Get Ready to Buy Like It's 2002

Following the market peak in October of 2007 (one year ago), stock averages began a steady downtrend into the month of October 2008. In October 2008, the stock markets crashed, and major averages would have ended down over 30% for the month, had it not been for a furious 3.5 day rally commencing on Tuesday, October 28th at 2 PM and ending on Friday, October 31st. This 3-day rally advanced the major market averages about 15 - 20%. Still, most averages were down around 15% percent for the month.

As an example, the Russell 2000 Index was trading about 440 at noon on Tuesday, and closed at about 540 on Friday. The Dow Jones Industrial Average was trading around 8200 mid-day Tuesday, and closed over 9300 on Friday. Most of the 3-day advance occurred in just 2 hours, between 2 PM and 4 PM on Tuesday, October 28th. The INDEXES rallied about 10% in just 2 hours. Anyone thinking about a coordinated intervention in the markets orchestrated by Big Government and Big Money?

Much has happened in the past year. Trillions of dollars have been lost on bad real estate loans and investments tied to those loans, the US brokerage industry collapsed and disappeared, US banks would have failed were it not for trillions of dollars in Government intervention, Trillions of dollars have been lost in the value of US real estate, and Trillions of dollars have been lost in the US stock markets. And stock, real estate, and banking losses of similar magnitudes occurred overseas as well, in the U.K., continental Europe, Australia, etc.

Heck, the totalitarian stock markets in Russian and China lost most of their value in the past year, and everyone's favorite emerging market, Brazil, lost 70% of its value peak to trough.

Oddly enough, just 6 months ago perceptions were astonishingly different. While it was known that the US economy was slowing down, and bad real-estate assets were weighing down the books of many financial companies, the conventional wisdom was that world wide growth would continue, spurred on by hyper-growth in the so-called emerging markets like the BRIC countries.

That perception fed the final phase of the commodity rally, which was a classic climax run to the top. The last great burst of enthusiasm for commodities began in the summer of 2007 and ended in the summer of 2008. Results of this final push up in commodity prices saw gold top $1000, oil top $140, copper top $4, along with soaring prices for all commodities during the year at some point.

Prices for all these commodities have come off anywhere from 25-75%, with gold holding up relatively well only about 30% from its peak, currently trading at about $720 per ounce. Oil, once over $140 per barrel, now trades around $68 per barrel. We have since come to find out that the price spikes of these commodities were largely driven by demand from speculators following and fueling an uptrend. No surprise there.

Stocks too are a commodity, and represent nothing more these days than electronic flashes on a computer screen. There are many sophisticated models about what stocks are worth based on current and future earning projections, profit margins, stability of business, etc. But truth be told the amount of stock issued in the past couple of decades has been astronomical, fueled in part by the granting of massive amounts of stock options to company insiders, initial public offerings of companies with no earnings, and, the IPOs of many foreign companies, such as those in China.

Another reason there is so much stock on the market these days is that when the appetite for stock was nearly insatiable in the 1990s and, for some market sectors, the 2000s, stocks were bid up, split, and bid up again, increasing the share count, or the float (number of shares traded on the open market, as opposed to shares held by company insiders such as founders).

I have a question. What exactly is a share in a company in the People's Republic of China worth? If I buy shares in a Chinese energy company or a Chinese bank, what exactly are my shareholder rights? Isn't China a totalitarian communist police state? Sure, if China were a democratic country with individual property rights these companies might be worth something. And if China reforms to a freer society and government these companies might have some free market value.

But Jim Rogers, who wants to place a big chunk of his assets in China, and who would have moved to China had it not been, so he says, for the poor air quality, seems to have forgotten some of the harsh lessons of history. What history teaches us is that one day we may wake up and China has invaded Taiwan, trading on its stock exchanges is suspended, and foreigners will be expelled or imprisoned. Come to think of it, this is precisely what has already occurred in Russia just this year, following its invasion of Georgia. Ask British Petroleum (BP) what's it's like to do business in Russia (its assets were essentially seized, and its people were expelled from the country).

Stock ownership only makes sense in countries where the political and legal structure support the rights of private property, as represented by stocks, which themselves represent fractional shares of ownership in companies. I would argue that a share of stock in Russia and China is worthless, unless they pay a dividend. But even that could be changed by government edict at any time.

