Search results matching tags 'Democracy', 'Bear Market Rally', and 'Summer Rally'

September 2008 Investment Strategy

RichardSchwartz — 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

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

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

RichardSchwartz — 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!