Search results matching tags 'Historical Perspectve', 'Inflation', and 'Technical View'

Monday Weekly Strategy

RichardSchwartz — 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

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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

Get Back Into Gold!

RichardSchwartz — Wed, 04 Jun 2008 13:19:00 GMT

GOLD VIEW. It’s Time to Buy Back into GOLD! I must say the gold chart looks ripe for a rally and the background economics are screaming rising inflation here in the US and all around the globe, so I would recommend buying back into gold. Gold pulled back from its big Round Number of $1000 in almost perfect fashion for those of us like myself who believe Round Numbers are meaningful & insightful. If you remember gold traded over $1000 an ounce for just two days, on Friday, March 14^th and again on Monday, March 17^th, found that it didn’t have enough buyers to propel it higher and promptly rolled over, sold off and said sayonara to $1000. So it’s been down for the normal three weeks to three months which normally encompasses counterswing rallies to primary down trends . Since then it’s bottomed at $852.70, then at $864.00 and then $877.90. So it’s made a series of higher lows which is bullish. And, as I mentioned earlier, all I see is rising inflation around the world, from here in the US to Europe to Asia to the developing world to the new “frontier” world. Sensible because food and energy are soaring everywhere.

Schwartz View: Since gold reversed direction around the “fateful weekend” when the Fed showed they were backstopping the whole financial system, it just makes sense that if the stock market rally which began around that same time is over or in its last throes, the other counterswings that began the same time may be over as well. One such counterswing has been in gold. So, I recommend buying gold today.

Like always let me recommend buying the gold bullion tracking stock, now called SPDR Gold Trust (symbol GLD) instead of the gold mining companies. Buying GLD takes the added, now unnecessary risk of buying the gold miners themselves out of the mix. Regular readers know I want to take that geopolitical risk out. The recent risk that developing countries all want to renegotiate their contracts with all the mining companies including the gold miners. (And who can blame them?) They want better deals than which they made back when gold was at $250 an ounce. Renegotiating would hurt gold mining profits, so in spite of us having the right investment idea we could lose; you know being in church but in the wrong pew.

Bottom line, I have to think with global wide inflation rearing its head for the first time in some 25 years, gold will surely benefit over the longer run. And since we just pulled back, it’s a good time to get back in. Thus I would buy a little gold here and buy more on weakness, paying close attention to the correct percentage exposure for your own circumstances and also how much you buy each time in. Overall through your gold exposure starting today should be much larger than the normal 3% to 5% exposure that many advisors normally and historically recommend. It’s gold’s time to shine again after being out of favor for 25 or so years. Be sure to get some as it should prove a great hedge against your long portfolio.

Disclaimer! I own a little GLD and plan to buy more although please remember I can switch my views and thus my positions at any time.

1973-1974 Redux

RichardSchwartz — Thu, 22 May 2008 14:09:00 GMT

The Principle of History. Knowing one’s history gives us guidelines and a basis to work from. So yesterday I began to compare the last Papa Bear market we lived through, 1973-1974, which encompassed the first really oil crisis, to today’s ongoing bear market and oil shock. I said I was printing research off the (wonderful!) Internet & get back to you. Well, I’m baaack.

1973-1974 OIL CRISIS COMPARED TO TODAY

Studying the 1972 through 1974 period in more depth yesterday, please let me note that:

There were three separate legs down in the two-year Papa Bear bear market of 1973-1974:
The first leg down was sharp and came in January 1973. From a peak on January 11^th, 1973, the Dow fell -10% over the next 30 trading days. Then kept sawtoothing lower until late August when it completed a seven-month loss of over -18%. This first leg down can be compared to what the Dow has recently gone through, since its peak on October 9^th last year. From Dow 14,164.50 to the Dow low of 11,740.20 the Dow lost -17.12%. Schwartz View: So about comparable in time, seven months versus five months, and extent, -19% to -17% to the first leg down in the Papa Bear market of 1973-1974.
The stock market in 1973 then rallied +15% from its lows over the following two months. That brought us back to within about -6% of its old January 1973 high and peak. Schwartz View: This time around the Dow has rallied +11% from the March 10^th lows to the May 2^nd highs, so for just under two months. And has brought the Dow within -7.8% of its old highs. So a weaker, shorter rally, which may be bad, IF it’s indeed over.
Going forward from that bear market ally high in August 1973, the two-month rally where some investors “were likely lulled into believing that a new leg up was occurring” the market began its second leg down, which brings us up to date and to today.
Looking back again to what happened in 1973, and projecting forward to what unfolds today, the 1973 second leg down began in August and ran until December and the Dow dropped an additional and even more severe -20%. The leadership of that era, the “Nifty Fifty,” resolved its previous divergence, holding up while the smaller cap stocks got hurt during the first leg down, and caught up on the downside as shown by the -20% Dow drop. This drop took roughly three to four months. Schwartz View: Thus I have to project a second and more severe leg down starting now or soon. Probably including the remaining leading energy and commodity sector taking a hit.

Other similarities and/or dissimilarities from the oil shock and crisis back in 1973-1974 to today’s oil shock which I unearthed in my research yesterday are:

1. Rising inflation was a big issue in both periods.

2. The Vietnam War ended during that past bear market, something similar to what I expect to happen during this bear, us getting out of Iraq.

3. The US dollar was under pressure back then even in the early stages of the bear market, in February 1973, it was devalued by 10%. It’s losing value again, now.

4. Oil jumped from $3 a barrel to $5.11 a barrel, beginning with the October 1973 OPEC oil embargo, a quick jump of 70%. We all know oil has soared the last couple of years as well.

5. We had massive layoffs of 142,000 in the auto industry in 1974; yesterday American Airlines announced “large layoffs” ahead.

6. We had Franklin National Bank be declared insolvent in 1974; this year Bear Stearns effectively was declared insolvent by the Fed. Other banks, investment and money center remain under great pressure.

7. BARRON’s Roundtable was unanimously bullish starting off 1973; same thing from Barron’s Roundtable kicking off last year.

8. The US economy from 1972 to 1974 dropped from a growth rate of +7.2% to -2.1%. And the UK economy dropped from +5.1% to -1.1%. This time around both the US and UK economies are also dropping quickly.

9. Stocks priced in gold were priced very low back then. Same low valuation in terms of gold today with gold at 900$+.

10. We had a new Fed chairman, Arthur Burns, arrive in 1970, who encouraged inflation. We have a new Fed Chairman, Ben Bernanke, who is also encouraging inflation today.

SCHWARTZ SUMMING UP. No use looking out too far, looking at the third leg down in 1974 for instance, which came after another always-to-be-expected stock market rally and multi-month trading range. Let’s hope this time around isn’t so bad although I must say things do look pretty bad to me.