Search results matching tags 'Investing Strategies', 'Economic Trends', and 'Recession'

Weekly Monday Overview

RichardSchwartz — Mon, 06 Apr 2009 13:17:00 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, April 6^th, 2009: It’s Master’s week so I’m pumped up. It’s golf’s 1^st major of the year, tradition packed, for you non-golfers. Should be great with Tiger back, Phil Mickelson saying he’s playing the best golf of his life, Paddy Harrington going for his 3^rd major in a row and lots of up & comers. All I can say is wow! Even just watching this old southern flower nursery turned into a golf course in the spring, lavished with money for decades, may be worth the watching for any non-golfers out there. For me, it’s just heaven.

THE KEY QUESTION

Instead of discussing The Big Picture today, let’s focus on The Key Question. Since that’s what I keep pondering. Plus it has to be on every investor’s mind as well. “Could this rally be the start of a new bull market?” To intelligently answer -- as during every bear market rally -- necessitates rehashing all the available evidence. I can make a solid case for a cyclical bull market having just started and I can make an even more solid case that this is just a normal bounce in a Papa Bear market. Consider:

MINI BULL MARKET HAS STARTED

·        The economic stimulus is now starting to kick in which will stabilize and bounce the economy.

·        The monetary stimulus, lower interest rates, is also now kicking in and housing sales are increasing.

·        Inventories have been drawn down and need to be restocked which will pump up GDP growth near term.

·        The US and other governments have done everything possible to mitigate this downturn.

·        We now have more coordinated and get along global leadership than in many years.

·        The US economy has proven itself wonderfully resilient to shocks in recent decades.

·        Markets can counter-swing at any time for long periods, posting mini bull markets, versus primary trends.

·        Almost two years has passed since the beginning of the credit implosion back in July 2007.

·        Many independent market gurus think the March 2009 lows will last for a good while, months or longer.

·        The latest government bailout plan has more enthusiasts and support for it than previous plans.

·        Oil stopped falling back in December and is now on the rise possibility indicating growth rebounding.

·        We have recently had a number of better economic data reports from both retail and housing.

JUST A BEAR MARKET BOUNCE

·        The bear market hasn’t lasted long enough to discount all the problems that have come to light.

·        More problems, coming as bearish ripple effects and because of long lag times, are due to show up.

·        The bear market hasn’t fallen deeply enough to factor in the sudden massive shock to the global economy.

·        There hasn’t been enough overall selling or liquidation for a solid bottom. Stock and mutual fund liquidation haven’t reached previous classic big bear market bottom levels.

·        No solid bottom appears on the charts. We need a climatic sell off or a long low volume erosion to bottom.

·        Interest rates have to go up at some point, soon – either with and because of an economic rebound or from panic selling -- which normally depresses stock prices because of this new competitiveness from bonds.

·        The American consumer has suddenly stopped spending. This has slowed down business all over the world and finally exposed the global imbalances problems. Too much manufacturing in China and Asia and too much spending coming from America. Now those imbalances are being forced to readjust. Takes time.

·        The stock market is ignoring soaring unemployment. Yes, employment is a lagging indicator but continuing jobless claims isn’t. A new report just out says that in coming weeks and months, hundreds of thousands of jobless Americans will exhaust their unemployment benefits. Finally, 600,000 new job losses each month is going to add to weaker consumer spending, problems for local communities and cause negative ripple effects.

SCHWARTZ CONCLUSION: In review, we started this big bad bear market back in the year 2000. That was the peak of the last big bull market and thus the beginning of this big bear market. This is evidenced by the benchmark S&P 500 Double Topping in March 2000 and October 2007 and then subsequently and decisively breaking below October 2002’s previous decade-long lows by over 10% in March 2009. Showing that since 2000 and the ending of the Internet boom we’ve really been living on lower interest rates and big tax cuts, a false, “pump me up,” house of cards. Really not any wealth building going on, just paper shuffling to make things look great fueled by easy money credit creation. But now reality has set in. Thus, looking around, we see we’re almost nine years into a bear market which has been interspersed with one bull market, running for five years. So stocks were down almost two & a half years, up five years, now down about another one & a half years, sort of repeating The Visit of the Three Bears. In that infamous and extended bear market run of nine years, netting a -50% loss, there were two cyclical bull markets sprinkled in and surrounded and book-ended by the three bears, Baby, Mama and Papa.

