Principles of the Stock Market : Capitalism

IBD 100 'New Names': Using Sir John Templeton's Approach

Richard Schwartz — Tue, 15 Sep 2009 13:17:00 GMT

IBD 100 ‘NEW NAMES.’ Only three new names hit the latest weekly (September 14^th, 2009), computer-generated IBD 100 list of “leading growth companies,” those companies showing good fundamentals, having some institutional sponsorship, producing solid earnings growth and outperforming the average stock. Three new names is about the norm. And Investor’s Business Daily(IBD) in its commentary, is pretty calmed down and happy now that its list is acting normally, leading the general stock market, writing this week that: “Whenever leading stocks post the best gains, it’s a sign of health for the market and its leaders.” When this list lags, it worries IBD and until recently it had been lagging for many months now.

New Names Mkt IBD Industry

Price Cap Rank Rank Business Line

ECPG Encore Capital 16.47 378m 72 45 Resale of unsecured, discounted loans

CNSL Consolidated Comm. 15.26 451m 88 152 Local phone service in TX/IL

WLT Walter Energy 61.86 3240m 99 48 Goal miner/degasifies coal beds

Schwartz View: My continuing strong suggestion for growth investors searching for big winners is to research in depth all ‘new name’ companies when they first show up on the IBD 100 list. I believe this one approach alone could pretty consistently make you handsome profits. (My opinion is arrived at after trying out as many stock market approaches as I could unearth searching full time for over 20 years.) Many of these companies go on to become ‘ten baggers’ over time and you’re finding them, when they first appear on this list, before the crowd, and thus if you do follow through and finding out exactly why they are in fashion, you can be a ‘first mover’ in buying them. Plus your research -- so easy in today’s world of the Internet -- clues you in to many, not so incidental, trends in the economy providing you insight into the Big Picture as well. Again, because companies appear on this list for some reason, “your mission, if you decide to accept it,” is to find out EXACTLY why. One way to manage this approach, once you satisfy yourself about just why a company hit this list, is to use the Sir John Templeton approach, buy a small amount of each stock and put it away for some time. Remember Mr. Templeton bought 100 shares of all NYSE traded depressed stocks trading under $1 a share during WWII. A few years later he had quadrupled his money. His missive to us future generations is that some won’t work out, some will trade sideways but the big winners will provide you with a handsome overall profit. Thanks Sir John Templeton!

Let’s see, this week a cursory look tells me that Encore Capital seems to be in a sweet spot. There’s a ton of bad loans floating around today so business is there for the company which comes up with a way to profit. As for Consolidated Communications, I’m not sure why a company in a very low ranked sector (IBD rank 157 of 197) and a local phone service provider made the list. Maybe a takeover? Your job, again, is to find out why and if you’re satisfied there’s big potential, buy a few shares. Finally Walter Energy, a coal coking company, maybe made the list as coal companies surge as natural gas rebounds on speculation of increased steel output from China. I’m not sure I buy into that as a good enough reason but again there may be some hidden, deeper reason which in depth research will unearth. Net, net, if you find solid reasons for these and/or any ‘new name’ stocks, one fundamentally solid market approach would be to buy a small equal dollar amount of each. Then put ‘em away. Yes, ‘buy & hold,’ exactly the approach most advisors today are saying doesn’t work anymore. Remember, take the road less traveled in your stock market approaches and you’ll generally come out on top. Ask Mr. Buffett and others of his ilk.

Stocks Have Risen When The Economy Is Down

Richard Schwartz — Mon, 03 Aug 2009 14:49:00 GMT

THE BIG PICTURE

The key thought: History shows the economy can be bad and the stock market good! Understanding that one idea is key to making a logical decision about the stock market here. I tried to get this across at Elizabeth’s 9^th birthday party to the family Saturday. The stock market is climbing its “wall of worry.”

THE SITUATION. My stock market and economic history studies of the Great Depression of the 1930s convinced me that stock market can rise while the underlying economy remains in a very weak condition. Because it’s happened before. In the 1930s depression, even while US unemployment remained at horrific, double digit levels for the whole decade and with few safety nets in place to help destitute Americans and with great ongoing divisiveness between political parties, the stock market posted a five year bull market run up, from 1932 to 1937. So, yes, there can exist a great disparity between the stock market and the economy. This confounding, confusing conundrum can exist as long as the economy is not sinking and/or when the economy stabilizes, no matter at whatever low level of economy activity. I believe that’s because the US capitalistic economy is essentially revitalizing and self-healing. Helped today, because over our history our capitalistic system has grown so large and diverse. In other words, first because Americans, with our continued open borders to any nationality, are a breed of extremely ingenious risk takers and thus will find ways to survive and prosper if allowed to do so. If, from time to time, when capitalism gets in a bind, it gets jumpstarted. Or gets the table reset when it knocked awry. Secondly, because today, there just are so many different industries, businesses, ideas, innovations in all parts and regions of America. Just meaning that while construction and manufacturing are down, maybe technology and the media are up. Or while Michigan is down, Tennessee is up. Or while big business suffers, smaller businesses spring up. I’m too provincial to see all this metamorphosis first hand and thus explain this concept more completely but what I see today is an America in downsizing mode, say moving to a rightsizing scale, but not in total collapse mode. Just like China, America in our own way is using this crisis, individuals one by one, businesses one by one, even the government is adjusting, although not totally because the government is itself the ultimate safety net when any major crisis hits. Our government, we’ve learned from past crises, is the rarely needed (thank goodness!) jump start provider, booster or table setter. Thus today America is using this financial crisis to rid our economic system of the bloat, the fat, all the long built up excesses, our bad behaviors and habits, particularly our overspending, even the corruption which always builds up during “unfettered capitalism,” seemingly prosperous but under the surface unhealthy, unsustainable times. Exactly why economists look at recessions as normal, healthy and needed cleansing events and why throwing money at any and all past downturns in recent decades led to this larger than life recent disastrous event. Schwartz View: My conclusion thus -- to get back to my opening statement that stock markets can rise while our economy is down and dirty, weak and lackluster and in substantial downsizing mode -- is that what investors mainly have to fear today is indeed fear itself. That fear partially coming from not being able to understand how the stock market can rise as we read about and see big economic trouble all around us. As I see it that’s investor’s biggest bugaboo now. We all know or should know that, as William O’Neil, founder of Investor’s Business Daily has always stressed, that success favors the optimist. Now I don’t mean the Pollyannas, I won’t besmirch the many of this ilk whom get be angry, they got their comeuppances by getting blindsided and riding the stock market down for 17 straight months between October 2007 and March 2009. But today, since we’ve moved past the bankruptcy risk, at least for the time being, no guarantees about future shocks knocking not us back down, we should overcome our fears and our misunderstanding of the economy and stock market relationship and again participate in the stock market to the extent of our own financial goals and objectives and how we’ve performed over the last two, years, during the bear market since mid-2007. To reiterate since this concept is so darn important, the hardest move to make is to buy stocks after this financial earthquake and while we see all the resulting damage around us. In other words, to separate the stock market from the economy. It’s very difficult for us investment professionals as well because every day we watch the stock market closely and/or read every update about each remaining financial problem. We all need to overcome our fears to make money during this full cycle. Easier said than done!

THE ECONOMY

The economy is so large and varied now that even with the shock and resulting dead stoppage of economic activity for many months, we’ve been able to stabilize the economy. Thanks to our government learning from our past travails and understanding its role. President Bush gets much credit but he’s gone now and thus last Friday I heard the first words uttered about an “Obama Miracle.” Pulling totally out of this massive slump is another thing and may take much time yet although we could post some surprisingly great numbers in coming months. Inventory rebuilding looks good statistically and allowing home foreclosures provides changes of ownership from the overextended to new risk takers. Still, over America’s 200+ year capitalistic history we’ve built a vibrant and reenergizing economic system so there’s always something good taking place somewhere and while the distressed and/or overbuilt areas of our economy right size the in fashion areas keep us moving forward. And our government has and is still performing admirably (sorry, I know many readers don’t agree with me), stabilizing our financial system and thus setting the stage to allow capitalism to provide us with future growth while at the same time realizing that any and all government intervention always adds additional drags on the economy and is trying hard to avoid such. While at the same time smartly tackling our long term deeply entrenched and ignored major issues and thus pointing America towards a more fundamentally sound future, remaining as one of the world’s leaders. Such as taking the lead in going green as the “clunkers for cash” program epitomizes. Americans really want to do their part and this program is providing one capitalistic way to do so. Getting polluting cars off the road while stimulating growth at the same time and in essence cutting back money supporting terrorism. I gotta love it! Schwartz View: So, we’re back on the right track in lots of ways and I’m delighted. But don’t get complacent. Please keep reading!

Please email me at RichardStk@aol.com for how the stock market will respond to the above analysis and whether, in the following THE STOCK MARKET and PORTFOLIO STRATEGY sections it’s time to buy the stock market today or not.

To Stimulate Or Not To Stimulate The US Economy

Richard Schwartz — Thu, 05 Mar 2009 19:29:00 GMT

ANTI-Stimulus Protest Demonstrations; Say What?

That’s a big global fear surrounding this global economic slump. History shows economic debacles like this breed unrest, anger, frustration among those losing their jobs, etc. and thus protest demonstrations. If one watches www.worldfocus.com or any other news global news show, you’ll see violent protests happening globally. In Eastern Europe as one example. In China too and especially. China’s government’s big fear, knowing it’s own history, is protests which bring down the government there. Making the upturn in global protests there and elsewhere important for all investors to track.

