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Weekly Monday Overview

RichardSchwartz — Mon, 06 Apr 2009 13:17:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

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

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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.

Where Now Inflation?

RichardSchwartz — Fri, 12 Sep 2008 13:39:00 GMT

THE FIRST INFLATION SURGE IN 25 YEARS IS OVER. So, what now?

First, let me give credit when credit is due. Federal Reserve Chairman Ben Bernanke and the Fed finally got one right. They’ve been promising us moderating inflation for a year or more and now with -30% lower crude oil prices and a big general commodity collapse we’re finally we’re seeing it happen. Or, at least, starting to (most things economic happen with a lag). And with the US dollar now surging, that’s going to reverse/diminish rising, problematic imported inflation as well. So now the deflationists out there, those who say deflation is our real problem facing us for some time – Gary Shilling, Robert Prechter, Ron Insana to name just three -- can really have their time in the sun.

Still, there remains some debate whether problematic rising inflation is going quiescent. Mac Courtenay of Seeking Alpha, I guess a boutique research firm, offers up seven reasons why inflation isn’t going away:

1. Inflation is already firmly entrenched. Schwartz View: I agree. I’ve been observing the Fed’s incessant jawboning that inflation expectations remain low is wrong and we all know that the government’s inflation data is terrible skewed to the downside from what inflation really is.

2. Inflation is already here. Schwartz View: The Producer Price Index (PPI) is up +9.8% over last year, and that’s only what the government grudgingly admits to.

3. Inflation is now moving its way through the “food chain” showing up in consumer prices as well. After some hope that because of global competition (globalization) producers would eat the higher inflation. Schwartz View: This rippling through is evidenced by the Consumer Price Index (CPI) rising too, again up the fastest in 17 years.

4. Average weekly earnings fell in July the largest since 1990. Schwartz View: I’d guess Mr. Courtenay’s point is that when earnings drop, we can’t buy as much. ???

5. More and more Federal Reserve governors are talking about raising interest rates next, not lowering them. Especially if we see energy prices stabilize above $100 and bounce. Schwartz View: Of course, these Fed officials, meeting again next Tuesday, can change their views.

6. Global (food?) consumption patterns are heading higher. Schwartz View: I don’t know if author Courtenay is talking about food, metals or just what. But I agree with him on food. As people get a little money, one of the first things they spend it on is more and better food. Thus global food consumption patterns should keep heading higher even if the global economy recesses.

7. The markets will take charge. If the Fed doesn’t raise rates, the marketplace will raise them. Schwartz View: Not sure about this reason he positing for inflation staying problematic. Right now the markets, the long US Treasury market, is still forecasting a slowdown by yields going lower and lower, which to me means more disinflation ahead, not rising inflation.

Schwartz View: He goes on to say part of oil’s recent comeuppance, coming down, is forced hedge fund liquidation because of Congressional pressure (I agree). And that it’s a great time to buy TIPs (Treasury Inflation Protected Securities) and the easiest way is to buy the symbol TIP. And to buy commodities on this correction, recommending also symbols DBC (a basket of commodities) and GDX (gold). Myself, while I believe this commodity pullback is indeed a correction, I think it’s too early to buy them back.

Schwartz BIG PICTURE Inflation View. My belief, garnered from studying stock market history and looking at thousands of charts over the last 20+ years, is that when any new trend begins, many times it begin with a surge in the new direction, then a pullback or at least a pause, sort of to regroup, consolidate gains, make believers out of disbelievers, open the eyes of others who are slow to see and just basically kill enough time to see if the new trend has legs. Then after this pullback correction, which more often than not can be large and long lasting, runs its course, the new trend reasserts itself.

Basically that’s where I see us today with rising inflation, in a pause to refresh. I’ve theorized over the last year than oil and other commodities would stay stronger, longer than most thought this year. I’d say that proved correct with oil going up all the way to about $147 and related sectors like natural gas, energy services, solar, wind and other alternative clean green leading the stock market for the whole first half of 2008. Similar to what happened during the first year of the last severe Papa Bear stock market back in 1973-1874 (oil stayed high the first year). But now, with commodities reversing downward and in major correction, it’s obvious change has occurred, that a pause to refresh is underway. And we can expect this new trend to last longer and correct deeper than many would think I’d venture. Sure, first because commodities are inherently extremely volatile, much more so than stocks and bonds. But also because of the emerging new, macroeconomic backdrop. We seem to be in line for a major, global economic slowdown which will throw a big detour on the road to a new long term trend to rising global inflation. If the global economy really goes blah for the next few years, commodities will take a longer than expected breather. Schwartz View: Still I’m in agreement with former Federal Reserve Chairman Alan Greenspan who predicted in his 2007 book The Age of Turbulence that we live in an inflationary world and that the disinflation trend dominating all during his tenure as Fed chief is coming to an end. And I’m in agreement also with famed, global investor Jim Rogers who says commodities normally correct 50% or more and that’s what we’re seeing now, a correction not the end, to this so far about 9-year commodity bull market.