My conclusion remains that this bear market is not over. But that the form and shape of it may get tricky going forward. Because the market has a history of posting cyclical or short term or mini bull markets on the way down when the bear gets ahead of itself. Which is why the stock market remains so fascinating!

THE ECONOMY

Well, the BUZZ has died down about how the economy is slowing its prior quick rate of descent. Guess because we’ve started seeing more bad economic data pop up or because the conversation has moved on. But some investors have decided an end to the economic collapse is out there, just over the horizon, so they are shifting into cyclical stocks now as a result. One can see this money rotating out of defensive sectors such as medical care, consumer staples and even gold. You know the concept, buying in advance of a recession’s end since history shows stocks rise roughly six months before the economy turns up. But if we indeed are stuck with a very mild even “anemic” economic recovery, as many figure, then stocks could also soon level off to mirror that trend as well. That is if the economic and earnings data don’t start sinking fast once again showing the economy is still sinking. For example, last Friday it was reported that the ISM Non-Manufacturing Index which now measures almost 90% of America’s economy - America now being a service oriented economy instead of a manufacturing economy - fell faster in March than in February somewhat debunking the idea that the economy has stabilized. Schwartz View: Yes, there is the possibility that economy-wise we are going to V- back up because sharp moves, in whatever areas of endeavor, are generally followed by responding sharp moves back up. We’re seeing that now in the stock market but after this bounce is over, I agree with the camp forecasting an anemic slow economic recovery.

THE STOCK MARKET

The stock market extended its rally to four straight weeks last week. We did see the first crack in this rally a week ago when the market fell sharply for two days. But then we quickly rebounded to new rally highs. That’s normal, the first crack being overcome but it does show this rally may be starting to struggle. We are getting closer to my minimum upside targets of Dow 8303 and S&P 1627, closing Friday at Dow 8017 and S&P 1621. And one can note trading volume has been slowing some, another sign of sluggishness. Or maybe cautiousness. Makes sense as we’re now moving into another corporate earnings reporting season starting tomorrow, the 1^st quarter January-March 2009 report kicking off after the close with Alcoa (AA), traditionally the first of the 30 Dow stocks to report. With the fall-off-the-cliff economy occurring early in last year’s fourth quarter, it only stands to reason that investors have to be wary of forthcoming earnings and thus wary of this rally as well. Schwartz View: It looks like the stock market has some more strength left in it so with stocks already having rallied beyond the 50% retracement level from their latest leg down, the early January peak, the teeter-totter phenomenon comes into play. Getting halfway up means it’s very likely to go all the way back up. Thus we kick off this week at roughly another key Fibonacci 61.8% price in both the Dow and S&P 500. That’s about 8088 and 838 respectively. If we break through those levels, then the next target is those January highs, Dow 9088 & S&P 944. Not guaranteed but increasingly likely.

PORTFOLIO STRATEGY

2009 may indeed prove to be the year to trade. If stocks fluctuate but go nowhere net, up or down, for many months ahead then it’s going to prove very frustrating for investors. In these times and they do happen, more often than the uninformed investor may realize, the best way to make profits is to: (1) trade individual stocks and (2) discipline yourself to continuously fade the market, buying on dips and selling on strength. Toward that end I’ve started incorporating the Commodity Channel Index (CCI) technical indicator into my work. Comes on most charting services like Bloomberg. Basically it shows deviations from the moving average, when stocks get too far overbought or oversold. Naturally you buy when a stock or index gets oversold. For more on the CCI I suggest getting Oliver Perez’s Swing Trading Tactics DVD or Alexander Elder’s book TRADING FOR A LIVING. Over the last month of rally for instance certain stocks have far outperformed the averages. And numerous tradable asset classes or market sectors like the US dollar and oil have been both up and down offering trading profits but no net profits for buy & holders.