Yesterday’s Investor’s Business Daily (IBD) newspaper had a front page article reporting that anti-stimulus demonstrations have occurred in 35 American cities. Yes, these are small demonstrations so far, 100 or 200 people and organized by interest groups, but maybe they will grow in size after IBD gave them face time, i.e. publicity -- I hadn’t even heard about these protests at all until yesterday -- and also gave them such a nationalistic and catchy name: “Nationwide Tea Parties.” I read where these events are being organized by those groups who sarcastically say we should: “Legalize Capitalism!” Or who believe: “The best government, governs least.” And those who sardonically and exaggeratedly say: “No to socialism!” And are epitomized by one protestor’s sign which read: “Your mortgage is not my problem!”

Obviously US government stimulus spending to try to keep this weakened economy from getting worse is anathema to those who believe in the strict Austrian school of economics. That economic school says things just get screwed up terribly whenever the government gets involved. And who knows, maybe doing nothing, to try to shorten this downturn, was indeed the right move. But as I see it it’s too late now; we’re already committed. I’ve given up opining on what were the right and wrong roads to follow but let me also report there are a lot of other angry people in America today, those that say they are tired of lavish retreats and concerts, tired of private jets, tried of companies paying out huge bonuses with or without government money. Regular readers know I’ve been angry and pounding the table for many years about these excesses. So maybe we do or will have class warfare, that is if these anti-stimulus demonstrations get larger and cause more of a divide among all kinds of angry Americans.

Schwartz View: But as I see it, we’re now committed to this “bail out” path, we got committed a year ago when we bailed out the first company, Bear Stearns or whoever came first. This far along this path I can’t foresee us stopping now. Plus it only makes common sense for any government to try to stimulate the economy when the two other major sources of normal demand, consumer spending and business investment, are in total hunker down mode. The even bigger picture, as I see things from up on the mountaintop looking down at the valley and what’s happening, is that these demonstrations by those who say your problem is not my problem, are the last desperate efforts by those who still believe in the “me first” path America has been on for roughly three decades now. As I see it, the results of the recent US presidential election announced that the majority of Americans want big change in America, a change which returns the America Dream to the average working person once again and returns us to a more level playing field. And that means, even though there is some opposition, that America has now crossed the Rubicon, so to speak. Meaning we’ve just begun a 10-year or so cycle which puts public interest over private interest. History shows we do swing back and forth from longer periods, or about 20 years, of letting capitalism run unchecked and America showing strong economic growth as a result to shorter periods of about 10 years or so where we put the unfortunate and forgotten Americans first, which yes, also means slower economic growth as a result. (Please read Arthur Schlesinger Jr.’s THE CYCLES OF AMERICAN HISTORY if you’d like more on this repetitive cycle.) All signs that I can detect today tell me that America is going to level the playing field, get rid of the excesses, the corruption and scamming of the system, in general just the overall greed which always naturally arises from allowing capitalism unchecked to run for too darn long. Again, I’m just observing what I see happening not opining whether it’s right or not. As for investment implications, for now stay hunkered down, practice extreme patience and proper money management while out waiting this Papa Bear market.

To subscribe to my daily letter PRINCIPLES OF THE STOCK MARKET or to receive a week’s worth of FREE letters, please email me at RichardStk@oaol.com.

Good trading, speculating and investing!

Chinese Strategy Looks Good

Richard Schwartz — Tue, 17 Feb 2009 14:38:00 GMT

GLOBAL VIEW. What Is China’s Strategy? Without having to worry about their banks, because China never got involved buying securitized, US subprime mortgages and other debt backed instruments, China’s now at a great advantage. Sure China is slumping fast economically like everyone else, their manufacturing industry shrinking rapidly, but China still has much greater leeway than other countries in lots of ways. First, luckily, because China has no developed bond market and is just starting to open up their financial markets, China missed the debt feast most other banks enjoyed. And are now regurgitating. So now it turns out, that’s a big, big plus. Also China still has its ‘Command Capitalism’ in place, meaning that when government decides on a path, boom, the country can start right off on it. No arguing back and forth like in big democracies like the United States and India. Next, China’s leaders are well educated, many with useful engineering backgrounds and have proven themselves. Finally, China is in a great spot financially. So what is China doing strategically, meaning their plans of long term significance?

Strategically, I’ve written previously how China is moving quickly to help their farms and farmers every which way because the farms were the first part of the Chinese economy to move to quasi free marketplace operations. After this move proved very successful, China then tried the same in manufacturing. Which, obviously, turned out to be a great and grand success. But now that Chinese manufacturing is downsizing rapidly, China has to keep the millions of Chinese workers forced back to the farms happy. Thus I see this government boost as making Chinese agriculture one of the few good buys around today as their farms consolidate, become larger and thus more efficient and productive, and have thus previously recommended Chinese agriculture strongly and offered up a list of stocks to consider buying.

Stockpiling Minerals & Mineral Producing Companies Too. Another, a second, strategic or long range move China has implemented is to stock up on raw minerals while their prices are down and also to take equity positions where allowed by other governments in mining companies themselves. The reason being that when China starts really growing again they are going to need adequate raw materials. China found this out quickly as it became the world’s manufacturing colossus. Even today with their new infrastructure program already in force, China needs cement, iron ore, steel, etc. So consider some recent Chinese moves:

· State-owned Zhongjin, China’s 3^rd largest zinc producer, bought a 50.1% stake in Australian zinc miner Perilya Ltd.

· State-owned Jinchuan Group, Asia’s largest nickel producer, bought 18% of Albidon Ltd, a Perth, Australia based nickel producer and has a deal to take 100% of the nickel from Albidon mines in Zambia.

· China’s 3^rd largest steelmaker bought a 50% interest in Australia’s Centrex Metals Ltd.

· Chinese interests bought a 40% stake in Australia’s Mount Gibson Iron.

· China’s 2^nd largest steelmaker upped its stake in Australian Gindalbie Metals from 12% to 36%.

· Aluminum Corp of China (ACH) has just increased it’s stake in Rio Tinto Plc.

· China’s Tongling Nonferrous Metals Group just bought 13% of Canada Zinc Metals.

· China Mining Resources said it would up its stake in Canada’s Quadra Mining from 4% to 19.9%.

Schwartz View: My point being watch what China’s doing. You might want to even sign up for FREE www.moneymorning.com as this service tracks closely what’s happening in China, the news clips above coming from a recent article. Again, while other countries play defense, having no real answer to their economic slumps besides cutting interest rates and implementing various stimulus plans, China is on offense, planning for where they want to be when this economic slump is over. So, again, if you want to put your toe back in the water on general market weakness, I would do so in China. You should have a ready resource right in front of you to do so, as along with the list of Chinese ag stocks I ran here, I also detailed by category & sub category the USX China Index and published it here for you on February 5^th.

* As soon as I wrote that along with China’s domestic-investor only stock markets, the Shanghai and Shenzhen Stock Exchange Composite Indexes going up this year, the USX China Index (symbol HXC) and the iShares FTSE/Xinhua China 25 Index Fund (symbol FXI), an ETF, were following suit and rising, that link ended. Schwartz View: Ok, I was surprised they were moving together anyway. Going forward, still scale in to China, just take it a little slower.

Monday Weekly Strategy

Richard Schwartz — Mon, 22 Dec 2008 14:37:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

Eighteenth Consecutive Year of Publication; Letter #1; September 18^th, 1990

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address: RichardStk@aol.com

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Monday, December 22^nd, 2008: So here it is, last letter ‘till Monday, January 5^th, as Lucy & I fly off to the white sand, warm blue waters of the Caribbean, maybe on a last hurrah (if the economy keeps sliding). I’m taking Cycles of American History & Rethinking the Great Depression books. Our routine is: Go to the beach, play backgammon, read & go out to dinner. Day after day. Warm our bones & work on new tans.

THE BIG PICTURE

Friday I saw John Bogle, who has been on Wall Street for 50 years and who created the first index fund, the Vanguard 500 Index Fund back in 1975, say investment bankers and bankers generally owe the country a huge apology (which I doubt we ever get). Their imprudent speculations and greed for massive fees from too complex speculations led to today’s financial sector problems, problems which have now fed out to the real economy hurting innocent, hard working, everyday Americans. Mr. Bogle says greed has even spread out to our whole economy, that we’ve morphed into in a “me first” society and it’s something we have to seriously take a look at. Thus capitalism, allowing markets to work unfettered of regulation and based on trust and trusting, has now been “deeply discredited.” Even the underpinnings of capitalism have changed radically. We’re no longer an ownership society whereby individual stockholders used to select and then hold 92% of all common shares; institutions 8%. Now institutions control 75% of shares through huge sums entrusted to them by others and have not invested prudently. Again, because of the incredible fees they got for investing. Mr. Bogle says they sure wouldn’t manage their own monies so recklessly. These institutions were supposed to be wiser than individuals but, again, it’s not their money. Supporting Mr. Bogle’s view is the revelation that 29 of the 30 largest losers in the Bernie Madoff Ponzi scheme scandal were institutions whereby just one of these fund of fund companies was paid $160 million in 2007 alone for recommending the Madoff “hedge fund.” In other words, where was the fiduciary responsibility, the prudency, the probity expected when we entrust institutions to manage 75% of our investments? Schwartz View: Regular readers know I’ve been distressed and pounding the table about a number of these societal issues for years. About capitalism running amuck, culminating its 30-year trend toward widening the gap between it and its counterpart, democracy, with President Bush’s skewed one way Texas twang policy saying the be all and end all is that “bidness is bidness” and thus stifling regulation. And about society becoming so uncivilized, we ended up booing our own hometown, beloved sports teams! So while no one wants to live through what may come next in the economy, I have to say America has finally woken up, albeit after the nightmare it usually takes to precipitate major change, and that we are now started down a long and arduous path, but one finally pointed in the right direction again. As one example, we’ve even started to SAVE once again; amazing! So, for myself, I guess sort of a contrary indicator in recent years, I’m becoming more optimistic and bullish on our future. Finally! “Go America Go!”