Is This Your Portfolio?

RichardSchwartz — Fri, 27 Jun 2008 15:14:00 GMT

WHERE YOU SHOULD STAND TODAY. The Ideal Portfolio (another Schwartz View).

Yep, let me offer up one man’s view of what the ideal portfolio should be today and why:

· Very minimal exposure to the stock market! This major, modern day margin call on institutional investors is causing havoc. I’ve likened this margin call to the one which wiped out many individual investors quickly back after the 1929 stock market crash, only this time around its institutional investors getting slaughtered and thus the process of meeting their margin calls is being stretched out. All are deleveraging their portfolios big time and since the securitized investments killing them are so opaque and illiquid, it’s a terrible, long, drawn out process.

· Where you do have exposure, have some in the Energy Service sector. Business is going to remain strong and money is going to funnel into this sector as long as oil stays up there, even if oil tanks 50%. The world is in now in a new competitive battle to secure our energy futures. Thus companies which help countries like Brazil find and produce oil should do well.

· Where you can, hedge your long stock exposure. One does this by having some inverse mutual funds and/or ETFs (exchange traded funds). Happily today, investors have access to this modern day invention of being able to go short (bet on declines) with inverse investments. You just buy a fund or ETF which goes up as the market goes down. I would recommend having small inverse positions, especially in financials. This allows you to ride through a day like yesterday knowing that a part of your portfolio is rising while your long positions are falling. The next day you check your portfolio’s value and see how you did. That’s what I do each morning. Say the stock market fell -3.00%, like yesterday, & your account lost just -0.20% like my ProFunds managed account did you might figure your hedge is just right. Just tinker with the hedge until you get it right.

· Hold NO BONDS. I’ve been recommending this for some time now. Yes, we may get a deflationary collapse at the end of this 25 year “too much of everything” Kondratieff disinflationary economic backdrop we’ve been in since former Fed chairman Paul Volker broke the back of runaway inflation in the early 1980s. But the world is now experiencing our first return to higher inflation jolt. Thus we’ve started a new bear market in bonds. I can’t help but remember when I first became a stockbroker with Merrill Lynch back in the late 1970s, the client who say she would never, ever buy a bond again, after losing money on bonds going back two or three decades. Well, we’ve had a 25 year bull market in bonds and its over or close. Thus, my recommendation is no bonds. (Except some very short term laddered US Treasuries for income.)

· Hold a little Gold. Yes, some will keep warning of a deflationary collapse ahead, when the economy really tanks and thus say gold will collapse as well. But gold is in a long term uptrend, a bull market, and no one knows quite how it will react in various market and economic scenarios. Buy SPDR Gold Trust (symbol GLD) as opposed to the miners themselves, thus eliminating one unneeded uncertainty. FYI, I’ve seen gold rise and gold sector funds fall, so watch yourselves.

· Hold a little foreign currencies. Again, in today’s modern day investment world, the individual investor can easily bet on foreign currencies … by buying their ETFs or tracking stocks. I’ve been recommending & still am, buying Swiss francs & Japanese yen, symbols FXF and FXY. Both are Big Picture superstar guru Jim Rogers’ picks and are in long term bull markets and dipping now so it’s a good spot to buy in on weakness. Today let me add the Chinese renminbi, symbol CNY, to the buy list since there is a exchange-traded note in existence. Not a fast mover but it’s also in a long term bull market and probably is now one of the most reliable bull markets going.