Anyway, the governments of the world, led by the USA, are filling the Trillion dollar voids of bad debts and bad assets and bad balance sheets to prevent the bankruptcy of most of the banks, remaining brokers, and other companies holding the bag for the reckless loans of this decade. The governments will of course succeed. A company can't go bankrupt if the government essentially gives it money to offset its worthless loan portfolios or level 3 paper or whatever.

If you owe $100,000 to your credit card company, and are getting ready to file for bankruptcy, and Hank Paulson knocks on your door, and gives you a check for $100,000, you are once again solvent. Or maybe Hank calls you up and says that he's called your bank and talked to it, and you now only owe $10,000, he'll take care of the rest, either by having the loan forgiven or by assuming $90,000 of the loan himself. Again, you're instantly back on your feet.

In any event, the credit bubble burst, the economy is in the tank, stocks are in the tank, interest rates are almost zero, and Governments are pushing piles of money everywhere to keep the system SOLVENT (not liquid). This is similar in style but much more massive in scope to our most recent recession following the bursting of the stock market bubble of the 1990s. The bubble of the 2000s included real estate, the Wall Street brokers, homeowners, the real estate market, as well as the stock market.

The negative wealth effect is bigger by several fold, I would imagine. The effects would seem to be easily predictable. The US has led much of the world into a deflationary recession that will last into next year. But with all the money being dumped into the financial system coupled with near-zero percent interest rates, that money will seek a better return than Treasury bonds, and, as risk appetite slowly returns, various asset class will begin to re-inflate.

I believe that the price of Treasury bonds will go down, the prices of stocks will stabilize and go up, commodity prices will stabilize and go back up, housing prices will stabilize and go back up, and eventually interest rates will go back up. There's nothing mysterious about it. It's just the inevitable repeating of economic cycles, boom and bust, that sort of thing.

My guess is that the worst is over, unless President Obama becomes President Carter, and runs the economy into the ground with high taxes and disincentives for individuals to work and disincentives for businesses to operate or to grow. That's a very big unknown, and a very important unknown. The power to tax is the power to destroy!

But deflation will rapidly revert to inflation sooner rather than later. The least risky way to make money, I'm guessing, would be precisely how money was made following the last recession: commodities and stocks in commodity based companies, and owning currencies in countries with better monetary polices, more robust economies, and countries rich in commodities the world needs.

You don't have to be a hero and pick the bottom in these asset classes, just wait for the charts to turn up. Wait a little while until the moving averages have gone from down sloping to sideways or even turned up. Wait until important resistance levels have been broken. If the next up cycle lasts a few years, there should be plenty of money to be made once it's clear the system has held together and is rebounding.

Positions: None.

Comments

[Steven Hansen:]

because of the headline, i was getting ready to jump on your case. I thought you were another pumper trying to get the little guy to get a haircut. but i agree with everything you said with one caveat.

the moving averages do not tell the whole story. this market has not been fair to the small investors as the big boys create momentum and then capitalize on it crushing all in their path. the market needs to settle down to the point you can walk away and not worry you are going to be significantly poorer.

2008 Nov 02 06:10 AM

[coldcall:]

Well i dont think stocks are all that cheap now, after the last few days rally. If we agree, as the author implies; that stocks and commodities became super inflated then i would think we have lower to go before bottoming out.

Considering the trauma global markets have experienced through the credit crisis, rapidly declining commodities, and now a deep recessionary outlook it would be almost miraculous were we to progress into another bull run so quickly. It would break a record in stock market turnarounds.

I think we are going to have some more big drops as investors measure the outlook realistically, and become much more picky about which stocks, commodities and other investments they choose.

2008 Nov 02 08:06 AM

[August9:]

Brilliant synopsis of the current situation.Finally,some... is getting it right.

2008 Nov 02 08:16 AM

[Vee:]

Nov 2, 2008 7:27 AM


We be more worried that Mccain would raise the taxes, than Obama.
And I'd also be weary of Mccain putting the draft back in to effect
since , he want's the wars to go on forever. So, he can hunt a dead
Bin Laden, and get thousands and thousands of our troops killed.
He's another Bushman, except he'd be double trouble, compared to
what Gw has been.
Also Mccain want's to get rid of the income tax and just put a tax on
everyone.