THE ECONOMY

It became apparent that the US economy was suddenly falling-off-a-cliff right after Lehman Brothers became the one firm chosen NOT to be bailed out by the Federal Reserve and US Treasury Department. (Looked back upon as a colossal mistake in strategy I’ve read.) Lehman’s bankruptcy rippled out far and wide and led directly to losses in some money market funds, a “breaking of the buck,” and thus then to a total loss of confidence. Now, by all accounts, the economy is in total free fall. This sudden screeching halt in US business activity has caused the same in our global trading partners and most everywhere I look is now in corresponding economic free fall. You extrapolate it for yourselves from here. One view I’m pondering is that many times sharp declines lead to the second leg of a V-move, back up, and we’re overdue. Maybe stocks, with their recent unwillingness to keep going lower on bad news, means Mr. Market (the consensus of large investors) sees some end out there to the economic free fall. Still, we’d have to see some economic revival to expect a sustained V snapback in stocks. For now, I see 2009 providing a steady stream of bad news every time we look up. Just like in the second year of the last Papa Bear bear market, back in 1974, a continuing stream of bad news back then ultimately overwhelmed all attempts to rally until the final months of that year. Schwartz View: The consensus I’m hearing is that this sudden, fall-off-the-cliff global economic contraction is NOT going to lead to a repeat of the depression-spawned 1930s starting with its four-year long period of contraction followed by its anemic recovery, a.k.a. the Great Depression. I hate to follow any consensus especially when this one’s been so wrong for so long. But my own history look backs and studies by Federal Reserve Bank Chairman Ben Bernanke, an expert on what went wrong in the 1930s, turning a recession into a depression, show that we raised taxes, cut spending and blocked global trade, just the wrong policies. So I sure don’t expect any exact repeat of those failed policies. Leading me to think out of the box and that maybe today’s Fed policy of battling a deflationary depression is also implementing incorrect strategy. How about worrying against runaway inflation spawning from all the money the US and now the world has and is still throwing at this economic slump? Just the problems we worried about in the early 1930s but didn’t occur. You know the old saying, people fight the wrong war, the old war, because that’s what’s still fresh in their minds. Thus, summing up, maybe we can’t expect much creativeness from the Fed pointing in the less obvious direction of battling inflation since they are entrusted with getting us through hard times. They will naturally, after learning certain lessons from the 1930s well, not break much new ground. One reason being that if their policies didn’t work, they would be heavily criticized for experimenting. Thus while everyone pooh-poohs an inflation problem, I still worry about one. Seems like the consensus, which may be correct, among the minority expecting and talking about an inflation problem, doesn’t expect one until 2010 at the earliest. Keeps me thinking about that quote I printed here back on Friday, December 5^th, from Sir John Templeton: “It’s impossible to produce a superior performance unless you do something different from the majority.”

THE STOCK MARKET

Maybe we’ve started off on a new, lasting stock market rally as many now say. Maybe the November 20^th closing low and November 21^st intraday low did end this bear market or at least this phase of it and start us up and on a new mini bull market. But I don’t think we can determine that from these final days of stock market trading this year. This jig jag, saw-tooth modest rally we’ve had in December – the Dow remains down -2.8% this month, but up +13.6% from its closing low on November 20^th – still looks like just a time killer rally to me after stocks fell -6% in September, -14% in October and another -5% in November. So while I’m off on my annual winter beach vacation, I’m leaving my managed portfolios hedged with a slight long bias, still with my modest overall about 20% or less market exposure which I’ve carried since late last year. You remember late last year? At least as a lesson learned for the future, if for no other reason. After the stock market rallied back from its original car wreck in July, in what amounted to a head fake, false move, dead cat bounce and pretty obvious sucker’s rally, and a failed break out to new highs by the Dow and S&P (while the rest of the stock market refused to confirm).

Anyway, last week I ended the letter by noting that psychologically we should rally since bad news couldn’t drive prices down in recent days. Technically we had what could prove to be two months of base building everywhere I looked on the charts (but bases which could easily prove false). Fundamentally we even finally had low enough market valuations, like P/E ratios, to support a rally as well. But how about a catalyst? Well, let me offer up: (1) much lower gasoline prices which keeps our wallets and purses fuller and healthier, and (2) the good feelings anyone watching our president-elect making non-partisan, non-political, non-ideological selections for his cabinet, should feel. There may be a wellspring of good feeling, a sort of honeymoon psychological effect on investors, business, consumers and most all of us as we hope our new president can perform miracles. Schwartz View: Unfortunately no one man is going to remake America overnight. So, while keeping an open mind and watching all unfolding developments, for now I’ll back history which says this “worst financial crisis since the Great Depression” has to lead to an extended Papa Bear market, one which lasts at least a couple of years. Not just for one year, where we stand today.

PORTFOLIO STRATEGY

I hate to follow or even agree with some of what I’m hearing about going forward strategy, especially if such is espoused by those who were so wrong all this year. I’m speaking specifically about Bob Doll, now at BlackRock as their “Trillion Dollar” fund manager. I don’t want to pick on anyone but since he’s been leading the charge forward as stock markets collapse and getting all the face time doing such, I guess I have to. I start off very skeptical because my belief is that these big money managers are not going to get on TV and recommend anything before they and their clients get first crack at their thinking, ideas and recommendations and position themselves accordingly. I already wrote awhile back many old stock market books talk extensively about how big money always used to try to sucker the little investors. The age old technical Wall Street term “distribution” implied big guys needed little guys to unload their big positions on to when they foresaw a bear market ahead and thus put on a bullish face. It took much time to unload huge positions these large investors stockpiled so much frenzied excitement about the stock market had to be built up as big money sold. What better way today than Bob Doll coming on CNBC ubiquitously and always saying we are now in a bottoming process. He said that back in March and those who followed him are much the worst after the October panic crash. Anyway, that’s all secondary, although supporting, my main point. My main point is that Mr. Doll now says next year is going to be a good one for those taking on risk, not for those playing it safe. Again sounds good to me, at least at first blush. We all know what goes down the most generally can bounce tremendously when psychology changes. But do we really want to buy really risky investments in just the early part of the second year of a big, bad bear market? I say no. Bear markets of this size and scope historically have taken a lot longer than one year to work through.

Net, net, probably Mr. Doll will be proven correct about taking on risk, if one doesn’t factor in any time period. I’d guess risky asset classes will move fast when this bear market ultimately does end but do I really believe its going to end soon? No. And if we do have a 2009 mini bull market, say because stocks have fallen so much, then I’m not going to count on Bob and other institutional investors to tell me and us exactly when to get back out. No, starting off next year next week, I’d suggest still playing our cards close to the vest. Yes, play modestly for a continuing rally but look at it for now as just a bear market rally.

Happy Holidays & Happy New Year!

Richard

Patience: Outlast This Bear Market

Richard Schwartz — Mon, 01 Dec 2008 14:19:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

Eighteenth Consecutive Year of Publication; Letter #1; September 18^th, 1990

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address: RichardStk@aol.com

Subscription · One-Year Morning E-Mail Delivery · $150.00

Monday, December 1^st, 2008: Since Lucy’s birthday was a Round Number & fell on Thanksgiving, everyone surprised her & came back Friday for tea. At the Tea House in the village, a reconverted barn on a hill with a great view of the mountain, a view I hadn’t seen before. Almost everywhere in town has a mountain view which makes me feel like I live in Lake Placid, another charming mountain town. Love it!

PS. I caught a bug which I’m working through today but possibly no letter tomorrow if I feel worse.

THE BIG PICTURE

I spent Thanksgiving evening discussing the past, present and future with my son Brian. In essence he asked me for a simple explanation of what caused the stock market to drop so much, what terms like deregulation, re-regulation, privatization, etc. mean & what the big picture looks like. Here’s my answer:

Let’s start with the two classical economic theories of thought. One, let free markets operate on their own, the old Austrian school of economics as promulgated in the early and mid 1900s by Friedrich Hayek versus two, getting government involved in the economy as advocated during the same time period by John Maynard Keynes. Both gentlemen lived through both world wars, the Great Depression and for decades beyond and their influence ebbed and flowed. Both economic theories had their time to shine, alternating roughly 30 year periods. The last totally free market cycle began its ascendancy when President Ronald Regan was elected to office in 1980. Since then union’s power has declined dramatically, corporate statesmen who shared equitably corporate wealth have became obsolete and bottom line profit became the only goal which caused stock price to rule business actions. During this long run in a totally free market direction whereby prosperity grew larger and larger spreading out to millions worldwide, normal prudence, probity and recognition of investment risk ultimately got lost. Greed took over completely when Wall Street came up with its latest round of newfangled, supposedly sophisticated investments, especially those incorporating securitization. Securitization just meaning turning all types of debt into securities which could be sold while spinning off huge commission style profits to everyone involved in the process or food chain. This, along with the 30-year trend to more and more deregulation, allowed commercial banks into previously banned investment areas, using heretofore unheard of leverage which caused capitalism to finally go off the deep end. By this I mean a 20% correction in our overheated, overdone, overblown US residential housing boom led to a bust after one bank woke up one day last summer to huge paper losses which soon showed everyone else was stuck with similar losses. This blow off following by an implosion and meltdown are the types of culminating events which cause these 30-year cycles to start swinging in the other direction. I now believe we’re just started a new long term swing away from free market economics as advocated by Mr. Hayek and towards a government role in economics as advocated by Mr. Keynes.

