Thursday, September 25, 2008

The Long Winter of Our Discontent


This is a follow up to my previous article.

I want to talk a little about this 9 year Bear market. This is what I am calling this period of time.

Others disagree and call the last nine years a series of Bear and Bull Markets. Bear-Bull-Bear. I see that 2005-2006 "Bull Market" as a correction in a longer term Bear market.

What we have lived though 90% of is a period very similiar to the period 1972-1982.

On October 1st 1972, the Market hit a high of 1020. The Dow rose and fell over the next 10 years before finally rising over 1000 permanently in October of 1982 when the Dow closed at 1046.

On October 1st of 1999, the Dow closed at 11497. Today the Dow closed at 11022. For the past 9 years the Dow has risen and fallen without making any meaningful advance.

But, what happened in 1982? The Dow began a 20 year advance that carried stocks to previously unimaginable heights. The Dow went from 1000 to 11497.

So, what will happen at the end of this long hibernation? The Dow will rise to unimaginable heights. We are talking about a Dow Jones of 50,000-100,000.

This won't happen over night and this won't start tomorrow. But, this will happen. History repeats itself.

Crisis Averted


Today we got some more good news from Capitol Hill. Lawmakers came together and have reached an agreement to fund the $700 billion "bailout" of the financial industry.

I was surprised how many people and how many commentators were against the idea.

As I wrote last week, the alternative was a financial disaster of unprecendented proportions.

Imagine a world where you can't borrow money to buy a car or a home. Where many companies could not borrow money to finance their operations. Companies like GM going out of business as a result.

I think we were looking at skyrocketing unemployment, maybe as high as 20-25%. Massive bank closings. Frankly, I felt that the the cost of paying out the FDIC claims would have been far greater than the "cost" of the bailout. That was easy, because the "cost" of the bailout is negative.

The government will make money on this. They will buy these mortgages for less than they are worth and eventually will turn a profit. That is what happened in 1991 with the Resolution Trust Company.

There is one problem with this plan, the Treasury will need to borrow more money to finance the purchase of these bonds and that is inflationary and bad for the dollar.

I believe we are in the tail end of a bear market that is about to celebrate it's 9th year. That is a long bear market. One of the four longest in the last 108 years.

I don't think that we are about to see the market take off. I do think we have seen the bottom. That bottom is around 10,800 on the Dow.

Over the next several weeks, we will look to modestly restructure our portfolios to take advantage of the next 6-18 months. Looking out past that period, we can begin to see the outlines of another robust Bull Market forming that will carry stocks into new, as yet unimagined, territory.

Thursday, September 18, 2008

"Fear Strikes Out"


Yesterday was another tough day.

I expected a big decline on Monday and the rally we got on Tuesday.

I thought that, in light of the AIG bailout, we might see something more normal on Wednesday. Perhaps even a rally.

Instead we opened down 300 points.

I was a little depressed and I went home for lunch. (Something I almost never do even though it is only 10 minutes away.) I wanted to hug my son. Alexander is now 2 1/2 and still cute as can be! He still doesn't talk much and is struggling a little getting potty trained.

I walked in and he saw me and started chanting, "I go potty. I go potty."

Sharon said she was mad at him and I asked why and she said, "Alexander tell your father why I'm mad at you."

"I pooped my pants," he said.

I started laughing and almost immediately felt better. There are a lot of things in life more important than work and money and while the content of his sentence wasn't all that wonderful, hearing him utter another complete sentence was music to my ears.

I came back to the office somewhat refreshed and invigorated and had a number of good conversations with clients, friends, and others I trust.

HERE IS MY TAKE ON WHAT IS GOING ON RIGHT NOW

We are all standing nervously in front of two doors.

One of those doors leads to oblivion, a complete collapse of the world economy, a return to the dust bowl era of the Great Depression.

The other door leads us through the final throes of this agony into the light of a new day.

I don't see a third option. It seems to me that it is one or the other; either things are going to get better or we are headed towards a financial disaster of Biblical proportions.

I believe that the signs point towards door number 2. I don't think we are headed into a second great depression.

As bad as the market has been this week, most of the damage has been in the financial sector. (General Mills was up a $1 today.)

There is a long history of a major brokerage house falling, as Lehman Brothers did the other day, at the bottom or end of a decline.

Oil is down.

Inflation is no longer a concern.

Manufacturing remains strong.

The economy has problems, but those problems are fixable.

Today, Thursday September 18th.

This morning, after thinking about what I had written yesterday as I stared down my fears, I purchased two stocks: Citigroup and United Technologies.

Citi is down 73% from its all-time high and more than 30% from when I sold off half of our position earlier this year. The stock has an 8.5% yield. Those kind of bargains just don't come along every day!

United Technologies is down 30% this year, with a 2% yield, a P/E of 13, and a growth rate of 11%. It is a great manufacuring company and the only reason it is down so much is that everyone is in a panic.


