Principles of the Stock Market : Historical Perspectve

BUY CLEAN GREEN! BEST INVESTMENT THEME FOR DECADES

Richard Schwartz — Thu, 01 Oct 2009 13:24:00 GMT

CLEAN, GREEN UPDATE. THE NEXT BIG THING IS HERE & WORKING WELL!

For a FREE week of PRINCIPLES OF THE STOCK MARKET, email me at RichardStk@aol.com

Starting back in December 2006, I started writing about the next BIG THING. And have updated it for you continuously ever since. Happily I started on this theme right before the 2007 boom in solar stocks. Since I eat my own cooking, so to speak, I was able to capture some doubles and more in companies like First Solar (FSLR), Suntech Power (STP) and a couple others. Hope you were too. That solar boom is over, for the moment -- a good time to nibble, with today’s oversupply of solar but other subsectors of the greater clean green energy universe are now having their day in the sun (pun intended). “Smart grid” stocks, those that help reduce, measure and regulate power usage have recently been hot and I’ve long recommended EnerNOC (ENOC) and Comverge (COMV). Disclaimer! I own small portions of both but can and do change positions without notice. And that’s even before America really starts to modernize our national power grid. Wind and natural gas stocks have been doing well now as have battery and other storage technology after General Motors threw out that figure of over 200 miles per gallon coming with their Chevy Volt. I did publish a decently all-encompassing list back on June 6th, 2008, right in the midst of the 17-month downtrend and asked you to “print, keep handy and archive” it for future use. Last Wednesday, I listed a few additional technology companies which have one foot in clean green and before that, on September 18^th, I posted a winnowed down list of my December 2006 list of about 80 clean green companies outperforming for possible near term trades. And of course a couple times recently I’ve again recommended that new clean green global mutual fund that Steve Leuthold and crew are now offering, which I recommended to you just back in July, that’s Leuthold Clean Green Tech (symbol LGCTX).

I CONTINUE TO BELIEVE THIS IS SHOULD BE #1 THEME FOR LONG TERM INVESTORS and thus let me pound the table again today (even though it’s not Friday when I’ve gotten in the habit of giving you YOUR CLEAN GREEN WEEKEND UPDATE; I’m a man of routine my friends say.). Just want to point out that holding a bunch of clean green stocks is still working well. What I’m finding is that some good news item seems to pop every few days about one of the stocks in my own IRA portfolio, almost totally composed of small lots of lots of clean green companies, and/or also for many of those stocks on my larger shopping list of clean green. My IRA is up over +30% this year and I’m only 50% invested! (Note! I’d be much less invested if this was my fund management money. Like monies that are designated to only go into sector funds or that only can be moved around minimally or that has no clean green choices, again like the money management I do for others.) Anyway, whether it be wind, geothermal, energy storage, battery technology, fuel cells, etc. etc, whatever, there are lots of clean green niches, I’d buy ‘em all and cover all bases. Yesterday one US wind company got a big contract from a Chinese firm and popped +10% (in a ragged stock market), that’s happened numerous times as China pushes clean green too. Back a week ago a reader sent me an email that three of his very low priced clean greens were all up nicely that day when he checked. I hold one of them so I won’t mention that name but two others I used to hold, not right now but maybe I’ll buy them back on weakness down the road, were Medis Tech (symbol MDTL) up +24% and Hydrogenics (HYGS) up +13%. Schwartz View: Bottom line, pull out my original shopping list of clean green, which I’ve run in various and updated forms numerous times over the last couple of years, review it and then buy small amounts of lots of clean green stocks. That way when a breakthrough occurs, wherever you’ll benefit while the rising tide carries all ships (almost all) over time. That was my original game plan for all of us and remains so and continues working nicely. By the way I’d buy BEFORE the scheduled December Copenhagen global conference. The rationale again is the world is going clean green because it has to. We all know that. Going clean green creates new jobs which we desperately need, cuts down on oil money somehow finding its way into terrorists hands and respects and protects Mother Earth. And when we forget we have to go green for a brief moment, some report about global warming comes out and reminds us.. China knows it, Europe knows it and America, our scientists, our government, our businesses (who wants rules in place so they can move forward with capital spending plans), our venture capitalists know it and our everyday Americans know it. All except for the pure unadulterated capitalists holdout contingent who won’t admit such because in their blindered view “it hurts business.” Let me say again: There is a critical mass for going Code Green and a critical mass means there’s no stopping it, maybe something, some event, can hold it back for a time, but there’s no stopping it.

THIS IS THE #1 BEST INVESTMENT THEME FOR THE NEXT COUPLE OF DECADES!

Come on, get on board!

Ending Wars Adds To Deflation Pressures & Ends Bull Runs

Richard Schwartz — Thu, 24 Sep 2009 13:52:00 GMT

GLOBAL VIEW. OK, HERE’S THE REAL BIG NEWS! All the above is well and good but the key news was shown on the public broadcasting channel last night, on World Focus which runs at 6 pm my time (the old BBC news, now Americanized as World Focus). I purposely watched it last night to see how they covered President Obama’s big speech to the United Nations. You know with delegates from Iran, Russia, the Middle East and everyone there. He did ok, said the expected, set forth America’s agenda. No surprises. But the surprise was the word the Obama, after getting a general’s recommendation that we need more troops in Afghanistan, is considering some change of strategy. To me that could only mean, if he’s considering NOT sending more troops, he considering cutting back on the troops we have there now.

IN OTHER WORDS, GETTING OUT, ENDING THE WAR IN AFGHANISTAN!

Now if that is the case, markets and investors will have to adjust, and the sooner the better. Regular readers will remember that during the later part of the five year bull market run up from 2002 to 2007, I used to write that when we pulled our troops out of Iraq, that would likely spell big trouble for the economy. Slowing it down maybe into recession as the troops came back home and looked for jobs, and thus in turn very likely could be the end point to that bull market. (Of course things do change and while we never did pull troops out of Iraq, we instead got hit by that unexpected ‘Black Swan’ event, the subprime implosion.) Anyway, back then I cited the historical fact that when a cease fire in Viet Nam was announced, in January 1973, the bull run of the previous 2 ½ years (coincidentally?) ended. Basically I’d say because ended the war was deflationary. This is generally the case. After WWII ended there was big fear of a recession as well. Well, in today’s case I imagine the outcome after pulling out of Afghanistan would be similar. When we stop spending money on ammunition and equipment, on troop salaries, on military logistics, etc., etc., etc., that will also lead to a big deflationary economic slowdown, just what we don’t need right now.

Of course, President Obama has to think about more than just the economy, he has to think about the safety of the American people, the safety of our troops and overall for what’s best for the country. Plus, in switching his attention to the war against terror, he might just be buying into the growing feeling that the credit crisis and recession are winding down, buying into the Fed’s SPIN (or the truth) about the economy, so he can look elsewhere and feel that another deflationary force won’t hurt us now. Remember VP Biden said the incoming administration didn’t realize how bad the economic situation was when they first came in office so that might again be the case. Schwartz View: No announcements have been made on what decisions President Obama will make concerning Afghanistan. Right now it’s all Schwartz speculation (and many times I’m early in spotting something new, I think because I read so much.) The administration may just be testing the waters about how a change of strategy would be received. President Obama might indeed follow the military’s recommendation and just send more troops there. But I doubt it, logic says Afghanistan is unconquerable. And with a new US president we could have a new US strategy.

Good Time To Sell. Following this train of thought, I have to say today or soon is another logically good time to take more money off the table. Ending wars generally lead to deflationary results and the first market participants that pick up on this trend will benefit the most. Again, a ‘first mover’s’ advantage. Plus please remember the many years in development SCHWARTZ RULE: "MOVE EARLY!" That applies to buying or selling.

NET, NET, I’D REVIEW PORTFOLIOS & FIND AREAS TO DO SOME MORE SELLING!!!

Watch One Particular Stock Market Guru!

Richard Schwartz — Fri, 14 Aug 2009 13:36:00 GMT

AN HISTORIC GURU VIEW. Written Friday morning, August 14^th, 2009.

Being in and around the stock market for the last 35 years -- I can’t believe it’s been that long! -- I’ve seen market gurus burn hot and cold. In my early years I was in more of a daze, doing ancillary brokerage jobs rather than following the stock market closely, just trying to figure out the whole brokerage industry. What a stock broker did, etc. Did I want to be one? Would I be recommending my own stuff? And again not being in New York city, the epicenter of finance, I was on the outside looking in. Even today that’s ones largest hurdle. So anyone wanting into the business I’d advise going where the action is, New York or another financial center like London. If not New York or London are not for you, find a big firm, say a big mutual fund family and get to its headquarters, be it in Boston or Singapore, etc. Anyway, back to point.