Summing up, we’ve just gone through that part of the long cycle which allows capitalism to run unfettered and thus grows the pie for everyone. The downside is that the gap between the rich and poor grows ever larger when we practice laissez-faire capitalism, essentially letting the marketplace alone which leads to the strongest doing best. But cycles are cycles and all eventually go to extremes and then swing the other way. Again, as I see it, we’ve just gone to one extreme and are now just beginning to cycle the other way, down the path whereby government steps in and applies regulations to the latest, most egregious ways of gaming the system. Which interferes with the magic of letting the free marketplace find its own proper price levels between consumers and producer providers and thus drags down the overall efficiency of the market. The rationale is that something has to be done to avoid another rare but normal breakdown by capitalism. Net, net our free market capitalistic system normally goes from one extreme to another, that deregulation goes so far it causes problems, then re-regulation sets in. With privatization or the selling off of previously government run businesses or business sectors being one form or aspect of deregulation. Thus, the last year’s breakdown and implosion in our financial system didn’t really show free market capitalism doesn’t work anymore, it just shows we’ve come to the end of the normal continuing pendulum swing out to one extreme and are now starting the long journey back to a middle ground and then out to the other extreme.

THE ECONOMY

Not much to comment about on the economy today.. We’re in that middle time period of this bear market and at the start of an economic downturn. Thus I expect the economic data, corporate earning reports and most other news to be pretty consistently bad for some time to come yet. One rule we do know about how the stock market operates and how it relates to the economy is that stocks turn up a few months before the economy does (with exceptions). So finding a bear market bottom will incorporate more than just watching the data. Waiting for the economic data to turn positive will make most investors months late in reentering the stock market. Schwartz View: Thus, myself, I watch the charts and believe in what I’ve espoused for many years, that charts tell you when to buy and then the fundamentals confirm down the road.

THE STOCK MARKET

Mr. Stock Market keeps trying its best to rally now. Last week the economic data was just plain awful and stocks rallied anyway. I wrote previously that stocks refusing to go down on bad news would be a good clue that the market has gone down enough, at least for the moment. Still, some remaining problems are: (1) I don’t see a proper base to support a big rally, unless I’m getting tricked by the undercutting of that possible base built from October 10^th through November 19^th, (2) I don’t see any improved fundamentals and still expect lots more bad news to become known next year and (3) history shows after financial glitches and consumer confidence losses of this magnitude bear markets and recessions following lead to once-in-a-generation market declines which don’t get over in just one year, roughly the time period we’ve seen this bear market last for so far. Yes, big bad bear markets generally last at least a year and a half to two years to even three years. Also this bounce reminds me very much of numerous temporary previous V-bottoms and short lasting rallies we’ve seen over the last few months. But a rally is a rally is a rally. And we have to play them. Eventually one rally will morph into the next bull market. Thus the key is to always keep sight of the Big Picture. Today the big picture perspective shows we’re firmly entrenched in a big bad bear market. So, in general strategy should be to sell and sell short rallies instead of buying dips. But when rallies periodically begin, we should modestly go along with them,, go with the flow, one toe in the water. That way if any rally proves to have legs we’ll start profiting immediately and know about it right away. But not to jump in with both feet because primary bear markets, just like primary bull markets, do reassert themselves, and until proven differently, it’s a whole lot easier to profit swimming with any tide or trend than swimming into it. Schwartz View: I’m trying to find a technical reason, say a good looking chart pattern at least, to buy a particular sector, but so far no luck. The one bullish trend which I see today is in the US dollar. Strength began back in mid-July and thus when strength continued past the three month normal max time frame identifying a bear market rally, or past mid-October in this case, and kept on going, I termed the strength as a new bull market. Otherwise everything else looks like iffy trends.

PORTFOLIO STRATEGY

Strategy remains one of outlasting this bear market. Of proving you have more patience than Mr. Bear Market does. This is a difficult job which will test your discipline again and again if the past is any guide (which I believe it is). Over time you’ll be tempted to buy back in again and again whether you see a believable bear market bottom or not. Especially if you’re one who really watch stocks, the whole Wall Street show, daily. So continue to do any irresistible buying and or investing in a much smaller, subdued manner. Keep just enough money in the stock market to keep you interested and not so much that future declines can put you out of the game and out of business. And stay tuned here to find the real bottom.

Have a good week!

1930s Parallels Keep Popping Up

Richard Schwartz — Thu, 20 Nov 2008 18:49:00 GMT

REVIEWING THE 1930s. The Principle of Knowing History. Let me get down on paper a bit about President Hoover (1928 to 1932) and President Roosevelt and the 1930s after nearly finishing up THE FORGOTTEN MAN (2007) by Amity Shlaes. Again, let me recommend you get yourself a copy as today’s happenings keep looking more & more like a redux. I’m still thinking about taking this book to the beach over the Christmas holidays. It’s entertaining reading. One back cover reviewer compared Shlaes to Frederick Lewis Allen and his wonderful early 1900 histories (which I loved and heartily recommend; ‘Only Yesterday,’ ‘Since Yesterday,’ ‘The Big Change’). Shlaes’ history of the Great Depression starts after President Coolidge, a hands off US president gave way to President Hoover, of the same party, who turned out to be much more hands on. This flies in the face of the old belief that Hoover was hands off.

Late 1920s. President Hoover was elected in 1928 and for his first year the economy and stock market was copasetic. But after the October 1929 terrible market crash, it was up to Hoover to decide how to proceed. To understand Hoover, we can go back to when he was Commerce Secretary and wrote a book entitled American Individualism although the name wasn’t appropriate, according to Shlaes: “Hoover rejected the old brand of absolute individualism and distained laissez-faire economics as ‘theoretical and emotional’.” So, when the crisis hit, President Hoover went right to work. First, he made very clear he was for regulation. Hoover believed in government help and loved standards, efficiency and organization and had done much in the middle 1920s to install such across America. But now, upon President Hoover getting a confidential report from the Fed that the market “readjustment” was going to last, and after asking himself a question he later wrote down: “The primary question at once arose as to whether the President and the federal government should undertake to mitigate and to remedy the evils,” Hoover concluded, yes, action was needed. President Hoover from the crash until President Roosevelt took over in March 1933 pushed for “expanded public buildings programs, requested a national system of cooperation among the states on public works programs, proposed expansion of the merchant marine, regulation of the new inter-State electric power system, consolidation of the railroads, development of public health services and departmental reorganization.”

In general terms, Hoover: (1) intervened in business, starting by calling business leaders to Washington and told them to keep up business as usual and to keep wages up, not allowing any free market cleansing, (2) signed one of the largest tariff bills in US history, which caused less trade and thus further contraction and (3) publicly assailed the stock market. All moves which backfired because they also caused a loss of confidence. Retired President Coolidge, the hands off president, railed against Hoover’s moves, calling them “socialistic notions of government.” Right up until President Roosevelt replaced Hoover in early 1933, Hoover continued using the government to try to make things better. In June 1931, for example, Hoover announced a moratorium on German debt repayment. And then created the Reconstruction Finance Corporation to help banks and homeowners. Finally Hoover signed a big tax increase, the Revenue Act of 1932, because of his fear an unbalanced budget would cause a run on the dollar. During the interregnum between Roosevelt’s election in November 1932 and his inauguration in March 1933, Hoover even wrote to Roosevelt trying to get him to sign off on special war powers to handle the emergency, and a bank holiday. Roosevelt said no, even though upon taking office, he followed many of Hoover’s beginnings.

March 1933. Upon entering office, President Roosevelt showed he would try anything. He knew people wanted action and that this was a rare opportunity for change. Plus he just enjoyed activity, of any sort. I can imagine how activity uplifted him, he wore these heavy metal leg things, for his polio. He was inaugurated in March 1933 when their was prevalent despair and unemployment had soared to about 17% Thus from March 1933 on he tried whatever struck his fancy. Plus he had a group of advisors called the “brain trusters.” Whatever they proposed, Roosevelt went with. The Hundred Days this period was called as President Roosevelt legislated galore. People hear that arts flourished during the Depression but now I know why. President Roosevelt (FDR) spent big money on them. He hired artists and had them paint murals--we have some in local post offices here near Roosevelt’s Hudson River home. He hired movie people and had propaganda firms made, burnishing the image of his actions, action which became known as the New Deal. Basically the New Deal was trying to help certain constituencies which Roosevelt chose. Essentially, the middle class or “everyman” or common man. And policies against the rich (even though Roosevelt was one of those). FDR started passing law after law seeing what worked. Lots of his laws were later thrown out, in the latter 1930s by the Supreme Court (which he then attacked by trying to “pack” the court, increasing the number of justices to decrease their vote importance). But the people knew Roosevelt was using government to help them for once. So he kept garnering support in spite of his arbitrary, sort of kingly behavior. Maybe because he was also able to charm his way through most any siutation.

