Sample Monday Overview Letter  

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

Seventeenth Consecutive Year of Publication; Letter #1; September 18^th, 1990

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address:  Richardstk@aol.com

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Monday, June 30^th, 2008:  Ok, I’m off this afternoon.  For a week of revitalizing rest and recreation, I hope.  Actually San Jose to Lake Tahoe runs through some of the worst housing bust in America, with one county near there declaring bankruptcy.  So I may be back with some first hand knowledge & new insights.  Have a great week and a greater 4^th of July.  I hope everyone gets to listen to lots of patriotic songs.  We all have to believe in this country which has done so many good things, for us, and the rest of the world too.

THE BIG PICTURE

In today’s Big Picture view, let me lay out how big bad bear markets historically have unfolded.  Thereby to offer up some guidelines on what to expect over the next year or two.  Essentially this model scenario comes from my many years of studying past history and also from my first hand experience of being in this fascinating stock market business for the last 35 years (dating myself).  Yep, when I add it up, it’s been that long.  Actually that’s also approximately how long its been since we suffered through the last Papa Bear market as I expect this one to prove to be.  I had just gotten out of college and started work at “Mother” Merrill Lynch and asked a rep which stock to buy.  He said buy Merrill Lynch, which I did and it promptly went down from about $23 to $8.  I really didn’t understand what was going on back then.

Bear markets, Papa, Mama or Baby, go through psychological stages or phases.  The first psychological phase is when investors deny and thus fight tooth and nail that a bear market has even really begun, after being so locked into bullish expectations for so darn long (in today’s case for five years, longer than normal).  The second psychological phase is when the news turns so bad that even firmly entrenched bulls have to admit that something is wrong out there.  That maybe the economy is sinking or in recession because the economic data (as inexact and easily manipulated as it is) then coming out is so negative.  This phase can go on for quite a long time and is generally the longest of the three phases.  Investors still look to find ways to invest and make profits through this phase although that becomes harder and harder as the incoming news goes from bad to worse.  And finally the third psychological phase is capitulation.. That’s when even the most adamant bulls lose all hope, give up the ship.  And sell.  This capitulation phase can be short or long but is epitomized by massive selling all at once, as everyone still invested feels the heat and pressure, can’t sleep and somehow all give in to the pressure at the same time.  After this massive selling, the pressure comes off stocks as everyone who wanted to sell has.  Still we generally need additional time to heal, thus after a lack-of-sellers bounce, stocks generally retreat once again, but this time on shrinking trading volume, they successfully “retest” their capitulation lows and the stage is set for a new bull market.

Schwartz View:  I think we’re in for a similar performance to the above scenario.  President Bush probably thinks he did something truly good with his multiple tax cuts following in President Regan’s footsteps but the early 2000 tax cuts just went primarily to the super rich.  And Bush’s Iraq invasion and following years of morass just went on our credit card.  And our looming long term critical economic and social problems like Medicare & Medicaid, Social Security, energy and health care haven’t been tackled.  Thus I see big problems accumulated for the next US president as he is going to have to tackle and come up with some very important solutions.  During this period, say the first two years of a new presidential term, most everyone in America is going to have to change our lifestyles, from freewheeling and overspending and living on credit to living a more disciplined, controlled lifestyle.  All in all in today’s very competitive global economy and world we live in the sooner America and Americans get our acts together the better.  I want to turn bullish on America again asap and thus benefit from America showing the world what we can do when we’re all pull together on the same page and right path.  But for now we’ve got a tough period to slug through, so hunker down.  Our fortitude, intellect and culture should stand us in good stead.

THE STOCK MARKET

We could see a stock market bounce soon, any time now after stocks have dropped so much, so fast, recently.  After the Dow Industrials plunged through its March lows last Thursday and the S&P 500 fast approaching its own March lows now, closing at 1278.38 on Friday, just +0.39% above its March 10^th closing low of 1273.37.  Generally institutional, professional investors like to defend old lows and other key prices levels I’ve found.  I mean there are sign posts in the stock market and besides low lows another  is when a key index drops -20% from its peak, that’s a price level where market observers start calling a decline a bear market and no one wants that.  For instance, the Dow hit that -20% point off last October’s high last Friday, CNBC started flashing the news and stocks promptly rallied, a bit.  Again, some investors will fight new trends at these key price levels.  We’ve seen this play out over the last few years during the bull market, at important correction points, like down -10% whereby mysteriously in came buyers time after time.  Maybe it’s a black box phenomenon, some trading strategy hedge funds have and profit by.