Otherwise than scalping profits what should we do? For now favor the long side and the cyclicals. I like technology, renewable energy and natural resources. Move up a notch in your market exposure to about 30% if you haven’t already but continue to hedge your bets and don’t get out on a limb by going too long. Just subdue your ego, don’t think you know more than Mr. Market does and just go with the flow, modestly. Bottom line take what the market gives you, right now there are some trading opportunities but don’t get carried away. There’s lots more trouble to come but the path ahead is likely to get more tricky as well. So don’t fall into the camp that says “fool me once, shame on you, fool me twice shame on me.”

Have a good week!

Go Tiger Go!

Big Names Predict Problematic Inflation: What's An Investor To Do?

RichardSchwartz — Wed, 11 Mar 2009 13:48:00 GMT

ECONOMIC VIEW. Rising Inflation Expected. So predicts a whole slew of big names, everyone seems to be jumping on board this train in the last few days. Now Warren Buffett and Bill Gross have joined Marc Faber and Jim Rogers and more in predicting problematic inflation just out there over the horizon. Yep, as soon as deflation became the consensus buzz word – recessions kill inflation is what I’ve heard repeated from many sources – we’re getting a groundswell of opposite opinion. Well, not quite opposite but close enough, let me explain. Everyone agrees this slump will preclude problematic inflation but all say that’s a temporary phenomenon. No one predicting rising inflation will go so far as to say just WHEN rising inflation is going to emerge but more and more observers are saying it’s definitely coming, arriving when this economic slump is over, whenever that is. Again, rising inflation, no, out of control inflation, no, to put it more accurately, hyperinflation is my biggest worry. That America printing money galore – yes, for bailing out businesses too important to the financial system to allow them to fail, and, yes, for keeping the economy greased and running, and, yes, for stimulating new growth and maintaining existing economic activity, and, yes, for overall deficit spending in this economic downturn – will come back to bite us in a big way. I can handle some inflation, I know how to shop for bargains which will help in food and clothing needs, what I’m worried about is a major currency devaluation which wipes out mine and America’s buffer. America’s savings becoming worthless as has happened time and again across the globe when some country’s finances just go kafluey. When a country can’t pay its bills compounded by a wholesale lack of trust in its currency. Schwartz View: Hasn’t happened in the US yet, but …

So I get more nervous when I hear Warren Buffett, America’s richest man and known as the best value investor of our time, say inflation could go as high as it was in the 1970s, that’s almost double digits! I get even more nervous when Bill Gross, who manages one of the largest bond funds going, says that US government efforts to break this recession will cause “costs for goods and services” to rise. I respect both these guys and their opinions. Now they join long term forecaster Jim Rogers, who is also more worried about rising inflation than deflation, best I can figure. He’s long been predicting an US dollar crisis and really bad inflation ahead and says he’s just waiting for the proper moment to essentially “short US Treasury bonds.” Rogers sees commodity inflation returning with a vengeance since today’s global economic slump in his view is just improving the fundamentals underpinning commodity prices. In other words today’s credit crunch and resulting recession causing miners to delay or even shut down exploration and thus leading to a further drop in supply. He loves to mention that global food inventories are already down to 50 year lows. Finally, Marc Faber, the well regarded international investor and past BARRON’S Roundtable panelist, sees rising inflation from another angle. He figures that the US government is going to have all kinds of problems in raising interest rates down the road or in effect withdrawing all the money it’s pushing into the system now to try to end today’s credit crisis. Schwartz View: This rising inflation camp is growing now, with many others predicting a forthcoming inflation problem as well. I am too.

Schwartz Recommendation. If you also worry about rising inflation, one strategy available today is to buy an inverse ETF or inverse sector fund. One that goes up when long term US interest rates go higher. That’s the natural reaction if inflation rises, yields generally rise forcing bond prices down. For example ProFunds has two such funds, RTPIX and RRPIX while Rydex offers up RYJUX and in the ETF camp there’s TBT which “correspond to twice the inverse” of the US Treasury bond. I recommend such.

Disclaimer! I don’t own any of the above now but can and do change positions without notice.

For a FREE week’s sampling of my complete daily e-letter, please email me at RichardStk@aol.com.

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

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 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

RichardSchwartz — 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

RichardSchwartz — 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.