SCHWARTZ SUMMING UP. Out of time this morning, so let me just summarize. Both President Hoover and President Roosevelt put government to work to stimulate the economy after the 1929 stock market crash. We still debate today whether that was the right move or not. Today our US government is following a similar path after a similar crisis. But the law of unintended consequences may again come into play; government may end up making things worse and thus cause a lackluster economy to last and last instead of allowing the natural process of the free market to clean out the old and bad and bring in the new. Still, if you were US president, what would you do? Be an ideologue? Sit back and stay out of the way? Doubtful since you’d be viciously attacked by the media and others to do something. As very interested bystanders, all the individual investor can do is sit back and watch developments and place them in historic perspective. Then plan out strategy. As of now, please just stay hunkered down and out of harm’s way as much as possible.

Re-Regulation Begins a Multi-Decade Road

Richard Schwartz — Mon, 06 Oct 2008 14:39:00 GMT

THE BIG PICTURE

Today’s Big Picture view revolves around the probable coming re-regulation of the financial markets. History shows regulation of markets is similar to a grandfather’s clock pendulum swinging back and forth although not as regular. A brief look back to the start of the 20^th century, shows free markets and a first age of globalization, with the introduction of the telegraph and telephone, steamships and railways, at a peak. Millions even migrated without passports while trade flourished meaning free markets were in charge.

· Governments Take Charge. Then, in August 1914, with World War I, that age ended abruptly. WWI left people disillusioned and looking for something better and many turned to socialism and communism. The Russian Revolution in 1917 drew followers and essentially sought to end capitalism for good, making private property illegal. Socialists and other government controlled economic systems were winning the battle of ideas, governments were in charge, free markets were in retreat. In less than 30 years, one third of humanity, including Eastern Europe, China and the Soviet Union, would be living under socialism or communism. Capitalism looked to be doomed except for in America. The 1920s in America was still a boom time, Americans buying cars, buying illegal gin, buying stock. Radio was the Internet of the 1920s. It was a classic bubble. Finally the 1929 stock market crash started Americans on the way to despair, a complete economic collapse "with no ability to earn, repay, spend, consume." Everything spiraled downward while about half the banks in the US closed. America turned toward government for help and thus re-regulation with President Roosevelt’s numerous new government regulatory agencies. Around the globe, governments gained power … over free markets. In Italy, Spain and Germany fascism took charge. World War II then arrived and even afterwards people all around the globe still blamed capitalism for causing the depression. The whole world kept moving towards more regulated economies. England even went socialistic as Winston Churchill, the great war leader, was beaten by the socialists! Most of the world operated under this sort of government planning process for the next 30 years.

· Free Markets Regain Control. But in the 1970s free markets began a resurgence. Margaret Thatcher came to power in England with free market thoughts as did Ronald Regan here in the US. with his Reganomics. Both cut back on government regulations, giving markets more ascendancy and free markets again starting coming to the forefront. England started privatizing its economy while President Regan cut taxes and let free markets regain control as epitomized by breaking the air controllers strike. Thus capitalism got a free hand which lasted for aboutt 30 years, even through the dot.com boom and bust. But after last year’s incredible debacle with investment banks, money center banks, insurance companies, etc. losing billions after irresponsibly leveraging up their investments 20 or 30 times, it’s apparent to most everyone that, just like in the 1930s, we can’t afford to have any similar financial market collapse spawning from totally free markets to happen again any time soon.

Schwartz View: So after reviewing the history of the 20th century and seeing how over long periods, market regulation swings back and forth, I have to figure we’ve just started a long term swing back on the way to re-regulation. For more on this topic, I recommend you watch Commanding Heights, the Battle for the World Economy, by Daniel Yergin and Joseph Stanislaw which was turned into a DVD and a PBS prouction, a wonderful esplanation of the battle for economic minds in the 20th century. Filled in some missing pieces for me and should for you all as well.

To Risk "Cleaning Out the System" or Not

Richard Schwartz — Mon, 29 Sep 2008 13:37:00 GMT

THE BIG PICTURE

Written Monday, September 29th, 2008: 6:30 a.m..

What happened in Congress last Friday – House Republicans refusing to go along with the government’s rescue plan – was caused by political/economic ideology combined with Americans not wanting to bail out Wall Street. With the men and women on Main Street contacting their representatives en masse to protest any plan at all to bail out Wall Street, some Republicans decided they were willing to test the thesis that not going along with the government’s plan risked Armageddon for the whole American financial system. Conservative capitalistic ideology says the best and only way to handle economic crises is to let the free marketplace work, meaning let those individuals and corporations who’ve made bad decisions fail. Famed investor Jim Rogers, who’s consistently said Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Henry Paulsen have been following the wrong road during this crisis, must have been pleased. Rogers also feels the best path is to let underwater financial concerns go bankrupt. He says bankruptcies have happened before, will again, and serve a purpose. They effectively clean out the distortions and excesses built up in the economic system so in the future we can start over and move ahead on a strong foundation. Not doing so would set up the same situation here in the US that caused Japan’s “lost decade” of the 1990s whereby the Japanese government let failed banks keep operating. Bailing out and keeping zombie-like banks alive here as well would just slow dramatically or even block America’s economic recovery. Bottom line, with terrific public opposition – calls coming in 100 to 1 against bailing out Wall Street -- late last week some conservatives decided to risk taking the whole country down and into the economic abyss and see what happens. They backtracked a bit over the weekend, giving in to the mantra that “we had to have a deal before the Asian markets opened.” Schwartz View: Boy, do I have mixed feelings! Invading Iraq because of itsreported stockpiles of weapons of mass destruction, proved that acting out of fear can be wrong. Thus when the government forecasts disaster ahead today unless we follow their rescue plan, it feels like they are crying wolf again. Plus I fervently believe we do need to “clean out the system” and show Wall Street we’ve stopped socializing their losses. On the other hand, common sense tells me at all costs we should avoid any economic meltdown which could morph into another 1930s-style depression. Finally I believe in letting the marketplace operate as freely as possible and I agree with the man on street that rich players who’ve gamed the system for so long should share the economic pain the rest of America has been feeling for many depressing years now. Making matters even worse and even more complicated is the absolute horrendous timing of this crisis. Our politicians wanted to recess and get out of Washington, DC last Friday to go campaign in their districts and certainly didn’t want to have to be forced into voting YES on any detested bailout plan. Now they all will have to explain to voters how “we’ll all sink or swim together.”

September 2008 Investment Strategy

Richard Schwartz — Tue, 02 Sep 2008 13:27:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

Seventeenth Consecutive Year of Publication; Letter #1; September 18^th, 1990

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address: Richardstk@aol.com

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Tuesday, September 2^nd, 2008: Had lovely, blue sky, humidity down weather to wind up the summer and the long Labor Day weekend. Indeed, the weather is supposed to stay gorgeous the early part of this week here as well. But don’t mention the grand weather to Lucy since it’s back to school for her today!

THE BIG PICTURE

Last week I wrote about the necessity of staying positive during a downbeat economy and stock market. Staying upbeat right when there’s near term problems and long term concern that America is losing status in the pecking order of the new, globalized world we live in. Hey, America has long encouraged the rest of the globe to go capitalistic and got a massive, all-encompassing global push in that capitalistic direction after so much economic rot was discovered in the Soviet Union sphere after the Berlin Wall came down. Countries switched and let the marketplace work and, voila, the world started moving forward, growing and getting wealthier. So now, with so much new global competition around and thriving, America has to respond in kind by redoubling our efforts to efficientize, modernize and improve our own financial, economic, social, and especially our dysfunctional political system(s). In other words, take our fundamentally solid, well-working capitalistic system and adjust it to today’s new globalized marketplace. Make some fundamentally sound and foresighted long range decisions about energy, education, health, finance, politics, etc. and then exhibit sacrifice and discipline. Again, all while seeing the glass half full.

Schwartz View: That’s why I’m dismayed by hearing friends, including one back from Iraq duty, tell me it really doesn’t matter who gets elected as the next president of the United States. Their rationale? It doesn’t matter since nothing will change anyway. Maybe my generation and the one coming immediately after us is just too jaded. But, from longtime trafficking in the stock market, the one thing I’ve found we can bet on consistently is change. Change does happen. So, I’d say we have to have hope. We have to believe that our votes will prove meaningful. And the youth of America, not being so long disappointed and denied, frustrated and jaded like their elders, us, have responded to this upcoming presidential election. Grass roots efforts by thousands of inspired youth and the ready adoption of the Internet for fundraising from the masses is how Barack Obama overcame sure bet Hillary Clinton to get the Democrat’s nomination in the first place. So I say re: politics, energy use, etc., just like in the stock market, we need to keep upbeat that positive change is out there just over the horizon. So buck up. The realistic investor can forecast hard times ahead and yet get up each day, plaster a smile on his and her face and still believe that better times are out there, knowing that just like the daily cycle, it’s darkest right before dawn … arrives.