Granville & More. I’ve seen Joe Granville burn hot (and drop his pants to show stock quotes on his boxers and walk on water on a hidden board) and turn ice cold in popularity and heard about Jim Dines. I used to follow that curly haired woman guru, yes, that image is bringing her name back, Elaine Garzarelli. For many years I read Richard Russell, one of the deans of newsletter writers and whom I modeled my own letter after, took sample letters to numerous letter writers including Ned Davis, Dan Sullivan, Harry Schultz, Norman Fosback, Lou Navellier, .Marty Zweig, Stan Weinstein and unearthed Ted Warren’s one book (one of my favorites) and read everything I could find. I like William O’Neal’s approach and regular readers know I use and recommend his paper and its IBD 100 list. Having an economics background I gravitated to Ed Hyman’s work and read a number of economist A. Gary Shilling’s books. And read John Naisbitt’s Megatrends series with his long range projections. I’ve read and studied all the Dow theorists from Dow to Hamilton to Rhea to E. George Schaefer to Russell. I continue to read many new guys too, Alexander Elder, “Trader Vic” Sperandeo and on and on. Etc., etc. etc. Many unknown letter writers too. I really could throw a ton of names around if I sat down and reviewed my stock market library and mine and other’s old market letters. So I’ve seen many gurus come and go and burn hot and cold. But one who I continue to admire and track is Bob Prechter of Elliott Wave fame who was the #1 guru way back when. He was a major market mover like Joe Granville. While he uses charts -- which Wall Street loves to disdain, I think that’s mainstream Wall Street spinning a veil and case on the public to justify their big bucks, they all surreptitiously use ‘em -- Mr. Prechter also is now ties market swings to societal mood changes (which makes good sense to me). And is in the process of attempting to add and formalize to current investment analysis the concept of tying stock market trends to mood shifts. “Go for it Bob!”

SCHWARTZ RECOMMENDATION: TRACK MR. PRECHTER GOING FORWARD!

Anyway, I have to strongly recommend keeping one eye peeled on what Mr. Prechter is advising right now. Especially now! I’ve related the histories of Granville and Dines going terribly wrong in this letter, getting stubbornly bearish right at major market bottoms, so I realize the danger now for Prechter in remaining so adamantly bearish but I can’t fault his analysis, what he’s saying and my 35 years in the business tells me to not pooh-pooh his foresight. After reading everyone I can and adding in own my market intuition formed over those 35 years in and around the stock market, I’d say he’s on track. So I’m with him and the other bears, Jim Rogers, Marc Faber, Gary Shilling, the Comstock guys and others out there, still recommending extreme caution going forward. Remember us outsiders were bearish but correct at the July through October 2007 bull market peak while most of those bullish today were also bullish back then and missed that major top completely. Amazing! I mean even after the subprime disaster unfolding ahead became plain in August 2007 and on the head fake rally to new highs in October 2007 they remained Pollyannaishly [sic] blinded. (And no, for all you individual investor skeptics out there about Mr. Prechter’s work, and I know there’s a lot by reading the responses and comments now added at the end of most all Internet carried research, no I’m not a shill for Prechter. Never met, emailed or corresponded with him at all.)

So, yes, play this rally which will likely run longer than most bears think, but stay near the exit; somehow!

For a FREE sample of my daily, emailed stock market letter and advisory, email me at RichardStk@aol.com.

Stocks Have Risen When The Economy Is Down

Richard Schwartz — Mon, 03 Aug 2009 14:49:00 GMT

THE BIG PICTURE

The key thought: History shows the economy can be bad and the stock market good! Understanding that one idea is key to making a logical decision about the stock market here. I tried to get this across at Elizabeth’s 9^th birthday party to the family Saturday. The stock market is climbing its “wall of worry.”

THE SITUATION. My stock market and economic history studies of the Great Depression of the 1930s convinced me that stock market can rise while the underlying economy remains in a very weak condition. Because it’s happened before. In the 1930s depression, even while US unemployment remained at horrific, double digit levels for the whole decade and with few safety nets in place to help destitute Americans and with great ongoing divisiveness between political parties, the stock market posted a five year bull market run up, from 1932 to 1937. So, yes, there can exist a great disparity between the stock market and the economy. This confounding, confusing conundrum can exist as long as the economy is not sinking and/or when the economy stabilizes, no matter at whatever low level of economy activity. I believe that’s because the US capitalistic economy is essentially revitalizing and self-healing. Helped today, because over our history our capitalistic system has grown so large and diverse. In other words, first because Americans, with our continued open borders to any nationality, are a breed of extremely ingenious risk takers and thus will find ways to survive and prosper if allowed to do so. If, from time to time, when capitalism gets in a bind, it gets jumpstarted. Or gets the table reset when it knocked awry. Secondly, because today, there just are so many different industries, businesses, ideas, innovations in all parts and regions of America. Just meaning that while construction and manufacturing are down, maybe technology and the media are up. Or while Michigan is down, Tennessee is up. Or while big business suffers, smaller businesses spring up. I’m too provincial to see all this metamorphosis first hand and thus explain this concept more completely but what I see today is an America in downsizing mode, say moving to a rightsizing scale, but not in total collapse mode. Just like China, America in our own way is using this crisis, individuals one by one, businesses one by one, even the government is adjusting, although not totally because the government is itself the ultimate safety net when any major crisis hits. Our government, we’ve learned from past crises, is the rarely needed (thank goodness!) jump start provider, booster or table setter. Thus today America is using this financial crisis to rid our economic system of the bloat, the fat, all the long built up excesses, our bad behaviors and habits, particularly our overspending, even the corruption which always builds up during “unfettered capitalism,” seemingly prosperous but under the surface unhealthy, unsustainable times. Exactly why economists look at recessions as normal, healthy and needed cleansing events and why throwing money at any and all past downturns in recent decades led to this larger than life recent disastrous event. Schwartz View: My conclusion thus -- to get back to my opening statement that stock markets can rise while our economy is down and dirty, weak and lackluster and in substantial downsizing mode -- is that what investors mainly have to fear today is indeed fear itself. That fear partially coming from not being able to understand how the stock market can rise as we read about and see big economic trouble all around us. As I see it that’s investor’s biggest bugaboo now. We all know or should know that, as William O’Neil, founder of Investor’s Business Daily has always stressed, that success favors the optimist. Now I don’t mean the Pollyannas, I won’t besmirch the many of this ilk whom get be angry, they got their comeuppances by getting blindsided and riding the stock market down for 17 straight months between October 2007 and March 2009. But today, since we’ve moved past the bankruptcy risk, at least for the time being, no guarantees about future shocks knocking not us back down, we should overcome our fears and our misunderstanding of the economy and stock market relationship and again participate in the stock market to the extent of our own financial goals and objectives and how we’ve performed over the last two, years, during the bear market since mid-2007. To reiterate since this concept is so darn important, the hardest move to make is to buy stocks after this financial earthquake and while we see all the resulting damage around us. In other words, to separate the stock market from the economy. It’s very difficult for us investment professionals as well because every day we watch the stock market closely and/or read every update about each remaining financial problem. We all need to overcome our fears to make money during this full cycle. Easier said than done!

THE ECONOMY

The economy is so large and varied now that even with the shock and resulting dead stoppage of economic activity for many months, we’ve been able to stabilize the economy. Thanks to our government learning from our past travails and understanding its role. President Bush gets much credit but he’s gone now and thus last Friday I heard the first words uttered about an “Obama Miracle.” Pulling totally out of this massive slump is another thing and may take much time yet although we could post some surprisingly great numbers in coming months. Inventory rebuilding looks good statistically and allowing home foreclosures provides changes of ownership from the overextended to new risk takers. Still, over America’s 200+ year capitalistic history we’ve built a vibrant and reenergizing economic system so there’s always something good taking place somewhere and while the distressed and/or overbuilt areas of our economy right size the in fashion areas keep us moving forward. And our government has and is still performing admirably (sorry, I know many readers don’t agree with me), stabilizing our financial system and thus setting the stage to allow capitalism to provide us with future growth while at the same time realizing that any and all government intervention always adds additional drags on the economy and is trying hard to avoid such. While at the same time smartly tackling our long term deeply entrenched and ignored major issues and thus pointing America towards a more fundamentally sound future, remaining as one of the world’s leaders. Such as taking the lead in going green as the “clunkers for cash” program epitomizes. Americans really want to do their part and this program is providing one capitalistic way to do so. Getting polluting cars off the road while stimulating growth at the same time and in essence cutting back money supporting terrorism. I gotta love it! Schwartz View: So, we’re back on the right track in lots of ways and I’m delighted. But don’t get complacent. Please keep reading!

Please email me at RichardStk@aol.com for how the stock market will respond to the above analysis and whether, in the following THE STOCK MARKET and PORTFOLIO STRATEGY sections it’s time to buy the stock market today or not.

The Great Recession Unfolds This Way

Richard Schwartz — Tue, 28 Jul 2009 18:16:00 GMT

SCHWARTZ RECESSION CONCLUSION. Tuesday, July 28^th, 2009.

Ok, after much consideration, here’s my conclusion as to what unfolds going forward. The economy struggles through but survives the next few years. About 20% of Americans have a very, very difficult time out of work and out of hope but the other 80% make out all right. Similar to the 1930s when those with a job managed. Today the US economy is so deep and varied, meaning there is so much diversification, that there will be areas of growth and even prosperity along with much despair. The stock market, in its infinite wisdom and with its amazing discounting faculty, based on the government having prevented an all out total collapse, sees this and settles down. And this mini bull market lasts and lasts confounding the adamant bears. But somewhere along the line we get a recession within this Great Recession, just like hit America in the 1930s when we got a “depression within the depression” after a five year hiatus and stock market run up, which hit in 1937-1938 when the market crashed big time. This time it will be a recession within a recession because of all the safety nets put in place after and as a result of the Great Depression of the 1930s. What will cause this second down turn will be the other 80% of Americans retrenching. I mean the 80% of Americans who are monitoring today’s troubles but not being directly affected by today’s high and rising unemployment are continuing their current lifestyles, meaning continuing their current over spending habits without (m)any changes today. I see this going on all around me. People still working aren’t cutting back much, it’s only those rich and not so rich alike who have been struck head-on by today’s sudden economic downturn, who have been FORCED to cut back. The other 80% while being a bit more cautious are continuing their too abundant lifestyles. Myself I’m not exactly sure what will cause this second and more all-encompassing retrenchment but I believe it does lie ahead. Likely some “Black Swan” event, some unpredictable sudden shock. But the domino, rippling outward series of cutbacks now working their way through America will be partially to blame, having weakened the foundation. I must say driving through the village of New Paltz, NY this morning, probably the most vivacious and bustling town in the Catskills or mid-Hudson River valley region partially buoyed by its SUNY college, I saw more 'For Sale' and 'For Rent' and 'For Lease' signs than ever before in my ten year history living here. Ironically it’s the old paradox of thrift which may get us over time. Meaning savings is good for the individual but bad for the overall economy. For more, agree or disagree, email me at RichardStk@aol.com for a sample of my daily "learning, teaching, always evolving stock market letter and advisory service."

