Let’s call a spade a spade and quit trying to sugar coat yesterday’s financial debacle by calling it a recession. It is obvious, we are in a full blown depression, but stacking up the Great Depression to the current situation is simply not an “apples to apples” comparison, when it comes to the stock market. There is abundance of noise alluding to the fact, that since the 1929 depression saw the stock market fall 85% from its highs, then today’s stock market must also repeat the same fate, and eventually fall to the 2100 area. Nothing could be farther from the truth.
The differences between now and then are vast:
- We are in a global economy.
- We have the computer, incredible technology and the ability for instant communication.
- We have the internet, the single most powerful business tool. Bears, put that in your pipe and smoke it.
- We have the knowledge and ability to learn from the last economic debacle-history has basically made us smarter.
- Margin buying power leverage of ten to one has been reduced by 80%.
The bottom line is we have a much better economic system (with better checks and balances-not perfect) in place than we did 80 years ago and a drop of another 1500 Dow points is about as bad as it will probably get, if it happens at all. We could just as easily rally 2000 points in the next month.
What to do: Don’t listen to the “end of the world” prognosticators. They are simply trying to make a name for themselves by putting out the most outlandish predictions possible. Their gloom and doom stance should be taken with a grain of salt (maybe they are heavily invested on the short side) as everybody seems to have a “spin” these days, including me. Many figure if they throw enough garbage against the wall, something will stick. They should be ashamed of their sensationalistic antics. Their attempt to achieve some type of notoriety is simply disgusting.
Rise above the smoke and noise: It’s pretty simple. Disregard all the panic permeating amongst the so called experts and buy high relative strength stocks. You certainly want to be long any stock that is doing well in this environment. Consumer staples stocks such as Autozone (AZO), Wal-Mart (WMT) and McDonald's (MCD) are prime examples of quality stocks rising in a horrible market. These are the type of stocks you should be slowly accumulating. Don’t follow the crowd, go against it. Those that have the bravery to buy when others are fearful make the largest fortunes, just do not prospect in the junk yard as you usually end up with what you pay for. Stick with high quality, dividend paying, low debt stocks with high relative strength, and your ship will come in. I can’t overemphasize the importance of relative strength enough, when stock picking.
If you can’t beat em, join em: Besides owning a portfolio of high relative strength stocks, make sure you are exploiting the downside of the market with plenty of short positions. Why not make money on the downside? My perennial short favorite is AMZN, because it is still quite expensive, with a ridiculous 40 times 2009 earnings estimates. The fact that it is merely a retailer, dealing in discretionary items that most consumers do not need, cements it as a perfect short. It is one of the few stocks left out there that still has not completely cratered-in other words it still contains a lot of water waiting to be let out. A $25 drop is certainly not out of the question, especially if the Kindle fails to live up to all its hype. Its declining gross profit margins also give credence to my bearish outlook. The Nasdaq 100 (QQQQ) should also be considered a core short holding.
Disclosure: Short AMZN.