2008 Nov 02 08:39 AM

[Loxomo:]

Simply put, right now is a perfect time to be picking up stocks on the cheap, FOCUSING exclusively on dividend payouts of safe companies.
The idea of picking up, say GE, with a close to 6.5% dividend is heavenly in it's splendor-as never before could you do this. So, regadless of all the analysis, and spending torturous hours reading graphs, charts, and worrying "where the bottom is", but and accumulate great dividend yielding stocks on average as they go down or up, and r-e-l-a-x...turn off the freakouts pundits on TV and know that in due time we'll be back at 15,000 in a few years time, or 5 yrs, or 8 yrs-whatever-it won't matter when...you'll be enjoying great dividends that are reinvesting and growing your portfolio. It's that simple "my friend"-loxomo


On Nov 02 08:06 AM coldcall wrote:

> Well i dont think stocks are all that cheap now, after the last few
> days rally. If we agree, as the author implies; that stocks and commodities
> became super inflated then i would think we have lower to go before
> bottoming out.
>
> Considering the trauma global markets have experienced through the
> credit crisis, rapidly declining commodities, and now a deep recessionary
> outlook it would be almost miraculous were we to progress into another
> bull run so quickly. It would break a record in stock market turnarounds.
>
>
> I think we are going to have some more big drops as investors measure
> the outlook realistically, and become much more picky about which
> stocks, commodities and other investments they choose.

2008 Nov 02 08:59 AM

[Alex and th...:]

A very well-written article! I agree with your thoughts. Keep up the good work-

2008 Nov 02 09:13 AM

[Mac77:]

In response to VEE...........

Hey you forgot to add.."I'm Barack Obama and I approved this Add"

2008 Nov 02 09:25 AM

[notsosmart:]

what is a real value? maybe there isnt any. certainly not in china or russia.they are still dictatorships.its your money so you are free to lose it anywhere you want. these people move the goal posts at any time.we are getting to the same point but still have ownership rights(how long?).everyone laments the so called losses but maybe the values were phony for many years on the way up.i got out @ 14,000dj. not out of smarts but i got scared.so many scammers & scoundrels along with phony AAA ratings showed the world that they should not only fear china & russia but the usa also.how sad from the good reputation we enjoyed for so long.

2008 Nov 02 09:25 AM

[Orient_lee:]

I think China is now facing a big possibility of further economic recession. Export companies are now impacted and unemployment rate is increasing greatly. China is really at the very early stage of the recession just as US at end of last year. Though chinese government is now encouraging big investment, hard time will surely come soon for him from all kinds of signals. Though US really wants to throw out more dollars by open his printing machins, worries unwilling to hold greenback around the world will stop him.
So I donot agree that the world economy will soon turn up. One or two years have to be waited before commodities stop dropping.

2008 Nov 02 09:27 AM

[Fabien Hug:]

I like this article. Perspective is provided and it put the finger on something that was eluding me. Trying to guess what will happen next, as Dr. O mentions perfectly, cos. will be back to SOLVENCY thanks to various injections of money, but solvency only. In order for the markets to punch back, I think that more than solvency will be needed. As a matter of fact, don't forget that the last market boom was fueled by cos. going into INSOLVENCY. Are we going to repeat that feat? I don' think so for the near future. I would expect a lot of volatility in the future fueled by hope followed by disappointment.

2008 Nov 02 09:50 AM

[Boubou:]

In answer to various comments on the safety of investments in Russia, China etc. it's not ONLY in these countries that you can get scewed. How about the USA?
Suddenly they dilute and inflate your currency to nat's piss
Your bonds, preferreds, some of your cash, your bank and your broker dissapear.
Your house is worth half what you payed. Hey , is this the third world?

2008 Nov 02 10:00 AM

[Boubou:]

In answer to some of the haters of anything foriegn, another point I'd like to make is that the rest of the world has been financing the usa along with all its wars and binges ever since the dollar became the reserve and cast adrift from gold. The us debt to the world can now probably never be repaid. Lets hope they do something decent with all this money .