Weekly Monday Overview

Richard Schwartz — Mon, 06 Apr 2009 13:17:00 GMT

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PRINCIPLES OF THE STOCK MARKET

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Monday, April 6^th, 2009: It’s Master’s week so I’m pumped up. It’s golf’s 1^st major of the year, tradition packed, for you non-golfers. Should be great with Tiger back, Phil Mickelson saying he’s playing the best golf of his life, Paddy Harrington going for his 3^rd major in a row and lots of up & comers. All I can say is wow! Even just watching this old southern flower nursery turned into a golf course in the spring, lavished with money for decades, may be worth the watching for any non-golfers out there. For me, it’s just heaven.

THE KEY QUESTION

Instead of discussing The Big Picture today, let’s focus on The Key Question. Since that’s what I keep pondering. Plus it has to be on every investor’s mind as well. “Could this rally be the start of a new bull market?” To intelligently answer -- as during every bear market rally -- necessitates rehashing all the available evidence. I can make a solid case for a cyclical bull market having just started and I can make an even more solid case that this is just a normal bounce in a Papa Bear market. Consider:

MINI BULL MARKET HAS STARTED

·        The economic stimulus is now starting to kick in which will stabilize and bounce the economy.

·        The monetary stimulus, lower interest rates, is also now kicking in and housing sales are increasing.

·        Inventories have been drawn down and need to be restocked which will pump up GDP growth near term.

·        The US and other governments have done everything possible to mitigate this downturn.

·        We now have more coordinated and get along global leadership than in many years.

·        The US economy has proven itself wonderfully resilient to shocks in recent decades.

·        Markets can counter-swing at any time for long periods, posting mini bull markets, versus primary trends.

·        Almost two years has passed since the beginning of the credit implosion back in July 2007.

·        Many independent market gurus think the March 2009 lows will last for a good while, months or longer.

·        The latest government bailout plan has more enthusiasts and support for it than previous plans.

·        Oil stopped falling back in December and is now on the rise possibility indicating growth rebounding.

·        We have recently had a number of better economic data reports from both retail and housing.

JUST A BEAR MARKET BOUNCE

·        The bear market hasn’t lasted long enough to discount all the problems that have come to light.

·        More problems, coming as bearish ripple effects and because of long lag times, are due to show up.

·        The bear market hasn’t fallen deeply enough to factor in the sudden massive shock to the global economy.

·        There hasn’t been enough overall selling or liquidation for a solid bottom. Stock and mutual fund liquidation haven’t reached previous classic big bear market bottom levels.

·        No solid bottom appears on the charts. We need a climatic sell off or a long low volume erosion to bottom.

·        Interest rates have to go up at some point, soon – either with and because of an economic rebound or from panic selling -- which normally depresses stock prices because of this new competitiveness from bonds.

·        The American consumer has suddenly stopped spending. This has slowed down business all over the world and finally exposed the global imbalances problems. Too much manufacturing in China and Asia and too much spending coming from America. Now those imbalances are being forced to readjust. Takes time.

·        The stock market is ignoring soaring unemployment. Yes, employment is a lagging indicator but continuing jobless claims isn’t. A new report just out says that in coming weeks and months, hundreds of thousands of jobless Americans will exhaust their unemployment benefits. Finally, 600,000 new job losses each month is going to add to weaker consumer spending, problems for local communities and cause negative ripple effects.

SCHWARTZ CONCLUSION: In review, we started this big bad bear market back in the year 2000. That was the peak of the last big bull market and thus the beginning of this big bear market. This is evidenced by the benchmark S&P 500 Double Topping in March 2000 and October 2007 and then subsequently and decisively breaking below October 2002’s previous decade-long lows by over 10% in March 2009. Showing that since 2000 and the ending of the Internet boom we’ve really been living on lower interest rates and big tax cuts, a false, “pump me up,” house of cards. Really not any wealth building going on, just paper shuffling to make things look great fueled by easy money credit creation. But now reality has set in. Thus, looking around, we see we’re almost nine years into a bear market which has been interspersed with one bull market, running for five years. So stocks were down almost two & a half years, up five years, now down about another one & a half years, sort of repeating The Visit of the Three Bears. In that infamous and extended bear market run of nine years, netting a -50% loss, there were two cyclical bull markets sprinkled in and surrounded and book-ended by the three bears, Baby, Mama and Papa.

My conclusion remains that this bear market is not over. But that the form and shape of it may get tricky going forward. Because the market has a history of posting cyclical or short term or mini bull markets on the way down when the bear gets ahead of itself. Which is why the stock market remains so fascinating!

THE ECONOMY

Well, the BUZZ has died down about how the economy is slowing its prior quick rate of descent. Guess because we’ve started seeing more bad economic data pop up or because the conversation has moved on. But some investors have decided an end to the economic collapse is out there, just over the horizon, so they are shifting into cyclical stocks now as a result. One can see this money rotating out of defensive sectors such as medical care, consumer staples and even gold. You know the concept, buying in advance of a recession’s end since history shows stocks rise roughly six months before the economy turns up. But if we indeed are stuck with a very mild even “anemic” economic recovery, as many figure, then stocks could also soon level off to mirror that trend as well. That is if the economic and earnings data don’t start sinking fast once again showing the economy is still sinking. For example, last Friday it was reported that the ISM Non-Manufacturing Index which now measures almost 90% of America’s economy - America now being a service oriented economy instead of a manufacturing economy - fell faster in March than in February somewhat debunking the idea that the economy has stabilized. Schwartz View: Yes, there is the possibility that economy-wise we are going to V- back up because sharp moves, in whatever areas of endeavor, are generally followed by responding sharp moves back up. We’re seeing that now in the stock market but after this bounce is over, I agree with the camp forecasting an anemic slow economic recovery.

THE STOCK MARKET

The stock market extended its rally to four straight weeks last week. We did see the first crack in this rally a week ago when the market fell sharply for two days. But then we quickly rebounded to new rally highs. That’s normal, the first crack being overcome but it does show this rally may be starting to struggle. We are getting closer to my minimum upside targets of Dow 8303 and S&P 1627, closing Friday at Dow 8017 and S&P 1621. And one can note trading volume has been slowing some, another sign of sluggishness. Or maybe cautiousness. Makes sense as we’re now moving into another corporate earnings reporting season starting tomorrow, the 1^st quarter January-March 2009 report kicking off after the close with Alcoa (AA), traditionally the first of the 30 Dow stocks to report. With the fall-off-the-cliff economy occurring early in last year’s fourth quarter, it only stands to reason that investors have to be wary of forthcoming earnings and thus wary of this rally as well. Schwartz View: It looks like the stock market has some more strength left in it so with stocks already having rallied beyond the 50% retracement level from their latest leg down, the early January peak, the teeter-totter phenomenon comes into play. Getting halfway up means it’s very likely to go all the way back up. Thus we kick off this week at roughly another key Fibonacci 61.8% price in both the Dow and S&P 500. That’s about 8088 and 838 respectively. If we break through those levels, then the next target is those January highs, Dow 9088 & S&P 944. Not guaranteed but increasingly likely.

PORTFOLIO STRATEGY

2009 may indeed prove to be the year to trade. If stocks fluctuate but go nowhere net, up or down, for many months ahead then it’s going to prove very frustrating for investors. In these times and they do happen, more often than the uninformed investor may realize, the best way to make profits is to: (1) trade individual stocks and (2) discipline yourself to continuously fade the market, buying on dips and selling on strength. Toward that end I’ve started incorporating the Commodity Channel Index (CCI) technical indicator into my work. Comes on most charting services like Bloomberg. Basically it shows deviations from the moving average, when stocks get too far overbought or oversold. Naturally you buy when a stock or index gets oversold. For more on the CCI I suggest getting Oliver Perez’s Swing Trading Tactics DVD or Alexander Elder’s book TRADING FOR A LIVING. Over the last month of rally for instance certain stocks have far outperformed the averages. And numerous tradable asset classes or market sectors like the US dollar and oil have been both up and down offering trading profits but no net profits for buy & holders.

Otherwise than scalping profits what should we do? For now favor the long side and the cyclicals. I like technology, renewable energy and natural resources. Move up a notch in your market exposure to about 30% if you haven’t already but continue to hedge your bets and don’t get out on a limb by going too long. Just subdue your ego, don’t think you know more than Mr. Market does and just go with the flow, modestly. Bottom line take what the market gives you, right now there are some trading opportunities but don’t get carried away. There’s lots more trouble to come but the path ahead is likely to get more tricky as well. So don’t fall into the camp that says “fool me once, shame on you, fool me twice shame on me.”