· Hold a little agricultural commodity position. The middle class global world has grown tremendously, yay!, and thus the general commodity bull market has now spread out to foodstuffs. A larger global middle class, means more and better food is needed, especially increased protein. Food commodities are up so only buy on pullbacks here if you don’t own any now. My picks have been and remain symbols RJA and DBA. Again buy the commodities themselves as much as possible and not the companies which produce such although ETFs like MOO have been doing well to this point. Today, let me add iPath Livestock ETN (symbol COW) to the buy list if I haven’t already, a livestock play. Looks like with corn prices so high, cattle is being killed off (thus one can still get steak and hamburger at $1.99 a pound) because it costs too much to feed ‘em. But that will change too and red meat prices will skyrocket.

· Finally, hold small positions in lots of alternative, clean green energy stocks. I see new fortunes being made by those riding the wave of the US and globe getting off oil. The best way I’ve found to buy these is to keep the shopping list of alternate, clean green stocks I’ve compiled and posted for you back on June 6^th in this space handy. (If you don’t have it email me and I’ll send you a copy.) Buy a bunch of these stocks on weakness. I bought one for myself yesterday.

Disclaimer! I hold or plan on holding many of the ideas recommended above.

Once a Century Day of Reckoning Starting?

RichardSchwartz — Mon, 09 Jun 2008 13:44:00 GMT

THE BIG PICTURE

Ok, here’s a Big Picture of where America and we Americans stand today. A fairly downbeat Big Picture so buckle your seatbelts. America has been on the verge of a major comeuppance for many, many years. But its been postponed and postponed. Because the US dollar is the world’s reserve currency we’ve been able to play by different rules than the rest of the world but now we’ve pushed that special benefit to the limit and beyond. But each time we’ve come close to going into a major economic recession, which almost by definition means a near term cleansing out and thus longer term strengthening of the economy, we get “bailed out,” so to speak, by the Federal Reserve or by our much deteriorated if not totally corrupted political system, i.e., by the sitting president and his staff or by Congress. Our economic problems which terribly need to be resolved, just get more and more money thrown at them (which just makes them worse and more deeply entrenched) say by President Bush’s multiple tax cuts upon taking office in 2000 or by the Fed dropping interest rates rapidly or through the floor or both. For example, former Fed Chairman Alan Greenspan numerous, back to back to back interest rate cuts in 2001 and 2002 and current Fed Chairman Ben Bernanke’s dramatic rate cuts since September. So our economy has been artificially pumped up and stimulated by what I call, financial “steroids.” time and time again for many years now. But now this use of steroids just isn’t working. Now all the money the Fed is pumping into the system to mitigate the credit crunch and crisis is just causing a big bubble in gasoline (and heating fuel prices) in America which at $4.00+ a gallon is now being felt widely. I say $4.00 is the tipping point and things are going to get worse quickly now because of the four following examples over the past weekend. First, Lucy let her Honda get down to a quarter of a tank for the first time in a long time. She called the dollar cost to fill it up

“eye-opening” numerous times as we drove off and away. I could hear the wheels turning in her head. Second, a real estate owner told me he was feeling this recession with a massive increase in real estate taxes, etc. and that he never felt any previous economic downturns in his life. Knowing me I probably blurted out it was just beginning, but I hope not. Third, awhile after my Sunday early morning bird walk, while reading the paper and drinking my coffee I heard the morning manager of Stewart’s, the local all purpose convenience store, tell another customer, a bit desperately, she couldn’t afford to drive to work now. And lastly, when I called to wish my brother-in-law Happy Birthday, my sister, retired but who was a bank trust officer in Buffalo for many years, says she’s never seen anything like this looming downturn. All in all, I expect $4 gas or out of control oil prices in general, is what the stock market discounted roughly six months back, it’s normal advance foresight time frame, when it really collapsed back in January, it’s first leg down in this bear market.

