, while energy titan Chevron Corp. slumped to $57.83 from $86.95.

For investors who hunt for value in the market, "no formula is working now," said Brian Barish, head of Denver-based Cambiar Investors, which manages more than $5 billion for clients.

"If you bought something, it has just gotten clipped even lower," he said.

On some level, of course, nothing is new here. Bear markets are supposed to be frightening, and they're supposed to severely test investors' patience.

And by the time they run their course, many stocks inevitably are at bargain levels -- yet buyers are scarce.

The old maxim is that stocks are the only thing people want less of as prices drop; with any other product or service, consumers tend to love to buy on the cheap.

Typically, the market falls because investors are anticipating economic trouble that will slash corporate earnings.

That is true this time as well. But the root cause of the economy's woes is the credit crisis that is gripping the global financial system. And the credit situation is so far-reaching and so dire, it has left many investors hard-pressed to gauge the ultimate effect on share prices.

In the near term, the credit market turmoil is forcing some big investors to sell stocks without regard to what they might believe the securities are worth in the longer term.