Have a good week!

Go Tiger Go!

Big Names Predict Problematic Inflation: What's An Investor To Do?

Richard Schwartz — Wed, 11 Mar 2009 13:48:00 GMT

ECONOMIC VIEW. Rising Inflation Expected. So predicts a whole slew of big names, everyone seems to be jumping on board this train in the last few days. Now Warren Buffett and Bill Gross have joined Marc Faber and Jim Rogers and more in predicting problematic inflation just out there over the horizon. Yep, as soon as deflation became the consensus buzz word – recessions kill inflation is what I’ve heard repeated from many sources – we’re getting a groundswell of opposite opinion. Well, not quite opposite but close enough, let me explain. Everyone agrees this slump will preclude problematic inflation but all say that’s a temporary phenomenon. No one predicting rising inflation will go so far as to say just WHEN rising inflation is going to emerge but more and more observers are saying it’s definitely coming, arriving when this economic slump is over, whenever that is. Again, rising inflation, no, out of control inflation, no, to put it more accurately, hyperinflation is my biggest worry. That America printing money galore – yes, for bailing out businesses too important to the financial system to allow them to fail, and, yes, for keeping the economy greased and running, and, yes, for stimulating new growth and maintaining existing economic activity, and, yes, for overall deficit spending in this economic downturn – will come back to bite us in a big way. I can handle some inflation, I know how to shop for bargains which will help in food and clothing needs, what I’m worried about is a major currency devaluation which wipes out mine and America’s buffer. America’s savings becoming worthless as has happened time and again across the globe when some country’s finances just go kafluey. When a country can’t pay its bills compounded by a wholesale lack of trust in its currency. Schwartz View: Hasn’t happened in the US yet, but …

So I get more nervous when I hear Warren Buffett, America’s richest man and known as the best value investor of our time, say inflation could go as high as it was in the 1970s, that’s almost double digits! I get even more nervous when Bill Gross, who manages one of the largest bond funds going, says that US government efforts to break this recession will cause “costs for goods and services” to rise. I respect both these guys and their opinions. Now they join long term forecaster Jim Rogers, who is also more worried about rising inflation than deflation, best I can figure. He’s long been predicting an US dollar crisis and really bad inflation ahead and says he’s just waiting for the proper moment to essentially “short US Treasury bonds.” Rogers sees commodity inflation returning with a vengeance since today’s global economic slump in his view is just improving the fundamentals underpinning commodity prices. In other words today’s credit crunch and resulting recession causing miners to delay or even shut down exploration and thus leading to a further drop in supply. He loves to mention that global food inventories are already down to 50 year lows. Finally, Marc Faber, the well regarded international investor and past BARRON’S Roundtable panelist, sees rising inflation from another angle. He figures that the US government is going to have all kinds of problems in raising interest rates down the road or in effect withdrawing all the money it’s pushing into the system now to try to end today’s credit crisis. Schwartz View: This rising inflation camp is growing now, with many others predicting a forthcoming inflation problem as well. I am too.

Schwartz Recommendation. If you also worry about rising inflation, one strategy available today is to buy an inverse ETF or inverse sector fund. One that goes up when long term US interest rates go higher. That’s the natural reaction if inflation rises, yields generally rise forcing bond prices down. For example ProFunds has two such funds, RTPIX and RRPIX while Rydex offers up RYJUX and in the ETF camp there’s TBT which “correspond to twice the inverse” of the US Treasury bond. I recommend such.

Disclaimer! I don’t own any of the above now but can and do change positions without notice.

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To Stimulate Or Not To Stimulate The US Economy

Richard Schwartz — Thu, 05 Mar 2009 19:29:00 GMT

ANTI-Stimulus Protest Demonstrations; Say What?

That’s a big global fear surrounding this global economic slump. History shows economic debacles like this breed unrest, anger, frustration among those losing their jobs, etc. and thus protest demonstrations. If one watches www.worldfocus.com or any other news global news show, you’ll see violent protests happening globally. In Eastern Europe as one example. In China too and especially. China’s government’s big fear, knowing it’s own history, is protests which bring down the government there. Making the upturn in global protests there and elsewhere important for all investors to track.

Yesterday’s Investor’s Business Daily (IBD) newspaper had a front page article reporting that anti-stimulus demonstrations have occurred in 35 American cities. Yes, these are small demonstrations so far, 100 or 200 people and organized by interest groups, but maybe they will grow in size after IBD gave them face time, i.e. publicity -- I hadn’t even heard about these protests at all until yesterday -- and also gave them such a nationalistic and catchy name: “Nationwide Tea Parties.” I read where these events are being organized by those groups who sarcastically say we should: “Legalize Capitalism!” Or who believe: “The best government, governs least.” And those who sardonically and exaggeratedly say: “No to socialism!” And are epitomized by one protestor’s sign which read: “Your mortgage is not my problem!”

Obviously US government stimulus spending to try to keep this weakened economy from getting worse is anathema to those who believe in the strict Austrian school of economics. That economic school says things just get screwed up terribly whenever the government gets involved. And who knows, maybe doing nothing, to try to shorten this downturn, was indeed the right move. But as I see it it’s too late now; we’re already committed. I’ve given up opining on what were the right and wrong roads to follow but let me also report there are a lot of other angry people in America today, those that say they are tired of lavish retreats and concerts, tired of private jets, tried of companies paying out huge bonuses with or without government money. Regular readers know I’ve been angry and pounding the table for many years about these excesses. So maybe we do or will have class warfare, that is if these anti-stimulus demonstrations get larger and cause more of a divide among all kinds of angry Americans.

Schwartz View: But as I see it, we’re now committed to this “bail out” path, we got committed a year ago when we bailed out the first company, Bear Stearns or whoever came first. This far along this path I can’t foresee us stopping now. Plus it only makes common sense for any government to try to stimulate the economy when the two other major sources of normal demand, consumer spending and business investment, are in total hunker down mode. The even bigger picture, as I see things from up on the mountaintop looking down at the valley and what’s happening, is that these demonstrations by those who say your problem is not my problem, are the last desperate efforts by those who still believe in the “me first” path America has been on for roughly three decades now. As I see it, the results of the recent US presidential election announced that the majority of Americans want big change in America, a change which returns the America Dream to the average working person once again and returns us to a more level playing field. And that means, even though there is some opposition, that America has now crossed the Rubicon, so to speak. Meaning we’ve just begun a 10-year or so cycle which puts public interest over private interest. History shows we do swing back and forth from longer periods, or about 20 years, of letting capitalism run unchecked and America showing strong economic growth as a result to shorter periods of about 10 years or so where we put the unfortunate and forgotten Americans first, which yes, also means slower economic growth as a result. (Please read Arthur Schlesinger Jr.’s THE CYCLES OF AMERICAN HISTORY if you’d like more on this repetitive cycle.) All signs that I can detect today tell me that America is going to level the playing field, get rid of the excesses, the corruption and scamming of the system, in general just the overall greed which always naturally arises from allowing capitalism unchecked to run for too darn long. Again, I’m just observing what I see happening not opining whether it’s right or not. As for investment implications, for now stay hunkered down, practice extreme patience and proper money management while out waiting this Papa Bear market.

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Good trading, speculating and investing!

Chinese Strategy Looks Good

Richard Schwartz — Tue, 17 Feb 2009 14:38:00 GMT

GLOBAL VIEW. What Is China’s Strategy? Without having to worry about their banks, because China never got involved buying securitized, US subprime mortgages and other debt backed instruments, China’s now at a great advantage. Sure China is slumping fast economically like everyone else, their manufacturing industry shrinking rapidly, but China still has much greater leeway than other countries in lots of ways. First, luckily, because China has no developed bond market and is just starting to open up their financial markets, China missed the debt feast most other banks enjoyed. And are now regurgitating. So now it turns out, that’s a big, big plus. Also China still has its ‘Command Capitalism’ in place, meaning that when government decides on a path, boom, the country can start right off on it. No arguing back and forth like in big democracies like the United States and India. Next, China’s leaders are well educated, many with useful engineering backgrounds and have proven themselves. Finally, China is in a great spot financially. So what is China doing strategically, meaning their plans of long term significance?

Strategically, I’ve written previously how China is moving quickly to help their farms and farmers every which way because the farms were the first part of the Chinese economy to move to quasi free marketplace operations. After this move proved very successful, China then tried the same in manufacturing. Which, obviously, turned out to be a great and grand success. But now that Chinese manufacturing is downsizing rapidly, China has to keep the millions of Chinese workers forced back to the farms happy. Thus I see this government boost as making Chinese agriculture one of the few good buys around today as their farms consolidate, become larger and thus more efficient and productive, and have thus previously recommended Chinese agriculture strongly and offered up a list of stocks to consider buying.

Stockpiling Minerals & Mineral Producing Companies Too. Another, a second, strategic or long range move China has implemented is to stock up on raw minerals while their prices are down and also to take equity positions where allowed by other governments in mining companies themselves. The reason being that when China starts really growing again they are going to need adequate raw materials. China found this out quickly as it became the world’s manufacturing colossus. Even today with their new infrastructure program already in force, China needs cement, iron ore, steel, etc. So consider some recent Chinese moves:

· State-owned Zhongjin, China’s 3^rd largest zinc producer, bought a 50.1% stake in Australian zinc miner Perilya Ltd.