Schwartz Reading Recommendations: For those of you who are interested in Big Picture investing, by that I mean not the nuts and bolts of everyday stock trading, charting, etc. but, say financial planning, etc. I’d like to add former Fed chief Alan Greenspan’s tomb of the 20^th century, The Age of Turbulence, to my recommending reading list. It offers up a wonderful history of America growing wealthy, explains how decisions at the Fed are made and gives forward looking guidance to the world ahead. Also let me add the even newer book, THE POST-AMERICAN WORLD (2008) by Fareed Zakaria, which after I got over my provincial American bias, was wonderful in explaining the world’s likely scenario going forward. a world of shared power with extra kudos to author Zakaria in how he gets into the heads of the Chinese and Indians, explaining how they think, operate and their cultures. Interestingly, India with its long-established democracy, and Indians in their outlook on life, are extremely close to how Americans think. Again these books are for those of you interested in longer range financial planning and the like.

THE ECONOMY

Dell Computer’s report last Friday that the US technology spending slump has spread to Western Europe and some Asian countries just confirms all the other evidence showing up that today’s world, economically and financially is very closely intertwined, not decoupled as the Wall Street argument goes. Of course, this intertwined relationship and what that means isn’t that easy to define, it’s gray, not black or white. But for the near term, negative economic ripples sent streaming outward last year when the US subprime mortgage market imploded are now being sighted and felt in other parts of the globe. How severe these global ripples get, these so-called 3^rd-order effects, as economists like to term them, remains to be seen. Bulls say they will prove minor; bears like me say they will prove more severe; only time will provide the answers.

Still, right now, everywhere one looks negative ripples sent outward from the US tsunami in collateralized asset-backed investments are starting to show up. One major problematic ripple in the US and globally is the effect being felt by banks and their business. It isn’t, can’t be “:business as usual” any more. Banks’ fortunes – with huge paper losses and their opaque, illiquid, very leveraged and still deteriorating loans on the books – are now directly tied to US house prices. As house prices fall, the value of these locked in bank investments keep tumbling as well. Leading to write-offs. It’s all a negative domino effect. The lingering loss of confidence leads to a continuing reluctance to make loans, thus to lower stock prices and thus also to a growing need for banks and other financials to repair their balance sheets by raising more and more capital. Which in turn dilutes earnings and the vicious cycle continues.

Schwartz View: My ongoing view is that this widespread consumer, business and investor loss of confidence, combined with the first bout of problematic inflation and a weakening US and now global economy is not some short term event. That we’re now in a downward spiral that will take much time to bottom out and reverse. We’re, bottom line, in an economic event and economic changes just can’t move along anywhere near as fast as stock market participants would like them to. Thus, we see frustration by strategists, money managers and all the bulls out there to find and call a bear market bottom way too early. I believe investors have to exhibit extreme patience for the foreseeable future.

THE STOCK MARKET

Impatient investors keep fishing for a bottom, thus causing the periodic “flashy-splashy” big rallies we get, like last Thursday’s +2% move up. These big one and two day moves up are actually symptoms and signs of a stock market still on the way down, actually now firmly controlled by the grizzly bear, if you believe a recent report by Merrill Lynch after they studied all the ups and downs of the just completed full stock market cycle, starting with the bear market running from 2000 to 2002 and the following bull market running from 2002 to 2007. Big pops happen in bear markets but then get completely washed away over time. Certainly during these bear markets stocks can also cobble together rallies which last for weeks or even months at a time, such as two-month rally we put in from mid-March to mid-May this year. Or the rally we are now experiencing; so far six weeks long and still alive and kicking although very saw tooth in nature. Obviously, nothing ever goes in just one direction. That’s especially so in the stock market whereby prices normally shoot out to extremes, up or down, and then need to balance themselves off.

Right now that’s where I see us. Stocks balancing off upwards after a downward movement that dropped too far, too fast. Actually that’s normal in any extended, economically-catalyzed bear market, investors losing confidence periodically, then regaining their nerve, then losing it again. Again, deteriorating economic trend(s) causing some major decline in stock prices just can’t cycle through its phases anywhere near fast enough to please myopic, very rapidly moving stock market players. So we get quick moves down, then bounces up or sideways movements to get time & price back in sync. Then it repeats again.

Schwartz View: These bounces are when and where traders try to make their profits during multi-year bear markets. Most traders early on realize it’s a lot easier and more profitable in the long run to always stay bullish, thick or thin, bull or bear market. Thus the extreme bullishness shown by a very experienced NYSE floor trader when interviewed late last week by CNBC. His time frame is so much different than the rest of us, he can be very bullish right now, right in the midst of a firmly entrenched bear market.

PORTFOLIO STRATEGY

Net, net this six-week rally may last for another month or even two but I wouldn’t get too attached to it. In fact today, let’s hope the market goes up a whole heck of a lot. I plan to book some profits. The first trading day after Labor Day is normally a seasonally strong day but then September can go south very fast and has proven to be the worst overall month of the year on average. Plus August was our first monthly advance in four months for many key indices so I’d like to take advantage of this normal “rally in a downtrend” and lighten up on some short term trading positions established back in July or early August. And suggest readers do the same, review everything else you now hold as well to see if any sectors are now timely to get out of. Again, to take advantage of this recent bear market rally. For example, please review the technology sector after Dell’s news last week warning it sees spreading, global tech weakness now.

Schwartz View: With big players coming back to work this week and with oil resuming its steep decline, we may extend this recent rally. Rallies can last upwards of three months in bear markets and since this one started on July 15^th, the best case scenario says it can run through October 15^th. Still, best I can deduce, all we’ve been doing this summer is killing time before the next round of bearish news hits. So I would continue to book trading profits as you go, sort of imitating the always in traders on the NYSE floor.

Have a grand week!

Monday Weekly Overview Sample Letter

Richard Schwartz — Mon, 28 Jul 2008 13:19:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

Seventeenth Consecutive Year of Publication; Letter #1; September 18^th, 1990

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address: Richardstk@aol.com

Subscription · One-Year Morning E-Mail Delivery · $150.00

Monday, July 28^th, 2008: Your New Paltz, NY SUNFLOWER update: A few sunflowers have popped but I noticed the farmer’s market has alternated its plantings so any time you visit you should see some. Just spectacular!

THE BIG PICTURE

Looks like one potential US and global leader gets it. Presumptive Democratic nominee Barack Obama, to shore up his lack of experience on the global stage, embarked on a global tour last week. And was again able to put his finger on the pulse of the world and his audience, exhibiting his knowledge of history and this particular critical point in time speaking at the historic Brandenburg Gate in Berlin. While he didn’t rock star the crowd, fine with me, it was good to see he continues his role as alienate no one, moderator showing again he understands all sides of issues and is committed to leading by example. While not denigrating any political party, say our Republicans, or country, say Old Europe. Thus there is hope that America will soon embark on a new direction, one of getting things done by bringing all parties together and then making logical and effective, not ideological, decisions, forgoing our previous path of fostering divisiveness in the world, between our two political parties and among the American people ourselves.

Schwartz View: Enough said. I always get negative feedback when treading in political waters. I do like presumptive Republican presidential nominee and American hero John McCain quite a lot but just feel we have to drastically change policies going forward, not follow a similar path. America needs to get it’s act together quickly as all long range forecasters have reached consensus, saying we’re on a downward slide, financially, politically, economically, socially. We just need to start cohesively tackling our problems.

THE ECONOMY

Numerous economists last week admitted that the US economy is weakening. Among them Brian Bethune of Global Insight, James O’Sullivan at UBS and Moody’s John Lonski. So, in spite of the US not posting two straight quarters of negative GDP growth, the old and easy definition of a recession, and one not used any longer by the National Bureau of Economic Research which calls and dates recessions but problematically many months late -- remember in today’s new globalized world we need to learn new economic relationships! -- it looks like a recession is here. And in my view is going to stay with us for quite some time. That’s because America has been moneying-over all near term problems for many, many years, thus postponing the always needed recessionary cleansing and efficientizing of the US economy, while we’ve also avoiding developing and implementing solutions to our long term ills, like our increasing oil dependency, our underfunded government pension plans, Social Security and former Fed head Alan Greenspan’s #1 concern, Medicare. America does have a bad habit of avoiding problems until they reach crisis state. Maybe that’s because our representative democracy has become so dysfunctional here in the US. I would suggest we start fixing things right there in Washington by first getting rid of lobbying which skews everything toward those with the money to get their voices heard. Even corporate America, who now realizes it’s entrapped by this self-perpetuating system, would like nothing better than to see lobbying go away as big business now has to carry and fund a large and increasingly onerous lobbying budget.

Schwartz View: All I’ve read recently has been about how there are so many inefficiencies corrupting our inherently great economic and social framework that it’s a wonder anything can get done. Such as the US having 600,000 lawyers while Japan has 15,000 (those figures were about 10 years back but obviously haven’t changed for the better). And all the broken marriages and unwed mothers costing America a fortune as well. It’s almost funny, after encouraging the rest of the world to move to free markets for decades, when the Soviet Union collapsed and showed the economic rot hidden there, the world finally started followed our recommendations. And economic success followed suit but that led to tremendous and widespread global competition, so it’s vital we get our own act together as soon as possible, to just keep up. Thus the silver lining to this current economic slowdown, a slowdown that isn’t responding to our normal response of throwing money at it, is that crisis is when change really does occur in America

THE STOCK MARKET

Stocks have again gotten ahead of themselves on the downside although not as much out of whack as at the first bottom back in mid-March. Figuring the Dow Industrials and S&P 500’s previous bull market tops were set back last October, after nine months of a bear market or at the recent July 15^th lows, we are down on average about 2.5% per month versus the historic average bear market monthly decline of 2%. So we could easily see a backing and filling trading range here and now or even a modest rally, the two normal ways bear markets correct themselves. Much government intervention has come together to force down the price of oil and thus commodities in general, prop up housing and consumer spending, keep the financial system from breaking down completely and holding interest rates way below the rate of inflation. So all this government stimulus has to go somewhere just as previous stimulus found places to bubble up. Plus new government props and controls historically have been able to put a temporary fix in place.