Now, Price Inflation. This commodity inflation, this cost of living inflation or price inflation, is starting to work its way through the economy in food prices as well. Watching the free marketplace work, in effect dramatically weeding out, killing off cattle herds because it costs too much to feed the cattle, that’s going to reverberate into higher hamburger and steak prices down the road. Plus Chinese wage demands will now work their way into much US clothing prices as well during this cycle. And if the US dollar keeps dropping, as it will because the US balance sheet is in such terrible shape, all prices will rise even faster. I’d go so far as to say commodity guru Jim Rogers’ and Peter Schiff’s predictions of hyperinflation are becoming a distinct possibility. All this rising inflation as the economy sinks and US wages stagnate or go lower and jobs shrink. So it’s not a pretty picture. And it’s possibly worse than a normal recession because we’ve put off this day of reckoning for so, so long. For example, in Trader Vic Sperandeo’s two early 1990s books, Trader Vic – Methods of a Wall Street Trader and Trader Vic II – Principles of Professional Speculation, he predicted a day of reckoning right then or very soon. And related to us a little history of how the US government operates, trying to paper over our problems by lowering rates, cutting taxes and whatever else they can think up to throw more money at our problems. This works and works and works … until it doesn’t work anymore. So far no one really has been able to predict when the day of reckoning will arrive. In the late 1980s/early 1990s was a flash point for trouble but we muddled through. Then another flash point around the dot.com bust from 2000 to 2002. But lower taxes and lower interest rates got us through. But now, 2008 -- 10 is the next flash point. Who knows? This time may indeed by the real thing. It sure looks it. Why? Obviously because the extremely important financial sector, the very area which has been driving the stock market higher by soaking up all the Fed and other government liquidity and manipulating it to make things look better and better on paper, has now imploded and gone bust. As Peter Schiff writes in his 2007 book, Crash Proof and Robert Prechter Jr. wrote in his 2002 book Conquer The Crash manipulating financial paper/assets/capital around to make it seem like we’re getting wealthier is a lot different than when America did grow wealthy by actual manufacturing, producing things people need and thus were willing to pay for. In the 1950s and 1960s we were the manufacturing colossus we lived on some of our profit and saved the rest. That’s how you build wealth. This disparity is one of Mr. Schiff’s key theses. Also one of Mr. Prechter’s major theses as well, just illustrated differently. Mr. Prechter, a chartist, says the US economy performed its best in the 2^nd leg up of this long term business cycle, say from the 1950s through the 1970s which shows this 3^rd leg up is nearing a major top. Schwartz View: So it’s all coming together now, seemingly. All the wrong paths we’ve followed for years coming home to roost now. That’s my guesstimate anyway. So, is this latest market decline really the beginning of America’s day of reckoning whereby the rest of the world finally loses confidence in America, waking up to the deception of the dollar as the world’s reserve currency, as Mr. Schiff describes it? Does the US dollar really head down as the world unloads our Treasury bonds, thus forcing up long term interest rates, which in turn ratchets up the already gigundo squeeze on America and us individual Americans and make the situation even worse? No one really knows for sure as Mr. Prechter reports these true economic disasters only occur about once a century! Like in the 1930s in the just departed 20^th century and once in the 19^th century as well. Why would this once in a century event be beginning now? As bad as things now look, maybe somehow we’ll get bailed out and the day of reckoning postponed once again. But since I began this stock market letter, 18 years ago in September 1990, I’ve watched things get worse and worse, not on the surface where we had a great stock market run in the 1990s, but under the surface, as democracy got pushed back and back, as labor unions lost power, as corporate statesmen became extinct, as much needed government regulation somehow morphed into a swear word and became despised, as liberalism or helping the unfortunate became obsolete behavior and as capitalism ran away unchecked, benefiting from fiscal and monetary stimulus over and over again whenever the economy lapsed into the normal down wave of a business cycle leaving us today with just a shell of the old wealth producing US economy. Yep, all looming economic crises and recessions have been pushed to the back burner by our dysfunctional political system which now listens only to corporations through their lobbying efforts. A system which even business if fed up with. Social Security, Medicare & Medicaid, pensions, health care, energy, the environment, a big wow! when I write them all down, all these long term vital issues have been avoided because of capitalism gone wild, because doing anything about them would “… hurt the economy and be bad for business … .” The same mantra Congress just used as its reason last week to kill a critical climate bill! Just awful action. Politicians should know there’s more to the economy than keeping the steroid sham going year after year, there’s more than keeping the business lobbyists happy near term and there’s more than their next election result. The US economy needs to be cleansed out from time to time and thus made fundamentally stronger for the longer term and more competitive in today’s new global economy. We still have the strongest, most fundamentally sound economic, financial and social system going from all I can tell. And the country has more than just our economy to worry about and strengthen for the longer run. We also need to re-strengthen our democracy once again after the loss of common man representation that’s taken place over the last 30 to 40 years. Actually, it’s no one’s fault, this push into Supercapitalism as Robert Reich terms it in his latest book of the same name, what has happened in America over the last few decades. But now it’s time to look at and push the flip side of the coin, to reawake democracy which is vital to American life as well. We need to regain representation for little towns and smaller groups, non-profits, etc., etc., all those groups who can’t get their sides of the story heard any more today as corporate lobbyists dominate. Again, I don’t blame anyone for what’s evolved. That’s capitalism, if left “unfettered” as even Republican presumptive presidential nominee Senator John McCain has described today’s economy, it will go to an extreme … as it now has. * For the record, one can get all five books I’ve just mentioned above from www.Amazon.com or elsewhere. And I recommend them all.