2008 Nov 02 10:06 AM

[gatekeeper:]

Actually, the rather good sized mainland "100% Chinese" company with which I conduct business is incorporated in Bermuda and traded on the Singapore exchange.

2008 Nov 02 10:15 AM

[romang:]

You know you are the first person to say to take care of your debt and wait till you know for sure that the market is going back up? In any case you are right.

2008 Nov 02 11:40 AM

[Directoy:]

Thanks for This Great article about the out comming economy!
But how long would you think all of this gonna be over?
any Idea?

2008 Nov 02 04:04 PM

[NOWHEREMAN:]

I before E except after C.

Wait a few weeks after the election no matter who wins. The final Hedge, Mutual fund redemption onslaught will play out with the possibility of early tax loss selling thrown in, getting out while they still have value Syndrome otherwise known as Panic.

I would go with SSO, IMHO.


Saw an interesting Spin on the Obama share the Wealth Tax plan.

High School student works hard all year, goes against peer pressure, studies, etc.. She/he gets an A. Another student gets a D for whatever reason. Should the A student be forced to give up the A so that the D student could get a C? Unanimous A and B student vote: NO.

2008 Nov 02 05:28 PM

[jmatson:]

Yep, pay off your debt (it's always a smart thing to do in any case).

I like small stocks that earn money, have little to no debt and are involved in the medical information, infrastructure and security sectors of the economy.

A few good gold and silver stocks would be appropriate for insurance purposes going forward also.

Good well reasoned article.

2008 Nov 02 06:06 PM

[brando:]

On Nov 02 08:39 AM Vee wrote:

> Nov 2, 2008 7:27 AM
>
>
> We be more worried that Mccain would raise the taxes, than Obama.
>
> And I'd also be weary of Mccain putting the draft back in to effect
>
> since , he want's the wars to go on forever. So, he can hunt a dead
>
> Bin Laden, and get thousands and thousands of our troops killed.
>
> He's another Bushman, except he'd be double trouble, compared to
>
> what Gw has been.
> Also Mccain want's to get rid of the income tax and just put a tax
> on
> everyone.

I surely hope no one has entrusted money to such a naive childlike mind as yours, Vee. Do yourself a favor and check into the nearest mental institution. Run. Don't walk.

2008 Nov 02 06:44 PM

[notsosmart:]

gratefully this nonsense will be over by wed.(if there are not too many hanging chats or whatever)

2008 Nov 02 06:50 PM

[salohcin:]

I have been watching McCain for a long time. He hits the nail on the head as to where the country went wrong. The only thing wrong is that he says it to soft. he calls it special interest and infuence peddling. It should be called selfish interest groupes, leagealized bribery and up for sale to the highest bidder.


On Nov 02 08:39 AM Vee wrote:

> Nov 2, 2008 7:27 AM
>
>
> We be more worried that Mccain would raise the taxes, than Obama.
>
> And I'd also be weary of Mccain putting the draft back in to effect
>
> since , he want's the wars to go on forever. So, he can hunt a dead
>
> Bin Laden, and get thousands and thousands of our troops killed.
>
> He's another Bushman, except he'd be double trouble, compared to
>
> what Gw has been.
> Also Mccain want's to get rid of the income tax and just put a tax
> on
> everyone.

2008 Nov 02 09:01 PM

[fawnpass:]

You are wrong on China. It is obvious you have not been there to see what is happening. China is not Russia. It is the last large economy to feel the world downturn and will be the first to shoot out of it. The government has many macro and micro tools yet at its disposal, and they are still ahead of the problem. There will of course be some dislocations and adjustment (mostly in export/shipping related industries), but they will be relatively isolated. Most export companies are already shifting their focus and adapting to other markets. Those that do not will go under or be consolidated, which will be good for the long term health of the Chinese economy. Companies with sound financial positions will continue to experience growth as the US markets rise a bit then stagnate for years to come and the hot money will follow the results. You should be in CHina now, but smart about it.