· State-owned Jinchuan Group, Asia’s largest nickel producer, bought 18% of Albidon Ltd, a Perth, Australia based nickel producer and has a deal to take 100% of the nickel from Albidon mines in Zambia.

· China’s 3^rd largest steelmaker bought a 50% interest in Australia’s Centrex Metals Ltd.

· Chinese interests bought a 40% stake in Australia’s Mount Gibson Iron.

· China’s 2^nd largest steelmaker upped its stake in Australian Gindalbie Metals from 12% to 36%.

· Aluminum Corp of China (ACH) has just increased it’s stake in Rio Tinto Plc.

· China’s Tongling Nonferrous Metals Group just bought 13% of Canada Zinc Metals.

· China Mining Resources said it would up its stake in Canada’s Quadra Mining from 4% to 19.9%.

Schwartz View: My point being watch what China’s doing. You might want to even sign up for FREE www.moneymorning.com as this service tracks closely what’s happening in China, the news clips above coming from a recent article. Again, while other countries play defense, having no real answer to their economic slumps besides cutting interest rates and implementing various stimulus plans, China is on offense, planning for where they want to be when this economic slump is over. So, again, if you want to put your toe back in the water on general market weakness, I would do so in China. You should have a ready resource right in front of you to do so, as along with the list of Chinese ag stocks I ran here, I also detailed by category & sub category the USX China Index and published it here for you on February 5^th.

* As soon as I wrote that along with China’s domestic-investor only stock markets, the Shanghai and Shenzhen Stock Exchange Composite Indexes going up this year, the USX China Index (symbol HXC) and the iShares FTSE/Xinhua China 25 Index Fund (symbol FXI), an ETF, were following suit and rising, that link ended. Schwartz View: Ok, I was surprised they were moving together anyway. Going forward, still scale in to China, just take it a little slower.

Monday Weekly Strategy

Richard Schwartz — Mon, 22 Dec 2008 14:37:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

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

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Monday, December 22^nd, 2008: So here it is, last letter ‘till Monday, January 5^th, as Lucy & I fly off to the white sand, warm blue waters of the Caribbean, maybe on a last hurrah (if the economy keeps sliding). I’m taking Cycles of American History & Rethinking the Great Depression books. Our routine is: Go to the beach, play backgammon, read & go out to dinner. Day after day. Warm our bones & work on new tans.

THE BIG PICTURE

Friday I saw John Bogle, who has been on Wall Street for 50 years and who created the first index fund, the Vanguard 500 Index Fund back in 1975, say investment bankers and bankers generally owe the country a huge apology (which I doubt we ever get). Their imprudent speculations and greed for massive fees from too complex speculations led to today’s financial sector problems, problems which have now fed out to the real economy hurting innocent, hard working, everyday Americans. Mr. Bogle says greed has even spread out to our whole economy, that we’ve morphed into in a “me first” society and it’s something we have to seriously take a look at. Thus capitalism, allowing markets to work unfettered of regulation and based on trust and trusting, has now been “deeply discredited.” Even the underpinnings of capitalism have changed radically. We’re no longer an ownership society whereby individual stockholders used to select and then hold 92% of all common shares; institutions 8%. Now institutions control 75% of shares through huge sums entrusted to them by others and have not invested prudently. Again, because of the incredible fees they got for investing. Mr. Bogle says they sure wouldn’t manage their own monies so recklessly. These institutions were supposed to be wiser than individuals but, again, it’s not their money. Supporting Mr. Bogle’s view is the revelation that 29 of the 30 largest losers in the Bernie Madoff Ponzi scheme scandal were institutions whereby just one of these fund of fund companies was paid $160 million in 2007 alone for recommending the Madoff “hedge fund.” In other words, where was the fiduciary responsibility, the prudency, the probity expected when we entrust institutions to manage 75% of our investments? Schwartz View: Regular readers know I’ve been distressed and pounding the table about a number of these societal issues for years. About capitalism running amuck, culminating its 30-year trend toward widening the gap between it and its counterpart, democracy, with President Bush’s skewed one way Texas twang policy saying the be all and end all is that “bidness is bidness” and thus stifling regulation. And about society becoming so uncivilized, we ended up booing our own hometown, beloved sports teams! So while no one wants to live through what may come next in the economy, I have to say America has finally woken up, albeit after the nightmare it usually takes to precipitate major change, and that we are now started down a long and arduous path, but one finally pointed in the right direction again. As one example, we’ve even started to SAVE once again; amazing! So, for myself, I guess sort of a contrary indicator in recent years, I’m becoming more optimistic and bullish on our future. Finally! “Go America Go!”

THE ECONOMY

It became apparent that the US economy was suddenly falling-off-a-cliff right after Lehman Brothers became the one firm chosen NOT to be bailed out by the Federal Reserve and US Treasury Department. (Looked back upon as a colossal mistake in strategy I’ve read.) Lehman’s bankruptcy rippled out far and wide and led directly to losses in some money market funds, a “breaking of the buck,” and thus then to a total loss of confidence. Now, by all accounts, the economy is in total free fall. This sudden screeching halt in US business activity has caused the same in our global trading partners and most everywhere I look is now in corresponding economic free fall. You extrapolate it for yourselves from here. One view I’m pondering is that many times sharp declines lead to the second leg of a V-move, back up, and we’re overdue. Maybe stocks, with their recent unwillingness to keep going lower on bad news, means Mr. Market (the consensus of large investors) sees some end out there to the economic free fall. Still, we’d have to see some economic revival to expect a sustained V snapback in stocks. For now, I see 2009 providing a steady stream of bad news every time we look up. Just like in the second year of the last Papa Bear bear market, back in 1974, a continuing stream of bad news back then ultimately overwhelmed all attempts to rally until the final months of that year. Schwartz View: The consensus I’m hearing is that this sudden, fall-off-the-cliff global economic contraction is NOT going to lead to a repeat of the depression-spawned 1930s starting with its four-year long period of contraction followed by its anemic recovery, a.k.a. the Great Depression. I hate to follow any consensus especially when this one’s been so wrong for so long. But my own history look backs and studies by Federal Reserve Bank Chairman Ben Bernanke, an expert on what went wrong in the 1930s, turning a recession into a depression, show that we raised taxes, cut spending and blocked global trade, just the wrong policies. So I sure don’t expect any exact repeat of those failed policies. Leading me to think out of the box and that maybe today’s Fed policy of battling a deflationary depression is also implementing incorrect strategy. How about worrying against runaway inflation spawning from all the money the US and now the world has and is still throwing at this economic slump? Just the problems we worried about in the early 1930s but didn’t occur. You know the old saying, people fight the wrong war, the old war, because that’s what’s still fresh in their minds. Thus, summing up, maybe we can’t expect much creativeness from the Fed pointing in the less obvious direction of battling inflation since they are entrusted with getting us through hard times. They will naturally, after learning certain lessons from the 1930s well, not break much new ground. One reason being that if their policies didn’t work, they would be heavily criticized for experimenting. Thus while everyone pooh-poohs an inflation problem, I still worry about one. Seems like the consensus, which may be correct, among the minority expecting and talking about an inflation problem, doesn’t expect one until 2010 at the earliest. Keeps me thinking about that quote I printed here back on Friday, December 5^th, from Sir John Templeton: “It’s impossible to produce a superior performance unless you do something different from the majority.”

THE STOCK MARKET

Maybe we’ve started off on a new, lasting stock market rally as many now say. Maybe the November 20^th closing low and November 21^st intraday low did end this bear market or at least this phase of it and start us up and on a new mini bull market. But I don’t think we can determine that from these final days of stock market trading this year. This jig jag, saw-tooth modest rally we’ve had in December – the Dow remains down -2.8% this month, but up +13.6% from its closing low on November 20^th – still looks like just a time killer rally to me after stocks fell -6% in September, -14% in October and another -5% in November. So while I’m off on my annual winter beach vacation, I’m leaving my managed portfolios hedged with a slight long bias, still with my modest overall about 20% or less market exposure which I’ve carried since late last year. You remember late last year? At least as a lesson learned for the future, if for no other reason. After the stock market rallied back from its original car wreck in July, in what amounted to a head fake, false move, dead cat bounce and pretty obvious sucker’s rally, and a failed break out to new highs by the Dow and S&P (while the rest of the stock market refused to confirm).

Anyway, last week I ended the letter by noting that psychologically we should rally since bad news couldn’t drive prices down in recent days. Technically we had what could prove to be two months of base building everywhere I looked on the charts (but bases which could easily prove false). Fundamentally we even finally had low enough market valuations, like P/E ratios, to support a rally as well. But how about a catalyst? Well, let me offer up: (1) much lower gasoline prices which keeps our wallets and purses fuller and healthier, and (2) the good feelings anyone watching our president-elect making non-partisan, non-political, non-ideological selections for his cabinet, should feel. There may be a wellspring of good feeling, a sort of honeymoon psychological effect on investors, business, consumers and most all of us as we hope our new president can perform miracles. Schwartz View: Unfortunately no one man is going to remake America overnight. So, while keeping an open mind and watching all unfolding developments, for now I’ll back history which says this “worst financial crisis since the Great Depression” has to lead to an extended Papa Bear market, one which lasts at least a couple of years. Not just for one year, where we stand today.