This afternoon, we got great news. Treasury Secretary Henry Paulsen announced a plan to create a government entity similiar to Resolution Trust Company that would buy up the bad debt in exchange for some Equity and save the banking system.

THE MARKET IS UP 400 POINTS!

Tuesday, September 16, 2008

"The oldest and strongest emotion of mankind is fear." HP Lovecraft.



"I steer my bark with hope in the head, leaving fear astern. My hopes indeed sometimes fail, but not oftener than the forebodings of the gloomy. " Thomas Jefferson


Fear is rampant.


Watching the Television Media last night I came away with three persistent messages.


1. The world is coming to an end.
2. A group of people think that Obama is the devil.
3. Another group of people think that McCain is the devil.

There is a famous quote from the '70s that my Father liked: "The medium is the message," by Marshal McLuhan.

I think it has become starkly evident that the current medium is fear-mongering and the message is, not surprisingly, fear.

Things are bad. They've been bad for over a year. We should never have allowed anybody to get a mortgage on anything at any rate with nothing down and no collateral. That statement seems self-evident. But, where was the media when the problem was brewing? Were they warning against the obvious excesses of that course? By and large the answer is no! In fact, if we flash back to that time one would have gotten the impression that anyone who wasn't taking advantage of nothing-down, interest only, financing to buy seven condos under construction in Las Vegas was just plain stupid.

The media is good at reporting what just happened and absolutely atrocious at predicting the future. Attempting to use them as a guide is as useful as using a list of directions for a trip we made last month to attempt to go someplace new.

LET ME ADDRESS ANOTHER FEAR.

A handful of people have sent me e-mails or called asking how safe their assets are at Schwab. I think this is a good question and one that is probably on other people's minds. Perhaps it is on yours.

Here is the answer to that question for anyone who is wondering.

YOUR ASSETS AT SCHWAB ARE INSURED:

Your assets at Schwab are insured by two insurance policies. One of those is Federal. One is from Lloyds of London.

Both insure you against Schwab's default.

The federal policy is from the Securities Investor Protection Corporation which was chartered by Congress. This policy insurances your assets up to $500,000.

The second policy is from Lloyds of London and provides protection up to $600,000,000

It is important to note that these policies protect you against loss in the event that Schwab were to go into default or declare bankruptcy. They also protect you if someone at, or associated with, Schwab was to attempt to steal your assets.

It does not protect you against normal market risk.

One final thought. Through all of this credit crisis, the discount borkerage firms like Schwab and Scottrade have not been mentioned negatively. They do not engage in the type of investment banking and trading activities that got others into trouble. So, I do not expect any problems at Schwab.

Thursday, September 4, 2008

Election Dip


It is election season and the market doesn't like it.

The stock market rarely does well during a Presidential Election Campaign, particularly when the outcome of that election is in doubt. The more divisive the rhetoric, the less happy the market becomes!

I think that for the past few days, the market has been reacting to the news from the Campaign Trail. Negative rhetoric from both sides, coupled with a growing certainty that Obama will be the next President and the incredible soap opera swirling around Republican VP nominee Sarah Palin have deflated the value of stocks and overshadowed some positive economic news.

As of today the London Bookmakers have placed the following odds on our elections:

Obama 4-9 to win. (A 9 Pound bet will win 4 Pounds if Obama wins.)

McCain 13-8 to win. (An 8 Pound bet will win 13 Pounds If McCain wins.)

Palin will be replaced before the election 8-1. (A one Pound bet will win 8 if Sarah Palin leaves the ticket.)

Although it is early and the odds could change, in the past the London Bookmakers have almost always correctly predicted the outcome of our Presidential elections. (I’ve always found it interesting that you can bet on political elections in England, but not in the US. And I think it is a tribute to the US that we don’t allow the process.)

Here is my take on what we will see over the next several months. I think the perception will grow that Obama will win. I think that the market will grow increasingly skittish regarding the perception of the Democratic ticket’s rhetoric regarding taxes and healthcare. You may remember that in 1992, the stock market deflated when then First Lady, Hillary Clinton, spoke out in favor of nationalized health care.

The economic news, which has been getting better recently, will continue to improve. Oil is declining. Commodity prices are plummeting. Both bubbles have burst. The dollar is getting stronger. The credit crunch will lessen. Housing will hit bottom sometime in 2009.
The one potentially troublesome issue on the economic front is, and will continue to be, the threat of inflation.

On the positive side for you, our stocks continue to be the right stocks on a relative basis and our large cash position continues to soften the blow of this decline.

We will continue to be defensive. We will continue to strive to protect your assets. We will also be hopefully and guardedly optimistic that the US stock market will emerge from this eight-year long bear market sometime in the not too distant future.

The Silver Lining = Long-term bear markets of the sort we have lived through are usually followed by periods of explosive growth. If history is any indication, investors who have faith and patience through the final days of this painful period will be amply and substantially rewarded in the coming rally.