Oil Near a Peak? Yes.

RichardSchwartz — Thu, 29 May 2008 18:56:00 GMT

OIL VIEW. I’ve been reading a lot about oil, the current state and the history of oil as we see prices keep rising and we all wonder where a top is. So below are some interesting tidbits which I’ve unearthed from the Internet (a great modern day development!) for you to ponder, some obvious, some insightful (I hope):

· OPEC has used oil as a weapon against western countries in the past. Schwartz View: A bad precedent. The October 1973 embargo effectively raised prices quickly and sharply to a new plateau (from $3 a barrel in 1972 to $12 a barrel) which lasted for the rest of the 1970s.

· The Iran revolution (getting rid of the Shah) in 1978 and the following war between Iraq and Iran in September 1980 again raised the price of oil quickly, doubling oil prices from $14 to $35 a barrel by 1981. Schwartz View: So both times oil rose sharply in price and stayed there.

· Oil is notoriously price inelastic according to some researchers. Another reports says: “The supply and demand for oil are both inelastic in the short run …” Which is what commodity guru Jim Rogers sees, that it takes many years for oil supplies to increase when demand increases which is his basis for the whole commodity complex to keep rising. Schwartz View: I’ve been waiting a year or so now for “higher prices to resolve higher prices.” Now I understand this is a too simplistic argument and why it hasn’t happened that way just yet. Another reason is because we are much less dependent on oil today. “Energy costs;’ share of GDP has fallen from 8% in 1973 to 2% today.” (From an Internet article written in 2005).

· Over time though, the supply and demand for oil is more elastic. Schwartz View: Thus the past history of oil prices rising sharply, then slowly sliding lower over time as more supply comes on board. Probably the price pattern we’ll follow again although we’ve likely raised the base price level or floor such as transpired in the past.

· Commodity (and China) guru Jim Rogers says his research shows commodity bull markets last roughly 17 years. Schwartz View: I see the price of oil slid from 1981 to November 1998 when it bottomed out about $13 a barrel. Just about when Rogers called a new commodity bull market.

· From the last bear market bottom in oil in 1998, we’ve had the first bull market leg up from the bottom in November 1998 to June 2000 as oil rose from $11 to $35 a barrel. Then after a price correction downward and a breather, we put in a 2^nd bull leg up from November 2001 at $20 to a peak around Hurricane Katrina at about $75. After that blow off peak, prices fell for five months coming back to $50. Since it’s been straight up in a third bull market leg. Schwartz View: Since we’ve now put in the normal three legs up which compose a full bull market we could easily be due for a sharp and severe pullback in oil.. Especially so since I see a guest on CNBC talking up $200 oil, bullish predictions being a normal sign of bulls getting carried away just before a top.

· The US placed price controls on domestically produced oil during the first energy shock in the early 1970s. This caused US consumers to pay less for gasoline than they otherwise would have. Longer term, price controls kept America from reducing our oil consumption in the middle 1970s and thus our dependence on foreign oil producers. Thus when the 2^nd oil shock hit in the late 1970s we were much more negatively impacted by prices jumping sharply. Schwartz View: This is why I advocate keeping oil prices high now, let America take the pain now, so money keeps flowing into developing alternate energy sources. Let’s not repeat the mistakes of the 1970s!

· History shows higher oil prices in the early 1970s, the late 1970s and then in 1990 after Iraq invaded Kuwait all led to recessions. Schwartz View: Maybe it will be different this time around but we all know predicting “this time it’s different” usually proves disastrously wrong.

· Here’s the rationale behind higher oil prices leading to recession: “Higher oil prices have historically led to recessions because they act as a tax on spending by absorbing consumer dollars that would be spent elsewhere, by reducing corporate profits through increased costs and lower demand, and by causing higher inflation which in turn causes higher interest rates.” Schwartz View: All of which seem to be developing today except, so far, higher interest rates because the Fed has been lowering shot term rates to free up the frozen-up financial system. These lower rates which ultimately should lead to even higher inflation.