Still, over a period of time the stock market reflects the economy and things aren’t really getting any better there, despite Q2 GDP growth out this Thursday going to again be positive. In point of fact, the economy is continuing to get worse if one looks under the surface at signals like credit spreads, a rough definition being the difference in yield between US government bonds and non-US government guaranteed bonds, which remain wide. Or if we factor in historic trends which show that economic downturns tend to surface hidden problems which end up feeding on themselves. Today’s continuing wide credit spreads mean at some point MBIA & Ambac and Fannie & Freddie, the other 17 big financials which have also been taken off the allowed short selling list & all the other financials who’ve lost billions of dollars aren’t going to be able to hide things any longer and are going to have to really own up. So stocks remain iffy for now. And with the rug pulled out from under the remaining stock leadership in the stock market over the last two weeks, out from under energy, the energy complex and other commodities, any market rallies are going to be just technically based, say from an oversold position or short sellers being forced to cover. Sure, a rally may then feed on itself and last longer than bears think, but should ultimately roll over as data worsens.

Schwartz View: Technically then, we could be embarking on a summer rally and if so sharp traders with the courage to risk their monies in the propped up financials may be able to scalp the stock market. And other pockets of strength should or may show up (hopefully in the health sector as that is now my focus with my few longs) normally searched out and propelled along by momentum players.

PORTFOLIO STRATEGY

LONG TERM PORTFOLIO STRATEGY continues to be hunkering down until this big storm passes. I expect that to be longer than most government and Wall Street economists and market strategists believe or at least publicly state. Publicly state because we all know that bearish Wal Street analysts and economists ultimately get fired and that in the aftermath of the dot.com bubble bursting, we got some theretofore hidden insight into what analysts really think. I see widely-followed, economist Nouriel Roubini, formerly holding various high level economic advisory positions in government, believes the US and European economies are now sinking as last Friday he said Wall Street was in spin mode and that financial institutions are “… manipulating at will their earnings, and analysts [are] falling for this supreme baloney.”

NEAR TERM PORTFOLIO STRATEGY depends more on whether this two-week, fledgling rally proves it has legs or not. I’m using as a key gauge whether the Dow and S&P are able to close above their last Wednesday’s closing highs, Dow 11,632.40 and S&P 1282.19. If these key indices close higher, then we will have the definition of a new up trend in place, a series of higher lows and higher highs. Strategy then will be to favor the long side but with say with no more than 50% at most market exposure. Planning on a modest summer rally for a month or two, with strategy being trying to scalp some short term profits.

AS FOR INCOME INVESTORS, we’ve all gotten used to our income fixes after 25 years of income investing being easy during a bull market in bonds, meaning just riding the trend toward lower and lower long term rates, I know it’s a struggle for you all today. My best suggestion is to watch for weakness in income sectors, say in utilities, royalty trusts and even REITs, then strike. Only move in and in a small manner AFTER a sector has just been blasted. This gives you some profit buffer as primary extended downtrends many times have sharp sell offs after disillusioned investors finally give up hope and sell, right before they rally. This can get you in at unusually good prices, at least for the near and intermediate term.

INCOME IDEAS. Thus I would currently search through the utility sector as the Dow Utility Index has just fallen a sharp -8% over the last two weeks. Or take another look at my previous July 11^th, 2008 two energy income recommendation Cross Timber Royalty Trust (CRT) and San Juan Basin Royalty Trust (SJT), both haven tumbled hard with crude. Both go ex-dividend tomorrow, meaning today’s the last day to get in to collect the substantial August dividend (both pay monthly). Or finally, revisit my other income recommendation, back on July 10^th, 2008, of two large European pharmas, GlaxoSmithKline PLC (GSK) AstraZeneca PLC (AZN) paying moderate dividend yields of 4.4% and 5.8% respectively. You need to buy GSK today to be entitled to this quarter’s dividend and buy AZN soon before it goes ex-dividend (not declared yet but last year it went ex on August 8^th). Good income investing!

Have a great week!

We Need To Move Past Oil!

Richard Schwartz — Fri, 25 Jul 2008 13:49:00 GMT

YOUR ALTERNATE CLEAN, GREEN ENERGY WEEKEND UPDATE

With not much stock market stuff to write about since I don’t want to recommend buying or selling this morning as we all should have our portfolios hunkered down and pretty much in place for a rocky and rough summer by now. Sure, stock market aficionados can always fine tune their portfolios and do some long and short trading, trying to scalp some profits here and there while long term investors stand pat, but with not that much going on, please let me rant and rave a little about those people out there who are slow in moving forward on American’s vital energy issue. And, don’t get me wrong, we all have to change our mindsets about energy and life in America and it will take everyone their own period of time since we’re all coming from different lifestyles, histories, jobs and places. Still, change is a coming now – I agree with George Soros who writes he sees America and the world moving from an established order and certainty to great change and thus greater uncertainty -- and we’ll all have to adapt. No problem for us Americans as that’s what we’ve always done; we’ve always adapted to change well.

“Drill, drill, drill!” I almost can’t believe Larry Kudlow on CNBC this morning. That’s his mantra: Drill, drill, drill. OMG (Oh my gosh!) I have to believe Larry, “a great American” no doubt and always bullish, is living on another planet or is somewhere back decades in time. He just doesn’t get it! But then I shouldn’t be so harsh on Larry. Millions of American’s still don’t get it as well. Though I’m delighted to see T. Boone Pickens gets it as he is now paying millions for TV ads publicizing The Pickens Plan, his idea to harness America’s wind corridor running north to south from Canada to West Texas, replacing natural gas as an energy source for cities and use that natural gas to power America’s vehicles.

Anyway, Larry just will have to realize that economic growth isn’t the be all and end all. Near term growth is just near term growth. We really need long term, sustainable economic progress to make the US and world a more prosperous place. And that switching from oil today, while a big burden now, is the best thing for us and for future generations to come. Thus we shouldn’t be doing anything to drive down oil and thus gas prices today. We need to leave them be because high and higher gas prices now will help drive America in getting off oil by creating profit in developing alternative power sources. That more and more Americans see this already and those that don’t will soon wake up to this fact going forward, and are or will be willing to sacrifice for the good of the country. And that this major change over – like moving to indoor plumbing, to railroads, to cars, to electricity in generations past – can be and should be done.

So my major #1 point is that we don’t want to drill for oil any more! Certainly not lift the moratorium on offshore drilling like President Bush has just proposed and Larry got all excited about. Or go up to Alaska and ruin one of the last remaining unspoiled parts of our planet and home. For what? Temporary relief and to lower by a dollar or so gas prices now? And then a few decades from now, when we use up that offshore and Alaskan oil, we’ll just have to address the same issue once again?

You’re not convinced? You still want to know more reasoning why we shouldn’t drill for oil any longer? Well, because we have to move beyond using oil as a power source. That’s the bottom line. We immediately have to start putting any and all plans in place now, today, to stop using oil and dirty coal as well. Now, I know what some of you are thinking: “Richard, get realistic! That’s impossible.” Maybe Larry Kudlow and George Bush 2 are thinking that too, that there’s no way to get off oil and coal. But someone has to give them a (loving) slap across their cheeks and wake them up to coming change. It is a total change of mindset but it’s happening here and all over the world. It’s happening here with movies such as Wall E. Lucy saw that movie with her granddaughter Elizabeth and says it make her more into a green believer. And the influence that movies have is great, thus every kid who sees the movie will be left with the unconscious thought that they’d better live a green, clean, low carbon footprint life.

And, as I’ve consistently written since December 2006, I’ve noted a critical mass already built up supporting a change in how we live on this planet. From scientists, to governments to large and small business alike, to venture capitalists, to individuals. Supported by logic, the reasoning that using a cleaner energy source will: (1) be a major, maybe knock out blow to global terrorism, (2) create millions of new jobs in the US and globally and thus spur the whole world into a new more prosperous phase and of course, be a big step forward in leaving Mother Earth at least as clean and healthy as we found it, just the right way to live. Back in December 2006 as a result, I took my own advice to you all and started using 95% of my IRA account to just buy small allotments of any and all companies involved in inventing, using, working on alternative, clean renewable energy sources. I’ve posited here time after time that fortunes will be made by those companies and individuals pursuing this same course. Thus I’ve listed many times in this space as many companies involved in alternative power as I could find. Solar companies, wind companies, battery technology, hydrogen tech, geothermal, thin film solar technology, energy savers, and on and on and on. And I must say this strategy has worked. My Ira has risen while the stock market has been on a slide for the last year now.