2008 Nov 02 11:10 PM

[hkn:]

This person who is touting OBama. We are talking about the stock market. The article is enlightening. You are not. I certainly do not want to share my hard earned money with you. Get you head out of the sand. O'Bama is going to tax our dividends at a much higher rate. As a Senior Citizen I dont even keep my social security. I live on my dividends. Our Democatic Congress lives on our sweat. Sweetheart loans from the banks and who reaped money from Fanny Mae. Dodd, Frank and O'Bama. Go campaign elsewhere

2008 Nov 02 11:13 PM

[cabear:]

Yeah, sounds like the author hit a nerve with the comparison between Obambi and Carter. I guess the Nobama supporter is afraid that it might be true.

We'll find out in 4 years' time although unfortunately I'm not holding my breath for a reincarnation of Reagan to save America in 2012. The sheeple and lemming vote may just continue to follow Obamanation off the cliff. 4 years from now they'll still be blaming Bush and hoping for change (in their pockets).

2008 Nov 03 01:30 AM

[Ebi:]

Until there is a stability in the credit market, the equity market is unlikely to show their 'true' bull run.

2008 Nov 03 07:17 AM

[Orient_lee:]

I am in China now. China will surely become a giant like U.S. in the future because of its advanced technology(much better than what the west think about him),hidden armed power(as I know, it must be only listed after U.S.,and its target is only to become another U.S.), fast growing and big economy systems(To only chinese, nowadays,making money is their only target),and ambitious plans(Well controlled by the governemnt). But I still want to say that this global recession will suely impact China in the coming year. Let's wait and see.

2008 Nov 03 07:55 AM

[Dr. O:]

China is a manufacturing superpower, and, like other countries with very low cost of labor, has been draining the developed world of relatively well paying manufacturing jobs. However, we've come full circle, in that our increasingly unemployed middle class cannot afford to purchase the vast amount of goods made countries such as China or Mexico, leading to a slow down in Chinese growth. Ultimately, one wonders whether it will end in US Protectionism.

2008 Nov 03 01:41 PM

[karte:]

How can one think McCain is going to raise taxes when that is all Obama has talked about? Raising taxes on people making as little as $42,000
and increasing capital gains and dividends taxes. What about tax on the 401K. All those increased government programs are going to cost money, and guess where that will come from. McCain is talking about tax cuts and decreased government spending. I suggest everyone listen carefully to their positions and vote McCain!


On Nov 02 08:39 AM Vee wrote:

> Nov 2, 2008 7:27 AM
>
>
> We be more worried that Mccain would raise the taxes, than Obama.

>
> And I'd also be weary of Mccain putting the draft back in to effect

>
> since , he want's the wars to go on forever. So, he can hunt a dead
>
> Bin Laden, and get thousands and thousands of our troops killed.

>
> He's another Bushman, except he'd be double trouble, compared to

>
> what Gw has been.
> Also Mccain want's to get rid of the income tax and just put a tax
> on
> everyone.

2008 Nov 03 03:03 PM

[Dr. O:]

The solar stocks took off yesterday in anticipation of an Obama Presidency. I wonder what other sectors would likely benefit? Obama has emphasized creating jobs in "green energy" and "infrastructure."

Reminds me of what I learned about the work programs of the Great Depression under FDR. Anyone know that companies that benefit with road construction?

2008 Nov 04 05:55 AM

[von Murgenthal:]

I just hope that all the Obama-Kool-Aid drinkers will enjoy all the
"CHANGE" they are expecting!
The euphoric crowd that swept Jimmy Carter into office in 1976
showed great disappointement already in 1978, and planted
Ronald- Reagan- Yardsigns in 1980 !!
Deja-vue all-over-again ???

2008 Nov 04 05:20 PM

[von Murgenthal:]

On Nov 03 07:55 AM Orient_lee wrote:

> I am in China now. China will surely become a giant like U.S. in
> the future because of its advanced technology(much better than what
> the west think about him),hidden armed power(as I know, it must be
> only listed after U.S.,and its target is only to become another U.S.),
> fast growing and big economy systems(To only chinese, nowadays,making
> money is their only target),and ambitious plans(Well controlled by
> the governemnt). But I still want to say that this global recession
> will suely impact China in the coming year. Let's wait and see

Sounds to me more like a question of "Quality of Life" !
You like China's !
I chose USA ! (over EU)
Long live freedom,hard work, happiness and prosperity ! (&McCain/Palin)

2008 Nov 04 05:27 PM