Dow 13,000

[aquaswim47]

Originally Posted by Ray The Money Man

But that is no reason to be bummed out. You need to learn to trade the DXD and the DDM. Or the SDS and the SSO. Or how about the DID and the QLD. Trading these indexes with the news creating catalyst is, well, easy.

I disagree. SSO was down 71% vs. SPY down 42%. The magnitude of the downside risk makes it difficult for these instruments to make it up during up markets.

It is possible that within a week, we could be much higher. Market rises happen before you know it, thus by being on the sidelines "until things get better" is an extremely risky strategy. If you wait till 11,000 to buy in, you lose out on many of the opportunities that are now available. We are no different than when we were at 14,000; it is our perception and our seeing of reality that has changed.

Markets tend to go up at the peak of a recession, since they are forward-looking. I do agree that this winter's earnings will be poor, but I believe by April of next year, the financials, housing, or retail will be much, much higher. Tech looks good for the Christmas holiday of 2009.

A 30% drop in the DJIA in the last month and a 28.5% drop in the S&P in the last 3 weeks. This is panic-selling. Come on!

[Airelon]

The last time the credit markets looked like they do now?

The market corrected 90%

It's just that simple. The first stage of deflation has already occurred. And that hasn't happened in 78 years.

[aquaswim47]

Originally Posted by Airelon

The last time the credit markets looked like they do now?

The market corrected 90%

It's just that simple. The first stage of deflation has already occurred. And that hasn't happened in 78 years.

I think it's a matter of opinion. Also, I perceive this more to be like what happened in 1987 since everyone thought we were going to be in a depression at that time. Banks went bankrupt because all the credit markets needed to do was fall 4%. Also, the balance sheets of the banks were weak to begin with. If the loss was instead 12%, the bank isn't anymore bankrupt than at 4%; they are simply bankrupt. This time, I believe there are fortress banks (WFC, JPM, C, and GS) that won't go under. Also, most of the community banks and credit unions didn't get involved in this trash. Lastly, most industries haven't bought excess inventory like they did prior to the crash of 1929.

To believe that this would be a 1929-like event, I would need to see a crash in the prime market, not just the sub-prime market. And if we had a crash on that proportion, I'd expect the Dow to fall to 6,000 (not 1,000) since that would bring us down to a 7 PE (currently 9.2). To trade at 1,000 would mean a PE of around 1.2 when earnings re-stablize and probably 4.8 to 6.0 during the crisis, assuming a 75-80% drop in earnings as a lot of firms would have negative earnings.

In 1988-1991, hundreds of banks failed and we did not fall into a depression. It was a bank turnover. The depression involved every industry turning over. GE, which was purely an industrial company at that time, fell from over $100 per share to $1.50. In a depression, there is a major reshuffling as to who becomes the large players.

When we are in a major bear market, there is about a 1/4 chance of having a Japan style deflationary event. I feel that Europe has the ingredients to end up in a depression whereas we acted much quicker than they did. China had to stop its excessive growth so they will probably fall the hardest in the end. Only China, though, has the ingredients to fall 94% like we did during the depression as if there is a banking system that collapses there, there are no industries that are performing with good fundamentals and they have excess inventory.

I made a call to buy China (FXI) only in 2010 for that reason and to only limit it to 0.5% of your portfolio at that time. That's despite the fact that the $27.33 has been triggered as a buy point for China. That means I think you can buy the next 1% in your portfolio (1/2 of that at $27.50 and 1/2 at $25.00) via limit orders. If it triggers a $20-22 per share target, buy another 1.5% (1/3 at $20, 1/3 at $21, and 1/3 at $22). Hold off on buying the final 2% until at least 2010 regardless of the price, but at a price of no more than between $15 and $18 per share. It's high price was $70.18 per share so that means I didn't tell you to buy anything until it fell over 54.9% at a price of between $30 and $33 per share. If it falls like we did during the depression, that means it will reach $4.20 per share (which is why to wait to buy the bulk of it until 2010). Thus, if its July 2010 and it still is trading at $19 or above, that's fine as you have built a 3% position in your portfolio for China.