PORTFOLIO STRATEGY

I hate to follow or even agree with some of what I’m hearing about going forward strategy, especially if such is espoused by those who were so wrong all this year. I’m speaking specifically about Bob Doll, now at BlackRock as their “Trillion Dollar” fund manager. I don’t want to pick on anyone but since he’s been leading the charge forward as stock markets collapse and getting all the face time doing such, I guess I have to. I start off very skeptical because my belief is that these big money managers are not going to get on TV and recommend anything before they and their clients get first crack at their thinking, ideas and recommendations and position themselves accordingly. I already wrote awhile back many old stock market books talk extensively about how big money always used to try to sucker the little investors. The age old technical Wall Street term “distribution” implied big guys needed little guys to unload their big positions on to when they foresaw a bear market ahead and thus put on a bullish face. It took much time to unload huge positions these large investors stockpiled so much frenzied excitement about the stock market had to be built up as big money sold. What better way today than Bob Doll coming on CNBC ubiquitously and always saying we are now in a bottoming process. He said that back in March and those who followed him are much the worst after the October panic crash. Anyway, that’s all secondary, although supporting, my main point. My main point is that Mr. Doll now says next year is going to be a good one for those taking on risk, not for those playing it safe. Again sounds good to me, at least at first blush. We all know what goes down the most generally can bounce tremendously when psychology changes. But do we really want to buy really risky investments in just the early part of the second year of a big, bad bear market? I say no. Bear markets of this size and scope historically have taken a lot longer than one year to work through.

Net, net, probably Mr. Doll will be proven correct about taking on risk, if one doesn’t factor in any time period. I’d guess risky asset classes will move fast when this bear market ultimately does end but do I really believe its going to end soon? No. And if we do have a 2009 mini bull market, say because stocks have fallen so much, then I’m not going to count on Bob and other institutional investors to tell me and us exactly when to get back out. No, starting off next year next week, I’d suggest still playing our cards close to the vest. Yes, play modestly for a continuing rally but look at it for now as just a bear market rally.

Happy Holidays & Happy New Year!

Richard

Patience: Outlast This Bear Market

Richard Schwartz — Mon, 01 Dec 2008 14:19:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

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

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

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Monday, December 1^st, 2008: Since Lucy’s birthday was a Round Number & fell on Thanksgiving, everyone surprised her & came back Friday for tea. At the Tea House in the village, a reconverted barn on a hill with a great view of the mountain, a view I hadn’t seen before. Almost everywhere in town has a mountain view which makes me feel like I live in Lake Placid, another charming mountain town. Love it!

PS. I caught a bug which I’m working through today but possibly no letter tomorrow if I feel worse.

THE BIG PICTURE

I spent Thanksgiving evening discussing the past, present and future with my son Brian. In essence he asked me for a simple explanation of what caused the stock market to drop so much, what terms like deregulation, re-regulation, privatization, etc. mean & what the big picture looks like. Here’s my answer:

Let’s start with the two classical economic theories of thought. One, let free markets operate on their own, the old Austrian school of economics as promulgated in the early and mid 1900s by Friedrich Hayek versus two, getting government involved in the economy as advocated during the same time period by John Maynard Keynes. Both gentlemen lived through both world wars, the Great Depression and for decades beyond and their influence ebbed and flowed. Both economic theories had their time to shine, alternating roughly 30 year periods. The last totally free market cycle began its ascendancy when President Ronald Regan was elected to office in 1980. Since then union’s power has declined dramatically, corporate statesmen who shared equitably corporate wealth have became obsolete and bottom line profit became the only goal which caused stock price to rule business actions. During this long run in a totally free market direction whereby prosperity grew larger and larger spreading out to millions worldwide, normal prudence, probity and recognition of investment risk ultimately got lost. Greed took over completely when Wall Street came up with its latest round of newfangled, supposedly sophisticated investments, especially those incorporating securitization. Securitization just meaning turning all types of debt into securities which could be sold while spinning off huge commission style profits to everyone involved in the process or food chain. This, along with the 30-year trend to more and more deregulation, allowed commercial banks into previously banned investment areas, using heretofore unheard of leverage which caused capitalism to finally go off the deep end. By this I mean a 20% correction in our overheated, overdone, overblown US residential housing boom led to a bust after one bank woke up one day last summer to huge paper losses which soon showed everyone else was stuck with similar losses. This blow off following by an implosion and meltdown are the types of culminating events which cause these 30-year cycles to start swinging in the other direction. I now believe we’re just started a new long term swing away from free market economics as advocated by Mr. Hayek and towards a government role in economics as advocated by Mr. Keynes.

Summing up, we’ve just gone through that part of the long cycle which allows capitalism to run unfettered and thus grows the pie for everyone. The downside is that the gap between the rich and poor grows ever larger when we practice laissez-faire capitalism, essentially letting the marketplace alone which leads to the strongest doing best. But cycles are cycles and all eventually go to extremes and then swing the other way. Again, as I see it, we’ve just gone to one extreme and are now just beginning to cycle the other way, down the path whereby government steps in and applies regulations to the latest, most egregious ways of gaming the system. Which interferes with the magic of letting the free marketplace find its own proper price levels between consumers and producer providers and thus drags down the overall efficiency of the market. The rationale is that something has to be done to avoid another rare but normal breakdown by capitalism. Net, net our free market capitalistic system normally goes from one extreme to another, that deregulation goes so far it causes problems, then re-regulation sets in. With privatization or the selling off of previously government run businesses or business sectors being one form or aspect of deregulation. Thus, the last year’s breakdown and implosion in our financial system didn’t really show free market capitalism doesn’t work anymore, it just shows we’ve come to the end of the normal continuing pendulum swing out to one extreme and are now starting the long journey back to a middle ground and then out to the other extreme.

THE ECONOMY

Not much to comment about on the economy today.. We’re in that middle time period of this bear market and at the start of an economic downturn. Thus I expect the economic data, corporate earning reports and most other news to be pretty consistently bad for some time to come yet. One rule we do know about how the stock market operates and how it relates to the economy is that stocks turn up a few months before the economy does (with exceptions). So finding a bear market bottom will incorporate more than just watching the data. Waiting for the economic data to turn positive will make most investors months late in reentering the stock market. Schwartz View: Thus, myself, I watch the charts and believe in what I’ve espoused for many years, that charts tell you when to buy and then the fundamentals confirm down the road.

THE STOCK MARKET

Mr. Stock Market keeps trying its best to rally now. Last week the economic data was just plain awful and stocks rallied anyway. I wrote previously that stocks refusing to go down on bad news would be a good clue that the market has gone down enough, at least for the moment. Still, some remaining problems are: (1) I don’t see a proper base to support a big rally, unless I’m getting tricked by the undercutting of that possible base built from October 10^th through November 19^th, (2) I don’t see any improved fundamentals and still expect lots more bad news to become known next year and (3) history shows after financial glitches and consumer confidence losses of this magnitude bear markets and recessions following lead to once-in-a-generation market declines which don’t get over in just one year, roughly the time period we’ve seen this bear market last for so far. Yes, big bad bear markets generally last at least a year and a half to two years to even three years. Also this bounce reminds me very much of numerous temporary previous V-bottoms and short lasting rallies we’ve seen over the last few months. But a rally is a rally is a rally. And we have to play them. Eventually one rally will morph into the next bull market. Thus the key is to always keep sight of the Big Picture. Today the big picture perspective shows we’re firmly entrenched in a big bad bear market. So, in general strategy should be to sell and sell short rallies instead of buying dips. But when rallies periodically begin, we should modestly go along with them,, go with the flow, one toe in the water. That way if any rally proves to have legs we’ll start profiting immediately and know about it right away. But not to jump in with both feet because primary bear markets, just like primary bull markets, do reassert themselves, and until proven differently, it’s a whole lot easier to profit swimming with any tide or trend than swimming into it. Schwartz View: I’m trying to find a technical reason, say a good looking chart pattern at least, to buy a particular sector, but so far no luck. The one bullish trend which I see today is in the US dollar. Strength began back in mid-July and thus when strength continued past the three month normal max time frame identifying a bear market rally, or past mid-October in this case, and kept on going, I termed the strength as a new bull market. Otherwise everything else looks like iffy trends.

PORTFOLIO STRATEGY

Strategy remains one of outlasting this bear market. Of proving you have more patience than Mr. Bear Market does. This is a difficult job which will test your discipline again and again if the past is any guide (which I believe it is). Over time you’ll be tempted to buy back in again and again whether you see a believable bear market bottom or not. Especially if you’re one who really watch stocks, the whole Wall Street show, daily. So continue to do any irresistible buying and or investing in a much smaller, subdued manner. Keep just enough money in the stock market to keep you interested and not so much that future declines can put you out of the game and out of business. And stay tuned here to find the real bottom.

Have a good week!

1930s Parallels Keep Popping Up

Richard Schwartz — Thu, 20 Nov 2008 18:49:00 GMT

REVIEWING THE 1930s. The Principle of Knowing History. Let me get down on paper a bit about President Hoover (1928 to 1932) and President Roosevelt and the 1930s after nearly finishing up THE FORGOTTEN MAN (2007) by Amity Shlaes. Again, let me recommend you get yourself a copy as today’s happenings keep looking more & more like a redux. I’m still thinking about taking this book to the beach over the Christmas holidays. It’s entertaining reading. One back cover reviewer compared Shlaes to Frederick Lewis Allen and his wonderful early 1900 histories (which I loved and heartily recommend; ‘Only Yesterday,’ ‘Since Yesterday,’ ‘The Big Change’). Shlaes’ history of the Great Depression starts after President Coolidge, a hands off US president gave way to President Hoover, of the same party, who turned out to be much more hands on. This flies in the face of the old belief that Hoover was hands off.

