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Fritz Hottinger
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Fritz Hottinger (a pseudonym) is a graduate of Northwestern University, with MBA from University of Chicago. While getting his MBA, he was fortunate to be trained under Harry Roberts (statistics) and Roger Ibbotson (stock market theory) when computers were in their infancy. These professors... More
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Hottinger Capital Consulting, LTD
  • Time to shorten sail and batten the hatches! 0 comments
    Nov 2, 2009 9:55 PM | about stocks: GSG, PWE, XLE, GLD, XLP, KXI, SDS

    Some years ago there was a comedian (can’t remember his name) who created laughter with his phrase, “Who are you going to believe, me - - - or your lying eyes? “.  Well, there are some ebullient economists, as well as federal spokespeople, who should be using that phrase today.

     

    According to a Nov. 2 headline in the Money section of USA Today, nearly 4 of 5 economists they surveyed believe the country is in a sustainable recovery.  “Sustainable” is defined as “won’t slip back into recession”.  To quote from the article, “the market low reached in March was a wild overreaction”. 

     

    Then this caveat follows:  the market could rise or fall 10% in the months ahead because of uncertainty about the recovery’s strength.  With the Dow presently testing the 9700 level, this prediction offers a spectrum of future readings somewhere in the 8,700 to 10,600 range.

     

    Well, who are you going to believe, these prognosticators, or your lying eyes?

     

    The government told us the economy grew at 3.5% in the 3rd quarter, but they do not emphasize that it was their programs (cash for clunkers, $8,000 first-time homebuyer credit, TARP funds, earmark projects, etc) that fueled such growth.

    It did not come from the true engine of our economy, small businesses and individual consumers.

     

    Thus, it would pay to read any statistic generated by the federal government with a large grain of salt.  There is a political purpose to promising the electorate they will be cared for, then presenting upbeat employment numbers, projecting future cost savings, and painting a rosy future.  But let’s put down some numbers for your “lying eyes” to digest:

     

    That same Nov. 2 article gave us some S&P 500 data, which this writer finds much more meaningful:

     

    Aug 13 – 17  dip     -3.3%

                                           Aug 18 – 27  rally  +5.2%

     

      Aug 27 – Sep 2    dip   -3.5%

     Sep 3   – Sep 22  rally +7.7%

     

    Sep 22 – Oct 2    dip    -4.3%

    Oct 2   – Oct 15  rally +7.1%

     

    Oct 16  – Oct 31  dip    -5.6%

    rally not yet in sight

     

    At first glance it would appear that these swings are nothing to worry about because the rally percentage is greater that the dip percentage. And if you do the arithmetic, the index is up 5% after all the dips and rallies.

     

     But remember, if you lose 50% of a holding, then it has to double (increase by 100%) just to get you back to even. And historically the market doesn’t gain even 10% a year.

     

    Moreover, these current dips are appearing in increasing severity, whereas the growth curve of the rallies seems to be losing headway.  Given the high level of uncertainties that abound right now, markets world-wide are exceedingly fragile.  It would not take but one shock to give us another Oct, 1987.

     

    Using a sailor’s metaphor, the horizon looks threatening.  It is time to trim sail, batten the hatches, and prepare to weather a storm.  Investors should be looking for companies that have tangible assets (oil, gas, perhaps even gold in some form) and ones that have shown ability to survive severe downturns (revenues not dependent on disposable income).  These all come to mind as offering investors strength in a storm:  

    GSG, PWE, XLE, GLD, XLP, KXI, EWX.

     

    Traders should be looking to gain more off the downside, going long on contras like SDS in any rally, and taking profits on the market dips.

     

    PS.  As this was being written, CNN carried this quoted message from President Obama:  “Businesses and consumers now realize they need to manage debt more carefully”.  Not one word about our Federal Govt doing the same.

    Time to don your foul weather gear!

    Stocks: GSG, PWE, XLE, GLD, XLP, KXI, SDS
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