· The 1970s were characterized by “stagflation” after sharply higher oil prices raised inflation levels while simultaneously reducing economic growth. Schwartz View: Isn’t the same economic ripple effect happening right now? I’d say yes.

· The 10-year US Treasury bond yield rose from 6% to 15% during the oil shocks in the early and late 1970s. Schwartz View: This time the 10-year, benchmark Treasury bond yield has stayed low because of the credit crunch and the “flight to safety” trade by investors. Doesn’t it seem logical that when the Fed stops lowering rates and/or says the credit markets are back to normal, long term interest rates will once again rise? Does to me. In fact, higher long term rates may be happening now. That’s one big reason why I’m not recommending bonds and haven’t been.

SCHWARTZ SUMMING UP. Actually I could go on and on researching and commenting on oil. And I’m interested in continuing my research so I may add a few more comments/insights in coming days. But for now the history & current spike higher in oil makes me predict that soon we’ll see some type of peak in oil very soon!

Hold Interest Rates Steady!

RichardSchwartz — Thu, 13 Mar 2008 14:15:00 GMT

CHAIRMAN BERNANKE: “HOLD INTEREST RATES STEADY ON TUESDAY!” Hey, why not? What have we got to lose? Cutting interest rates sure isn’t working, right? Along with setting interest rate policy, the Fed has another role, that is being the “lender of last resort.” They’ve sure done that this past Tuesday, so let’s try that for awhile and stop this failing attempt of “throwing money at the problem.” Lower and lower interest rates are just KILLING us as the dollar is sinking, yesterday accelerating downward from its already steep decline. And in turn causing commodity prices, especially oil to go through the roof as hedge funds pile into oil. There’s no reason for crude to be near $110 a barrel now, fundamentals don’t justify these prices not with economic growth slowing all around the world. It’s only that oil is priced in dollars and the sinking dollar causes speculators to pile into oil. And imagine what these oil prices are doing to Japan which imports all its oil and to Europe too, not too mention us here in the US. This “papering over the problem” by cutting interest rates is now causing higher and higher inflation. Schwartz View: “Thus Mr. Chairman, let’s try something new. DON’T cut interest rates next Tuesday!”

Bottom Fishing a Top

RichardSchwartz — Thu, 06 Mar 2008 15:50:00 GMT

LONG US GOVERNMENT BOND VIEW. Bottom Fishing. Yep, I keep fishing for a bottom in the “long” US Treasury bond. I mean a bottom in yield, a top in price. All logic I can come up with says the 25-year bull market run to ever lower long term interest rates is over or ending. All but two items. One, the constant “flight-to-safety” trade of getting out of all investments and parking the proceeds in the safest US investments possible ever since last summer (when the subprime mess first appeared). And two, the US economic slowdown. OK, I understand. Investors have historically bought US Treasuries for safety. And if we go into a deep recession, which can be very deflationary, interest rates should come down.

STILL, looking past these two temporary, near term factors, the larger macroeconomic backdrop tells me the long move toward ever lower interest rates is over. First, former Federal Reserve Chairman Alan Greenspan has said such, that during his 18 year tenure as Fed chief he was greatly helped by low and lower inflation caused by globalization. But that his predecessors won’t have that luxury of quiescent inflation. Second, now that China is raising their export prices, for eight straight months, and raising their minimum wage, from 17% to 50%, that’s removing the balm of very low wage labor which has kept global prices down. Third, I saw Marc Faber, the well-known Swiss investor, say on CNBC yesterday that the long US Treasury market is extremely overpriced and will prove a disaster for investors loading up on them at today’s historically low yields. I agree. Finally, of course we have the rest of the world already packed to the gills with US Treasuries, not a good sign when everyone is on only one side of a trade. Schwartz View: Bottom line, I keep trying to find a good entry point to fade, sell against, the last eight months of strength in treasuries. I’ve gotten in, buying RRPIX (ProFunds Rising Rates Opportunity Fund) and RYURX (Rydex Inverse Government Long Bond Strategy Fund) in the past and then had to get back out and take a small loss when yields fell. But now I’m back in once more, again fishing for a bottom. I would suggest you do the same; buy either of these inverse funds on weakness. Start small and if you get a profit buffer, buy more. Disclaimer! I own small portions of the two funds mentioned above.