.5% at $33
.5% at $27.50
.5% at $25.00
.5% at $22.00
.5% at $21.00
.5% at $20.00

2% at $6.00

At $19, 1/6 had a loss of $14, 1/6 had a loss of $8.50, 1/6 had a loss of $6, 1/6 had a loss of $3, 1/6 had a loss of $2, and 1/6 had a loss of $1. The average loss per share is $5.75, thus $19/($19 + 5.75) -1 = 23.2%. Not bad when the average person who invested in it lost 42.4%.

At $4, it means that this is what you had lost

10% had a loss of $29
10% had a loss of $23.50
10% had a loss of $21
10% had a loss of $18
10% had a loss of $17
10% had a loss of $16
40% had a loss of $2

Average Loss per share = $13.25 --> ($4/$4 + $13.25) = 76.8% loss as the value of the shares are $4 with an average cost basis of $17.25. That's opposed to an 87.88% loss if you had bought at $33 in a lump sum and 94.3% if you had bought at $70.18 per share. Look at it another way, you get to keep 23.2% of your money with the DCA strategy mentioned, 12.12% of your money in a lump-sum at $33, and 5.7% if you had bought at the peak. So that means, you have more than 4 times the money to work with by investing in small amounts rather than having bought when the craze was at its peak.

Since it is only 5% of your portfolio, it would shrink to 1.16% of your portfolio, assuming all the other elements remained the same or would account for a 3.84% loss of capital in the portfolio dropping it from a 7% average return to a 3.16% return; the 7% average return is the average return in the last 200 years.

[Airelon]

Proper position sizing, I agree with. That controls and manages your risk.

But this is NOTHING like 1987. I was there in 1987, and I remember it quite clearly. The credit markets were in much better shape then, than they are now. 1987 was a one day event. The crisis climaxes, we saw a downturn, and then boom - one day event. And then it was pretty much over.

This is continual. And each day that passes, more deflation is beginning to occur. We did not see that in 1987. Start looking at the credit markets, for pities sake. The worst thing for the economy right now? Well ... the worst evil of two evils? Would be a stock market rally while the credit markets continue to destroy themselves.

[aquaswim47]

Originally Posted by Airelon

Proper position sizing, I agree with. That controls and manages your risk.

But this is NOTHING like 1987. I was there in 1987, and I remember it quite clearly. The credit markets were in much better shape then, than they are now. 1987 was a one day event. The crisis climaxes, we saw a downturn, and then boom - one day event. And then it was pretty much over.

This is continual. And each day that passes, more deflation is beginning to occur. We did not see that in 1987. Start looking at the credit markets, for pities sake. The worst thing for the economy right now? Well ... the worst evil of two evils? Would be a stock market rally while the credit markets continue to destroy themselves.

It was continual because idiots hadn't done their homework as just reading a balance sheet would let you know that their were problems looming. If people had done their homework instead of simply looking at ratings, the market would have plummeted 3,000 points in one day from 14,000 to 11,000 and maybe fell from 11,000 to 9,000 over the next week; the market took a tantrum since it couldn't get its way. This steady 500 point decline hasn't been efficient since it took 11 months to fall when a faster fall would have resulted in these banks failing sooner and would have resulted in a much quicker resolution.

What I'm trying to say is that we are focusing on one sector of the economy. While the financial industry has great prominence within the economy, it's essential to see the entire economy as a cohesive whole rather than ignore those separate units. Wasn't the '87 crash caused by sell stop orders triggered by what was called portfolio "insurance" that was a moronic way to attempt losses within a portfolio instead of simply picking good quality stocks? I recognize you were around in 1987, but hundreds of community banks failed in the savers & loan crisis and the market didn't fall into the toilet at that time.

Didn't in 2000, the financial markets improve while every other sector was in the toilet. Isn't this the polar opposite of what happened in 2000 where financials are in the toilet and ever other sector is doing much better. To have a depression, you need BOTH to happen at the same time. We don't have a bubble market.


There was the perception at the time, though, that the financial system was in trouble and what followed were bank failures. I realize this leveraging also caused 1929. Moreover, there had been a drop for 4 months prior to the big precipitous drop. It went from 2,800 to 2,250 and then on that day, it fell 500 points or 22%. The drop had happened in a matter of weeks.