Anyway, and on the other hand, we may NOT get such a bounce this time down or at this point.  In fact, we’d better not count on it, not with crude oil making new highs every time we turn around, like this morning rising to another record, now about $143 a barrel.  Yes, some are calling for oil and commodities to collapse, calling their rise just another bubble.  Oil dropping $10 a barrel in a day and $30 in a few days would likely help the stock market but after the knee-jerk upside reaction, investors would probably decide lower commodities also broke the back of any and all remaining stock market strength and leadership.  And that resulting sigh-of-despair would then lead to even more selling.  Plus, who’s to really know whether the commodity boom isn’t really a sign that all the world wants to lock up vital crude oil, natural gas, foodstuffs and all other needed natural recourses to keep their economics functioning.  We do live in a suddenly, very competitive one global marketplace after all.  It’s interesting that the two super successful, first mover, hedge fund investors who teamed up way back in the 1970s with the Quantum Fund today have slightly different views of what’s going on in commodities, but pretty much the same.  Jim Rogers, the analyst of the pair, says buy commodities, these soaring prices are because the supply-demand equation is way out of whack.  Prior to recently soaring global demand there’d been no incentive and thus little search for new supplies in most any commodities going back two decades.  And George Soros, the trader of the pair, says yes there is a bubble in place today in oil and commodities but it’s superimposed on an credible long term uptrend.  In other words, both can see a big decline in demand during the next global slowdown, a major glitch, but both can see further commodity price rises over time ahead.  All combining with past US history, there for anyone to look at, that oil and oil stocks did very well during the first year of the last major market, in 1973-1974, thus supporting my theory that oil will hang in there longer than most expect.  And my recommendation to keep one toe in the energy patch; I’m recommending the oil service sector.

Schwartz View:  Looks to me like a second leg down in stock prices (as contrasted to a second psychological phase which seems also to have started) in this bear market has begun and thus that this summer could offer up much lower stock prices rather than more sideways, complacent trading of the last three months.  I would play your cards close to the vest.  Please see PORTFOLIO STRATEGY below.

PORTFOLIO STRATEGY

With the stock market  now down substantially -- and hopefully everyone reading my letter having already following my consistent and persistent advice over the last seven months of cutting back stock market exposure -- I still have to recommend “getting smaller” like well-known trader Dennis Gartman likes to say.  I mean it’s so easy to just be complacent here, figuring stocks are already down -20% so most of the risk is over.  But history shows the opposite, that stocks drop more like -50% or more during big bad bear markets.  Just seems logical to cut back even more as a second leg of price trouble begins.  And there’s no guarantee that these bear market legs will just number three, following along with the psychological phases of bear markets, as www.Comstockfunds.com calls them, denial, concern and capitulation.  In the 1929 to 1932 bear market, I remember reading there were like seven legs down in stock prices.  Thus, as I jet off on a quick vacation, be back writing next Monday,  I’m reviewing my own managed portfolios to find the best places to cut back my exposure even while only being 40% exposed in one portfolio, only 30% in another and pretty well hedged with inverse sector funds in the other three more actively traded accounts. Please, yourselves, attempt to take a look out six months or a year ahead, over the horizon yourself, a necessary step when managing other people’s monies, and consider the Big Picture.  Just say things unfold poorly.  What would you do next summer if the economy is finally post terrible stats and corporate profits have plunged?  And if your portfolios are then down -50% or more?  Are you going to sell then?  No.  Today we still have time to sell and looking back selling would have been correct strategy if that likely scenario unfolds,  wouldn’t you agree.  Bottom line, in big bad bear markets it’s better to be safe than sorry.  Wait until the next bull market comes along before you starting going for the gold.  Oops, hold a little gold here.

Have a great week and a terrific 4^th of July!

* Please also, go ahead and overdose on America’s heritage this week, listen to a lot of wonderful July 4^th songs and let them infuse you with a renewed sense of patriotism.