Late 1920s. President Hoover was elected in 1928 and for his first year the economy and stock market was copasetic. But after the October 1929 terrible market crash, it was up to Hoover to decide how to proceed. To understand Hoover, we can go back to when he was Commerce Secretary and wrote a book entitled American Individualism although the name wasn’t appropriate, according to Shlaes: “Hoover rejected the old brand of absolute individualism and distained laissez-faire economics as ‘theoretical and emotional’.” So, when the crisis hit, President Hoover went right to work. First, he made very clear he was for regulation. Hoover believed in government help and loved standards, efficiency and organization and had done much in the middle 1920s to install such across America. But now, upon President Hoover getting a confidential report from the Fed that the market “readjustment” was going to last, and after asking himself a question he later wrote down: “The primary question at once arose as to whether the President and the federal government should undertake to mitigate and to remedy the evils,” Hoover concluded, yes, action was needed. President Hoover from the crash until President Roosevelt took over in March 1933 pushed for “expanded public buildings programs, requested a national system of cooperation among the states on public works programs, proposed expansion of the merchant marine, regulation of the new inter-State electric power system, consolidation of the railroads, development of public health services and departmental reorganization.”

In general terms, Hoover: (1) intervened in business, starting by calling business leaders to Washington and told them to keep up business as usual and to keep wages up, not allowing any free market cleansing, (2) signed one of the largest tariff bills in US history, which caused less trade and thus further contraction and (3) publicly assailed the stock market. All moves which backfired because they also caused a loss of confidence. Retired President Coolidge, the hands off president, railed against Hoover’s moves, calling them “socialistic notions of government.” Right up until President Roosevelt replaced Hoover in early 1933, Hoover continued using the government to try to make things better. In June 1931, for example, Hoover announced a moratorium on German debt repayment. And then created the Reconstruction Finance Corporation to help banks and homeowners. Finally Hoover signed a big tax increase, the Revenue Act of 1932, because of his fear an unbalanced budget would cause a run on the dollar. During the interregnum between Roosevelt’s election in November 1932 and his inauguration in March 1933, Hoover even wrote to Roosevelt trying to get him to sign off on special war powers to handle the emergency, and a bank holiday. Roosevelt said no, even though upon taking office, he followed many of Hoover’s beginnings.

March 1933. Upon entering office, President Roosevelt showed he would try anything. He knew people wanted action and that this was a rare opportunity for change. Plus he just enjoyed activity, of any sort. I can imagine how activity uplifted him, he wore these heavy metal leg things, for his polio. He was inaugurated in March 1933 when their was prevalent despair and unemployment had soared to about 17% Thus from March 1933 on he tried whatever struck his fancy. Plus he had a group of advisors called the “brain trusters.” Whatever they proposed, Roosevelt went with. The Hundred Days this period was called as President Roosevelt legislated galore. People hear that arts flourished during the Depression but now I know why. President Roosevelt (FDR) spent big money on them. He hired artists and had them paint murals--we have some in local post offices here near Roosevelt’s Hudson River home. He hired movie people and had propaganda firms made, burnishing the image of his actions, action which became known as the New Deal. Basically the New Deal was trying to help certain constituencies which Roosevelt chose. Essentially, the middle class or “everyman” or common man. And policies against the rich (even though Roosevelt was one of those). FDR started passing law after law seeing what worked. Lots of his laws were later thrown out, in the latter 1930s by the Supreme Court (which he then attacked by trying to “pack” the court, increasing the number of justices to decrease their vote importance). But the people knew Roosevelt was using government to help them for once. So he kept garnering support in spite of his arbitrary, sort of kingly behavior. Maybe because he was also able to charm his way through most any siutation.

SCHWARTZ SUMMING UP. Out of time this morning, so let me just summarize. Both President Hoover and President Roosevelt put government to work to stimulate the economy after the 1929 stock market crash. We still debate today whether that was the right move or not. Today our US government is following a similar path after a similar crisis. But the law of unintended consequences may again come into play; government may end up making things worse and thus cause a lackluster economy to last and last instead of allowing the natural process of the free market to clean out the old and bad and bring in the new. Still, if you were US president, what would you do? Be an ideologue? Sit back and stay out of the way? Doubtful since you’d be viciously attacked by the media and others to do something. As very interested bystanders, all the individual investor can do is sit back and watch developments and place them in historic perspective. Then plan out strategy. As of now, please just stay hunkered down and out of harm’s way as much as possible.

"No One Can Time The Stock Market"

Richard Schwartz — Tue, 11 Nov 2008 14:18:00 GMT

TECHNICAL VIEW. The Principle of Technical Analysis. I don’t want to jinx myself but I can’t keep quiet. Not after hearing the usual Wall Street mantra again this morning. That is, that no one can time the stock market so it’s always best to ride out its ups and downs. I mean this type of misleading & confusing information is one big reason why I started this stock market letter back some 18 years ago. Part of my motivation, to quote myself, was to “unveil the mystery surrounding the stock market.” I saw numerous misstatements and unfounded general beliefs which I just thought were plain wrong being foisted on the investing public, not large institutional investors but aimed at individual investors. After working as a stockbroker/financial consultant for 15 years, I realized that Wall Street kept nurturing the stock market’s mystery. Why? For Wall Street’s best interest. Why pay a stockbroker or brokerage firm big bucks if individuals could understood for themselves the market? No, only if individuals felt (and kept feeling) overwhelmed by the market’s workings would there be a need for advisors and a way to charge big fees.

Anyway, I don’t want to get off track. I just want to comment on the one line of reasoning which we’ve all heard repeated so often that most now take it as fact. That is that no one can call the tops or bottoms of bull and bear markets. We hear it from about 50% of the mutual fund managers, market strategists and others every time they come on TV. Many begin with something like: “Since no one can call a bottom, …” Not only does this perpetuate the need for market advisors it also justifies the roller coaster performance of these money managers. Hey, it takes the pressure off them, right? As long as they are doing about as well or as poorly as the overall stock market, then they are doing their jobs well. At least that’s the thinking.

But then what about all the traders out there? Why did hedge funds start then? If no one can time the market what about this whole cadre of people trying to outperform the market? And what about those fabulously successful speculators we hear about? Some do time the market correctly is my answer.

Schwartz View: I’m sure many others did as well so I’m speaking just for myself now. After studying the stock market for 35 years, all facets from timing to investment themes and much, much more, I was able to correctly identify last year’s market collapse as the beginning of a bear market pretty early on. In spite of those who say no one can do such a thing. And I stepped up, following my own reasoning and got Lucy’s 401k or 403b or whatever it is into 100% cash. Right before we went away on our annual Christmas beach vacation last year. And thus kept her retirement account from falling about in half! With my managed accounts, I followed generally the same path, figuring my top priority was protecting our downsides because the market was turning bearish. Since then I’ve been able to keep mostly to the sidelines, watching this bear market unfold, gather steam and keep on rolling. This in spite of hearing the “Trillion Dollar Man,” BlackRock’s Bob Doll, incorrectly call a bottom in March, Mad Man Cramer call a bottom in July and other bullish, skin-in-the-game advisors come on CNBC and say they are buying, that a bottom is near or building a bottom is a process and you’d better get in now “…since no one can call the bottom.” Well, the bear market continues and we keep seeing further and deeper declines. My sense, as I’ve been writing for months now, is that this bear market will last for at least two years or until at least next October simply because what’s hit us is the worst mess since the Great Depression of the 1930s. So why wouldn’t this bear market last at least as long as the last Papa Bear market, the two year long drop in 1973-1974?

Bottom line, while I don’t expect to call the bear market bottom before it arrives or to the day (except in hindsight) I believe with the tools, skill sets and experience I’ve now got, after studying the market’s primary trend, history, psychology, value, technicals, etc. for decades, I should be able to identify the bottom reasonably well. Part of my overall game plan entails trading most possible rallies so when one does prove to be the real thing, I’m in with at least one foot near the start. Then, as I see prices rising, I should be able to get in more heavily. Bottom line, I believe anyone who’s willing to put in the time and effort should be able to quickly identity tops and bottoms in the stock market, totally counter to what we always hear. Oh, one last point. Be careful of the fear that these always 100% invested advisors love to leave you with (just like dentists do). That is the mantra that if you miss the first days of a new bull market, you’re in trouble. Sure the first days up are normally exciting and big. But bottoms generally are retested, providing the sharp-eyed observer more than one reentry point. And bull markets run for years not just for a couple of days. So don’t worry, be happy, if you’re now 50% or more in cash on the sidelines. Just stay tuned here. Because one way to indeed miss the bottom is to lose interest in stocks during a long bear market. Go ahead, lose interest if you’re 100% invested now because you’re already in a bind. But don’t lose interest if you’ve played out this hand fundamentally correct. If you’re saved yourself a bundle by already going against the Wall Street mantra of staying invested “because no one can time the market,” then stay in touch with stocks for your reentry point. One good and easy way to do so is by just reading this letter each day. It’s only a couple pages long, doesn’t take much time to read, you’ll learn something new most of the time AND you’ll be aware pretty quickly, & ready to profit, when this market turns up.

