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September 16, 2008
Maybe I'm wrong, and stuck on
"Sell", but I think the worst may still be in front of us...
I cannot escape the sense that the majority of investors
everywhere feel like a low cannot be far off in the world's
stock markets...As somewhat of a contrarian by nature, I can
easily understand the current widely held (I believe) mentality
of, "The news is so bad. This must be the bottom", but, again as
a contrarian, I know from MANY miserable experiences how awfully
wrong you can be, no matter HOW bearish everybody seems, when
you are trying to predict when a falling market will finally
stop falling and turn back up.
Along these same lines, I have recently seen a number of
professional forecasters pointing to various "sentiment" and/or
"oversold" indicators as being so bearish as to almost
conclusively call for an upturn in the equity markets any day
now...All I can say to this, after easily spending a decade
using those same sort of tools, and then discarding them years
ago, is there are times when those indicators can be a guide,
but just as often than can be essentially worthless, i.e., there
are occasions when these indicators are screaming, "buy!", and
there is still 25% of the move, or more, immediately to come,
when you can later look back and say, "Look how close (timewise)
it was to calling the bottom"...but in real money, in invested
dollars, it was off by miles and miles...I'd also say one of the
reasons I abandoned using those sort of indicators was they too
often gave bad signals precisely when the biggest moves
were taking place, which is what I believe we are seeing over
and over all over the markets.
I KNOW it's bearish out there, but I also can't get away from
the idea we are dealing with an environment which none of us
(and this includes economists, investors, Fed governors, etc.)
has ever personally encountered...Aside from the debilitating
aspects of crippling energy prices and the worst declines in
housing prices since the Depression (!!!), what worries me more
is how this financial institutions debacle keeps getting
worse...It may be an oversimplification, but isn't
the realization that seemingly all of the major banks and
brokerage houses (the people who hold all your financial assets
and lend everybody money) are really, really in trouble a bit
frightening?
Six months ago there were five major Broker-Dealers here in the
United States, all of them "ancient" names in the investment
banking and securities business. In March, Bear Stearns
disappeared, and we now have the news that Lehman Brothers is
declaring bankruptcy, with Merrill Lynch being so close to the
same it is being soaked up by Bank of America...In other words,
three of those five major securities firms have essentially now
gone belly up...When I then recall that the brokerage firms are
sometimes considered to be a lead indicator of where the stock
market is headed, I can't get away from the idea there may be
a lot more pain coming in equities...And what does it mean when
AIG, the largest insurance company in the USA (or so I've seen
it described), "loans itself" 20 billion dollars to prevent
bankruptcy?
You've certainly heard and read about all of these
companies...Here's what the devastation looks like on a
chart...whether it be Broker-Dealers, Insurers or Mortgage
Guarantors...THREE MIGHTY IMPORTANT FACETS OF THE FINANCIAL
WORLD...No, all of the corporations in these areas are in as bad
a condition as but I would guess there are plenty more out
there...some we know about, some we don't.
I think those are SCARY pictures, especially when you consider
these are just a few examples...
And here are some nasty historical statistics...
The table below notes every bear market or bearish correction in
the Dow going back to 1900, with the most significant figure
being the percent lost from bull market to top to bear market
bottom. While it might be argued, "It's different now", during
this 107 year period, I count 23 bearish phases in the Dow, of
which 12 have seen at least a 30% decline before the market
turned back up. As we are now in what may be the worst
economic condition since the Depression, with the fact today's
bear market has only declined roughly 24%, it therefore seems
likely there could be a LOT more ground to cover on the downside
before the equities markets find their lows...
Bear Markets - Dow Jones since 1901
Yes, these are just statistics and easily may be
meaningless...but I'd guess that many of those 40% declines came
under circumstances that were no where near as serious as the
economic situation we are now facing...This leads me to believe,
at a MINIMUM, we could be looking at another 10-15 % decline in
stocks, if not worse...I obviously don't know if this will be
the case (just because I've been "right" for the past 3-4 months
absolutely does not mean I know anything at all about the
future), and I may be jaded after too many years in this
business, but I do not think the markets exist to make the
general public rich and happy. In the end, whether it's every
few years, or every decade, or even every generation, there are
periodic episodes when the public gets reamed...when the markets
slam everybody hard enough to generate those "SELL everything I
own!" phone calls to their brokerage house (if any are still
there?)...Here we have the markets, I believe, teetering on the
brink, and do you really hear any of the "experts" screaming,
"GET OUT NOW!"? Isn't all the media dialogue about "when it will
turn"?...Nothing is absolute in this stuff, but when I see a
market dead on its lows and seemingly every analyst there is
talking about "good values", "and tons of cash on the
sidelines", and/or "the bottom is close at hand", too, too often
it means you ought to be selling with both hands.
I know nobody wants to read negative crap like this but my job
is to call it as I see it...I am, by nature, one of the most
positive people you'll ever meet (how else could I survive 28
years in this stupid business?), but I do believe the economy
and markets are in serious and snowballing trouble, and it may
just mean stocks, as measured by the Dow, could have another
1500-2000 points to go...Which will continue to mean falling
commodity prices and sharply higher bond prices (lower long term
interest rates).
Here are some charts and brief comments....
Still Buying Bonds
Bonds have made a stunning run during the last month or so...We
unloaded the majority of our position into today's upsurge...and
with the immediate (blind luck) 3 point sell off that followed
are already re-establishing long positions into the
weakness...Having traded this market more than any other, I AM
SURE just about every bond trader there is will be seeing
today's action as a big reversal, that is, they will all be
predicting the end of the bull move which none of them have been
on anyway...Maybe I'm wrong...I assure you I'm not
overconfident, but I still think we're headed for 128-130 (at
least).
Still see Soybean complex going lower
Booked some profits on our
short Soybean Oil today...but still short.
Still see Cattle as extremely
overpriced in this economy
Still shorting both Live and Feeder
Cattle
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