SCHWARTZ SUMMING UP. Sure we still need oil and coal today and let’s find more where we can, where we’re already drilling. But we need a new mindset in America and I see it as already occurring, already in place and inevitable that it’s going to change America and the world as we know now it. Better to ride this incoming tide, open up our minds to new thinking by ourselves rather than have it forced down our throats. Some will not see this major change coming or resist it, not being able to adapt to a new world ahead, but not so my readers, I hope. There’s so much support already that there’s no going back so the sooner we all cross over to the other side of this vital energy issue the better.

Let's Face Our Problems! Americans are Ready.

Richard Schwartz — Fri, 11 Jul 2008 14:13:00 GMT

HERE’S ANOTHER’S BIG PICTURE VIEW. A longtime regular reader emailed me his opinion of the current US residential housing market yesterday and how the government is handling things, writing:

‘It seems now to me that the "gov" is tweaking things to "hold it off." By that I mean that if you allow phony mortgages for years and pump up the price of homes, when that collapses home values must drop to the "normal" level. Pushing this pain off to the future only makes it more protracted and worse. I see a worse "bear" than you.’

I answered this way, with a couple of tweaks myself for today’s broader readership: .

“I agree. The way our political system and US government is currently put together it's always in the politicians own best interest to put off resolving trouble. Thus they never face trouble head on. Economists see this and note it as it occurs (like in the current housing crisis) but nothing every changes. Re: the current housing debacle, all the effort, like you say, has been to postpone trouble. Which means we can't get through it, it will linger & linger.

“Obama's plan is to put on all Congressional deliberations and votes on public TV so the public can watch what goes on and who votes for what. Hopefully that may change things and we can move from a representative democracy to a participatory democracy whereby the public gets a vote on all large issues. Therefore we get back to more equitable representation for all.

“Even business is fed up with the current lobbying system. It costs business a fortune! They now need to fund a large, extraneous lobbying budget. So business wants to end the whole lobbying system but can't while their competition keeps on lobbying. Just like business wants a cap & trade emissions scheme and other regulations. If our, or all, governments were to just say here's the new rules, no lobbying in Washington, or over in the pollution emission area, here’s the rules on how to operate going forward, these rules would apply to all business so all could see that no one would get an advantage. We do desperately need new, enlightened leadership!"

Schwartz View: It’s just like those suggesting we explore for more oil and open up more protected lands. We’re still heading in totally the wrong direction with wrongheaded thinking completely. We all just need to get a brand new mindset that we’re not using any more oil, let’s have America lead the way in getting off burning oil (and coal). Thanks goodness for one well known investor doing some out-of -the-box thinking, the long time oil man, Boone Pickens! Go Boone! I’m 100% behind The Pickens Plan, unveiled earlier this week. If you haven’t heard of it or you missed my Wednesday review and raves about it in this space, please let me know and I’ll email you some info. Or just google it and read about it yourselves. Briefly it calls for putting up wind turbines in the wind corridor from Canada down to Texas and using that energy to replace natural gas usage and start using that natural gas to power cars. I love it! And I’m all for any other similar plans anyone else comes up as well. America generally wakes up and responds only where there is a crisis. Let’s get America working as a team toward the right goal!

America's Path Forward

Richard Schwartz — Wed, 09 Jul 2008 14:31:00 GMT

A Recap of: THE WORLD IN 2020: POWER, CULTURE AND PROSPERITY

By Hamish McRae (1994)

Before my memory fades, let me recap a bit of the fact and opinion filled book I read on my vacation. Essentially Mr. McRae, an acclaimed commentator with a 25-year career writing for two British national newspapers interpreting the international and economic scenes and previously already a best selling author, portrays how the world will develop by 2020. Basically he briefs us about where the world stood in 1994, then discusses the major forces for change, including demographics, natural resources, trade, tech and government, and then concludes by describing the world as he sees it in 2020. (Mr. McRae's book offers great perspective. I recommend getting and reading it yourself.)

Let me begin at the very end. I was absolutely delighted to find in the final chapter this McRae conclusion: “If the US does reimpose majority values, it will do so in a spirit of decency and humanity. The United States has to come to terms with an inability to increase living standards for the majority of its people until and unless its citizens behave in a more ordered way. But it will do so.” Schwartz View: Yay! That’s my belief too. America must start living in a more orderly, civilized way to really regain our leadership role and again improve our living standards which have been stagnating for far too long.. Thus I’m relieved and delighted to come upon some other observer of life and the times noting the same thing I have.

This morning I’ll just describe America in 2020. But in forthcoming letters, say in my regular GLOBAL VIEW section, and elsewhere when and where appropriate, I’ll fill you in on Mr. McRae’s views on other countries’ progress and their standing in 2020 as well.

The United States In 2020. The US will continue to get multicultural, much more so than any other country. Thus it will feel much different than the past and different also from the rest of the world which discourages immigration. We’ll feel “big and vibrant” but not “particularly rich.” There will continue to be large pockets of poverty. [Schwartz: Unfortunately, that’s just how capitalism works.] The incoming immigrant population will keep the ideas flowing and innovation happening and the US growing faster than Europe or Japan but will cost us more as running a multicultural society is expensive. By 2020 we will be well on our way to de-industrialization, having less then 10% of America employed in manufacturing. We will be depending more and more on the service sector and will be the global leader in services by far. [Schwartz: This is debate about whether abandoning manufacturing is a good thing or not.] We will see a decline in the old city centers and further growth in edge cities which will also be different than the rest of the world. Edge cities just being semi-urban agglomerations inhabited mostly by professionals. Better communications will make large cities redundant as more workers will telecommute. More work and social life will be done by phone, videoconferencing, email and fax. Our neighbors, Canada and Mexico, will become even further integrated into the US economy as migration continues. Cultural and economic borders, if not political ones, will disappear. Although likely losing our richest nation role, the intellectual leadership of the US will remain and we will continue to export our culture, ideas and language.

We have three big issues facing us domestically; bureaucracy, security and lifestyle. Bureaucracy-wise, we are running an inefficient society now, for one example, too much litigation is a big drag on the economy. Security-wise, we have too much crime, as another example. And lifestyle-wise, we have too much divorce, too many single moms, low savings and low education standards. Schwartz View: Any and all ways of running our economy, political system and lifestyles inefficiently hurts our economic growth, no question about that. But Mr. McRae feels the US will break this negative cycle. And get back on track, living in a more orderly way, rebuilding the family unit, etc. McRae speculates on how this change will happen: “At some stage, most probably in the second decade of the next century, there will be one of those great radical shifts in US political attitude which take place from time to time, a shift akin to the New Deal …” Hey, it can’t come too soon for me as I rail under the monkey-see, monkey-do atmosphere of Hollywood, the New York Post and Mike & the Mad Dog, crude and rude, using whatever sells, taking no responsibility, gaming the freedeom of free speech, just living off other people. I see this shift beginning no matter who becomes our next president, although I see it really accelerating if presumptive Democratic nominee Barack Obama wins.

Yay for the Pickens Plan!

Richard Schwartz — Wed, 09 Jul 2008 14:19:00 GMT

YOUR ALTERNATE CLEAN GREEN ENERGY UPDATE

Finally! A Plan! The Pickens Plan. Kudos to Mr. Boone Pickens!

Yep, it finally came down to a long time oil man to propose a way out of our energy bind. Obviously, it’s only a first step and it has a lot of hurdles and a long way to go before implementation, but Boone Pickens’ proposal is a great first step. We have to get the ball rolling and the country pulling together again. Plan on seeing advertisements about Pickens’ plan because he plans on publicizing it & has the money to do so.

The Pickens Plan:: To dramatically reduce on dependence on foreign oil.

As Boone Pickens unveiled yesterday, he wants to have private industry fund and build thousands of wind turbines in the middle part of America, in what he calls a wind corridor, running north to south from the Canadian border to West Texas. Which can generate about 20% of our electricity needs! Then transport this wind energy to the Midwest, South and Western metropolitan areas by private industry building electric power transmission lines. This will free up the natural gas now used to fuel these Midwestern, Southern and Western regional power plants. We can then redirect this natural gas to replace imported oil as a fuel for transportation vehicles (cars, etc.). Yay!

Schwartz View: Mr. Pickens goes on to request a monthly report on the reduction in foreign oil imports and the progress of development and implementation of natural gas fired vehicles. I’m 100% for this plan and all others of similar ilk. We do have a serious crisis on our hands and we need to get started now in addressing it. Again, I believe there is already critical mass built toward solving the increasingly critical issues of terrorism, global warming or global pollution, a new impetus to growth and our own national security. And all can be resolved by getting off the use of the dirty power source of oil. Go Pickens Go!

* Finally, many boos for the Group of Eight (G-8) leaders who couldn’t agree on anything about energy in their just finishing up three-day meeting in Japan. They all know something needs to be done but they can’t agree on anything. And our President Bush is one of the worst offenders. I like the man but am anxious to see someone replace him because he just doesn’t get it. America is ready to sacrifice for the worthwhile goals of national security, job growth, fighting terrorism and respecting and cleaning up our planet, but he’s locked into a very bad and losing position and to top it off, is stubborn. Hey, being stubborn when wrong is a big no-no-in investing in the stock market, why not in politics too?

The G-8 statement? They will cut greenhouse gas emissions by at least 50% by 2050. Regular readers know when any proposal goes out more than 10 years or so it’s just a sop. And this statement has no plan, no measurements, no starting point, just about nothing. We truly need new global leadership!