Possible Bear Market Rally Ahead

Richard Schwartz — Fri, 17 Oct 2008 14:04:00 GMT

SOME REASONS FOR A BEAR MARKET RALLY

Written Friday, October 17th, 2008: 6:30 am

1. Obviously, IBD says we’ve set up properly for a rally as I spelled out above. Schwartz View: Diluting the strength of yesterday’s bullish follow-through day in the Dow Industrials and S&P 500 was the fact the Nasdaq Composite, S&P 400 Midcap and S&P 600 Smallcap all went to new bear market lows on Wednesday, which means that even after yesterday’s big up day, they haven’t posted bullish follow-through days.. Still a rally has to start someplace. What we don’t want to see next is new closing lows which would negate yesterday’s buy signal.

2. Warren Buffett, the best value investor alive, was in buying stocks below Dow 8500 yesterday and says in a New York Times article that he’s following his rule: “Be fearful when others are greedy, and be greedy when others are fearful.” CNBC says this morning Mr. Buffett did stop buying when stocks took off upward yesterday afternoon. Schwartz View: I’m a little skeptical of just why the Oracle of Omaha wrote to the Times. He does have lots of skin in the game after buying Goldman Sachs and other stocks recently. He sure doesn’t want fear to turn this economic downturn into a depression, right? So he may be using his massive influence to suit his purposes.

3. October has bottomed out numerous bear markets in the past, like the ones in 2002 and 1987 mentioned above. I’d include the Papa Bear market of 1973-1974 in that category too, October being the bottom although stocks did retest that December. Plus October ends the worst six month stretch of the year and leads into two of the best months for stocks, November and December. Schwartz View: Lots of stock sectors show rallies starting in October as well.

4. Recent dramatically lower stock prices have brought back value into the stock market, both here in the US and elsewhere. One reader pointed out General Electric to me yesterday and when I checked into GE, Bloomberg showed a price/earnings ratio of 10, the previous low PE being 16. And then an article I read says the PE for one MSCI Asian gauge traded at 10 times, the lowest since at least 1995. Even perma-bears at www.Comstockfunds.com wrote yesterday that: “For the first time since wee start writing these comments in early 2000 the market has declined to levels where it’s reasonably valued on all five of our major parameters – not, cheap, mind you, but reasonable.” Schwartz View: Many value investors and others now are saying they’re finding “many” cheap stocks out there now. Long term money mangers must be licking their chops.

5. The US presidential election will soon be over. Thank goodness! The stock market hates uncertainty and thus we’ll likely get some uplift just because one uncertainty will be put to rest. Schwartz View: Plus normally, just like after marriages, we should experience some type of honeymoon period where everyone is relieved and feeling good. Some coming together of the whole country at least for a short period after the November 4^th election.

6. Governments everywhere have now come together (somewhat), realizing and admitting the seriousness of this global credit crisis and more importantly have rolled out their big guns to fight it. We got the all-encompassing US rescue package, followed shortly thereafter by coordinated global interest rate cuts (unprecedented). Then we had EUROPE showing some great leadership, and I must say unexpected togetherness, last weekend saying all countries would do everything possible to support their banks and the overall global financial system. England came up with a plan to inject money directly into banks which was widely applauded and which the US and others countries said they’d quickly follow. Schwartz View: Immediately upon first hearing that the US was proposing an all-encompassing, system wide bailout plan to tackle this persistent global credit crisis, forgoing their previous piecemeal approach of tackling each problematic company one at a time as they arose, I felt it had a good chance of working. Then, getting there from here got all bollixed up by the US Congress. But now we’ve past that turmoil, I’m back to thinking these refined, now even larger global wide plans have a good chance of succeeding. And inspire enough, even tepid, confidence by big investors that they will start buying stocks.

7. Short term credit markets -- namely LIBOR, the rate banks charge each other for short term loans -- are freely up some, so say the experts. The average investor has to take the expert’s word for this one since there’s nothing easily tracked but I see Rick Santoli, CNBC’s bond expert, is saying the same thing, he sees signs of credit easing. Schwartz View: Easing of credit markets is and has long been priority #1 for, central banks, investors, everyone, in ending this credit crisis. If money indeed starts flowing again, risk of the ultimate nightmare scenario, businesses everywhere and in all sectors shutting down from lack of credit, will lift and then confidence would start coming back, exactly what we need.

8. Finally, we’ve just gone through a major bout of days upon days of capitulation, of panic selling, which I’d say can be laid at the feet of the economy, the admittance that its getting worse and we’re in recession now and heading deeper down. Not because, as some say, polls showing Senator Obama is likely to win the presidency in 2 ½ weeks caused the selling,. But because it’s just became painfully obvious during the wrangling in Congress over the US government’s proposed bailout bill that the economy was starting to tank and nothing could really stop that. Schwartz View: Whatever the cause of the recent dramatic plunge, the fact is rallies can easily, and many times do, begin when sellers exhaust themselves.

9. Oil is way down as are other commodities, taking big pressure off consumers, businesses, everyone. Schwartz View: If commodities stay down, that will help a lot.

10. Hedge funds, a large influence in today’s stock market, got margin calls because of their securitized investments which they can’t sell so they had to sell something, stocks, bonds, oil, gold, etc.. Another old Wall Street adage in play: “Sell what you can when you can’t sell what you want.” Schwartz View: Hedge funds are also getting quarterly redemptions too so they have to sell to prepare. Net, net, we ended up with this extended selling panic.

SCHWARTZ SUMMING UP. The above is a whole list of reasons, you could probably add a couple more, why the stock market should rally soon. Thus I’m going to search today for which sectors and stocks look primed to rally. While I believe any rally here won’t last more than the normal three months maximum of any intermediate term bear market rally, it sure would be good to get some relief from the downside. I think this bear market lasts at least two years but stock prices, after recently plummeting, are now way ahead of themselves in their normal, historical decline of about -2% a month during extended bear markets. We’re one year in and down -36% on the Dow, meaning we’ve lost on average, about -3% a month. So we have lots o time for a rally. Plus, psychologically, investors have just given up the ship on the economy, and we all know human beings overdo things, good or bad. So we’re due and hopefully all primed for a rally. Now, if only big investors who drive stocks will figure the same as I and start buying.

For traders and speculators only, I would once more put your toe and then one foot back in the water. Step by step get more invested for trading purposes. Rallies don’t come along often in bear markets so when one is due, go for it. One Schwartz Rule is to: “Move Early!” so I plan to do so and see what I can buy for trading purposes in coming days. As long as stocks don’t make new lows. Good trading!

Studying Similar Sharp Declines & Their Bottoms

Richard Schwartz — Tue, 07 Oct 2008 18:26:00 GMT

The Principle of Understanding History & The Principle of Technical Analysis. Written Tuesday, October 7th, 2008

OK, yesterday I heard one analyst, I believe it was Liz Ann Sounders, chief investment strategist for Charles Schwab say the recent sharp year-over-year (yoy) stock market decline is only rivaled by the year 1974 and two years back in the 1930s. I could make a good guess which years in the 1930s those steep yoy declines came but I went back and checked anyway because those are the years along with their stock market bottoms that I want to start studying, their charts and their economic, financial and psychological backdrops as well. All three years were big bad bear market years as yoy declines of -30% or more would have to be. 1974 was the year our last Papa Bear market ended, and was the second year of that bear market. 1931 was smack in the middle of that big Papa Bear (stocks bottomed May 1932 and in rallied the second half, preventing 1932 from making the list). And 1937 was the year the five year, first bull market after the Papa Bear of 1929-1932 ran out of steam and the economy ran off the cliff and we had a short but very severe Mama Bear market. (I distinguish Papa bear markets from Mama bear markets by their lengths, the 1937-1938 bear market lasting only one year.) A first, brief cursory review of those big down years is as follows:

· 1974. The total decline in the Dow came to -45.1% in just under two years. The stock market’s bear market ending was immediately preceded by a most severe leg down in stock prices, losing -27% in less than two months from early August through October 4^th. The ultimate bottom was characterized by the Dow Transports NOT making one last new low along with the Dow Industrials in early December. Schwartz View: Diverging in other words.

· 1931. The total decline in the Dow came to -89% and took just under three years, September 1929 to July 1932. 1931 came in the middle of that horrific Papa Bear market so that’s dismaying for us today. But, similar to the bottom in 1974, the 1932 bottom came after a grinding last leg down in stock prices. From March through July 1932, we saw an inexorable day-after-day, four-month decline totaling -54%. Whew! Schwartz View: Trading volume was the distinguishing characteristic of that market bottom, shrinking up noticeably.

· 1937. The total decline in the Dow came to -49% and took almost exactly one year. The bulk of the 1937 Mama Bear market occurred primarily during a sudden market collapse from August through December and encompassed another extended, depressing, sharp down leg of -40%. In October of this four-month leg down, trading volume spiked during a mini crash but that wasn’t the final bottom. Schwartz View: The bottom came on much reduced trading volume in March of the following year and prices didn’t really move up until volume again picked up, in about June.

SCHWARTZ SUMMING UP. My first, quick gleanings from reviewing past market bottoms after the three most severe year-over-year declines in stock prices, like one we're in right now, indicate we might look for anultimate market bottom to include: (1) a sharp leg down just preceding the bottom, (2) a divergence between the Dow and the Dow trannies and/or (3) sharply lower trading volume for some weeks before the ultimate bottom. Stay tuned for more to come while hanging tough.