When we look at this crisis, it is similar. It took 11 months to fall 20% and one month to fall 30%. Every person who looked at a bank balance sheet and saw a total assets/total liabilities ratio of 1.03 should have stated to themselves that the banking system could go into collapse shall the perception change or if any losses were taken. Why we have such ignorance of that is incredible! Those balance sheets indicated a lot more leverage, since 3% is unheard of in most industries that have 2.5-3 current ratios on average. If most industries had a current ratio of between 1.03 to 1.10 or a total assets ratio of less than 1.5, I'd agree that we were heading into a depression. I do think an economy of 8-10% unemployment or -5% GDP is possible, but I don't think we we exceed the 12-25% unemployment we had during the Depression. In other words, I think it might be the first severe recession in 26 years with an economy similar to what avails itself in Michigan. The stock market has priced that in and the worst figures I've been hearing was Cramer (8,200), 7,500, and 6,500 (Clark Howard) as that would equal a 60% drop from peak to trough. When people speak of a depression that to me signals a bottom because people believe there is no "hope" for the market. I predominately eliminate "hype" and over-capitulation from my analysis; the China experience is an example of where I'd actually believe in a depression as I would also in Europe since the ECB rate has remained extremely high!!!!

I don't see why 14% of the mortgage market is responsible for causing a market to become deflationary even though some firms took on 30x leverage leading to their downfall with as little as a 4% drop in value.

[aquaswim47]

Originally Posted by Airelon

It's just that simple. The first stage of deflation has already occurred. And that hasn't happened in 78 years.

The 1950s, 1990s, and the industrial revolution were deflationary. When there are no buyers in the market and smart people like you begin to capitulate, that usually signals a rapid short covering and a bull market plunge.

Time to load up on stocks! But stay away from the bond market and keep more cash than usual.

Things to buy:

1) Consumer Staples stocks - great in a recession since we all have to eat; if you can eat it, smoke it, or drink it, buy it!
2) Utilities stocks - pays a great dividend
3) State General Obligation Municipal Bonds (except CA)
4) Gimme Maes
5) US Treasuries
6) FDIC Insured Certificates of Deposit (CDs)
7) Industrials - the first stocks to succeed in a recovery, maybe try to get those with a domestic focus (MMM, UTX, DE)
8) Healthcare stocks (especially biotech & pharmaceutical) (ABT, JNJ, PFE, MRK, GSK, TEVA, etc).

Speculative Areas but interesting for those who wish to take risks:
9) Tech stocks (prefer ones with a good dividend) - TSM, MSFT, IBM
10) Chemical Companies - dropped a lot and provide a great opportunity - MON is an example as is SHW, DOW, and DD
11) Automotive (but only if the government guarantees all mortgages or only the foreign kinds, maybe Ford)
12) Energy stocks - but don't dive in, simply buy a little
13) Telecom stocks - T, VZ, CMCSA
14) Financials - but only the really strong and conservative ones - i.e. JPM, WFC, GS, HCBK, CBSH - there are many opportunities but be careful (even BAC, I'd avoid)
15) Consumer Discretionary (but not until 2009)
16) Housing (but not until 2009)

[Airelon]

Listen.

When was the last time, the TED spread was at 4.8 - right before all these companies have to order their supplies for the Christmas season, as well as pay their employees? When?

While, at the same time?

The Dollar surged ahead this strongly, for this long while the TED was at 4.8?

Do you honestly believe - that there aren't going to be disappointments for earnings going forward, with unemployment increasing, and deflation ongoing - with stocks and bonds selling at the same time? With consumer confidence lower than it's ever been?

I'm not saying you can't be inflexible. God knows the second those credit markets unfreeze? Then I'm all in. And I do mean ALL in to the stock market. But nothing, and I do mean nothing is happening, with the credit markets where they are at. Businesses cease to operate when two to eight week credit markets are in a log jam. That unfreezes? Yeup, I'm all in, from 91% cash. And I have no problem buying stocks in the midst of crisis either. Best time to buy in the stock market? 1932. During the worst of the Great Depression. But it was only at 1932 that the credit markets had completely unraveled, so that everything could proceed from that point.

Edit: Did you just seriously say to buy CD's? With CPI Core at 5.6% and PPI at 13.2%, and the TED at 4.8? So ... your recommendation to people? Is to instantly go - 2% on their money?

[aquaswim47]

Originally Posted by Airelon

Listen.


Do you honestly believe - that there aren't going to be disappointments for earnings going forward, with unemployment increasing, and deflation ongoing - with stocks and bonds selling at the same time? With consumer confidence lower than it's ever been?

No, this is going to be an awful Christmas season, but it is my hope that the stock market can perceive beyond a 3 month period; it is my hope that the market can predict at least 6-8 months into the future. I think that earnings will fall sharply and may go negative due to greatly reduced consumer sentiment. Inventories better be kept to a minimum and customers should have to place orders via back order this Christmas season. I'd have priority mail as a back-drop. This year will probably see a 1.5-2.5% increase in consumer spending (a very low level of increase) and it would not be surprising if it fell 0.5% to 1.5% on a nominal basis.

Originally Posted by Airelon

I'm not saying you can't be inflexible. God knows the second those credit markets unfreeze? Then I'm all in.

By then, the stock market will be MUCH higher (in my opinion). If the government guaranteed all mortgages, the market would be up 2,500 points in one day and it would be a rally equivalent to the 1987 crash. That's why it's a good idea to dollar-cost average into the stock market. If it rose 20%, you better have a good reason why your opinion changes, since it might rally without an apparent reason and that's dangerous! However, there are $55 trillion in credit default swap insurance contracts, thus it got out of hand.

Originally Posted by Airelon

And I have no problem buying stocks in the midst of crisis either. Best time to buy in the stock market? 1932.

Yes, it was July of 1932 that was the absolute lowest time during the depression when it had fallen 94% (the equivalent from 14,280 to 856.80 but more practically to 990 or 93.1% loss if the same thing happened today). It opened the month at 42.84 so if you bought it near the open of the market, you bought it very close to the low! You are right that is when the worst of the credit markets had worked out, but it took 9 years (until WWII) before the economy went under control even though you could have made significant money trading off that low. The main problem is that profiting during the depression was only possible for government employees as 25% of people were unemployed and 90% of people only had a PT job.

Originally Posted by Airelon

Did you just seriously say to buy CD's? With CPI Core at 5.6% and PPI at 13.2%, and the TED at 4.8? So ... your recommendation to people? Is to instantly go - 2% on their money?

You can get 4% on an ING 1 year CD and 4.3% on an OnBank 2 year CD. CapitalOne is paying 4.5% on an 18 month CD. If you are willing to stretch it out to 5 years, you can get 4.9% on an On-Bank 5 year FDIC insured CD. Gimmie Maes are another option if you have a middle to long-term time horizon (5-12 years) and are bearish on stocks during that same period.

I-Bonds are paying 4.8% for this six month period (the offer is good until Oct. 31) and then from April to October, you will receive the Nov. 1 rate which could be as low as 0% making it a minimum of 2.4%. The money is locked up (it cannot be taken out even with a penalty) for 1 year.

There are some municipal notes paying 4.55% when in normal markets would be paying 1.8% to 1.9% since taxable money market are paying around 2.5% (with Vanguard). To get to that rate, i.e. 4.8% LIBOR vs. 0.3% Treasury implies to have a significant loss of principal to the net asset value of the mutual fund paying that dividend. I've seen bond funds go down 40% in value this year. A higher yield may indicate higher risk (except for those that are guaranteed by the US government, such as FDIC insured Certificates of Deposit). I was reading though that the FDIC can take up to 99 years to repay the money. In practice, they've paid next business day, but I think in the S&L crisis, it typically took 3-6 months to get access to your money. If you are truly scared, buy Treasuries. I like state municipal bonds, but I'd stay away from California since it seems that they have a spending problem.

I don't think you need to fear T Rowe Price having any trouble as it has the balance sheet of an average tech company; it has an extremely strong balance sheet; as an asset manager, it did not leverage its assets and looks very strongly/conservatively capitalized.