| Today's Daily Reckoning: |
| A Broken Down Stock Market San Jose de los Perros, Nicaragua Tuesday, February 24, 2009 --------------------- *** Stocks are back down to '97 levels...things not looking good for Citigroup...should the U.S. nationalize banks? *** Gold's sudden rise in popularity...will the S&P rally?...Paul Volcker channels Gloria Gaynor... *** Capitalism is merely a recognition of basic principles...who wants to invest in a country run by a witch?...and more! Stocks fell 250 points, on the Dow, yesterday. Only 2,100 more to go. The Dow ended yesterday's trading at 7,114. Before this correction is over, it will trade below 5,000. That has been our prediction for the last 10 years. Maybe we were a little early. But we're sticking with it. Besides, stocks have been a bad bet for the last 12 years. They're now back to '97 levels...meaning, investors have made nothing for a dozen years. Stocks for the long run? How long do you have to wait? And now, the stock market is breaking down...again. Dow Theory has given a Bear Market Signal. What that means, exactly, we don't know. Stocks will go down until they stop going down, we guess. Citigroup is moving "closer to toast," the New York Times reports. The market cap of Citigroup has fallen by more than 50% since Monday. "I think it is going down," writes old friend Jim Davidson. "My best guess, it will be nationalized...on a 'temporary' basis." Many are the economists urging the government to nationalize the big banks. People need confidence in the banking system, they say, or we'll all be toast. Among the big names in favor of nationalization is Nouriel Roubini, one of the few economists who seemed to know what was going on. He saw the crisis coming and said so. Now, he's practically a media star. Of course, we saw the crisis coming too...here at The Daily Reckoning. We said something too... But we're still waiting for the press to call...just so we can hang up on them. The worst thing that can happen in this trade is success. It makes you think you know what you're talking about. The next thing you know, you're giving advice to central bankers and major corporations. Then, the gods get their backs up. Everyone starts believing what you say...even you. If we were in charge, we'd get out the toaster. But nobody asks our opinion. And it's probably a good thing. Because when people come to think what you think, what you all think is probably wrong. At least, that's the way it tends to work in the financial markets. As soon as everyone gets on to a trend, it is soon over. Back when the going was good, for example, everyone thought it would be good forever. Naturally, it stopped being so good soon after. Now, what does everyone think? Hard to say. We read the headlines and try to figure it out. "In Gold We Trust," says a headline at the Wall Street Journal. Gold fell back below $1,000 yesterday. The yellow metal seems very popular. Maybe too popular. But does everyone think gold is going up? We hope not; if they did, we'd have to sell. Still, most people still think gold is a little kooky...the kind of stuff that grumpy old men bury in their back yards. And most professionals, too, still think gold is weird - an investment for grandpas. 'Worried about inflation?' they ask. Then, solving their own problem: 'Just buy TIPS. You know, government bonds indexed for inflation. You'll collect some interest...and you'll be protected against inflation. These bonds are indexed to the CPI.' TIPS are cheap. That is, you don't give up much yield to get the inflation protection. But if investors can get protection from inflation for only, say, 1% of yield...what does that tell us? Well, it tells us that investors think the rate of inflation over the next 10 years - TIPS are equivalent to 10-year notes - will be only about 1% per year. People don't call an exterminator when they have no pests. Gold is protection against inflation. They don't usually buy gold when they don't fear inflation. The TIPS premium - the extra that investors pay (or the yield that the give up) - is so low, it tells us that investors aren't afraid of inflation. What are they afraid of then? Why is gold going up? What is it that everyone thinks? Our guess is that people don't know what to think. Some - and only some - are hedging their bets by buying gold. Something funny is going on, they must think. They don't know exactly what it is, but they're sure it won't end well. They buy gold...just in case. We continue to hold gold because we know it is the ultimate store of wealth... Think about it this way. No paper currency has ever stood the test of time. They've all eventually become worthless pieces of paper. But gold has not, and will not. This is why it is the ultimate hedge against inflation...against uncertainty in the markets...and is the anti-paper. This is why we hold it...and why you should do the same. Find out how you can get the precious metal for just a penny per ounce. See here. So, the major trends continue. Stocks go down. Gold goes up. *** The S&P 500 took quite a beating last week. After breaking through near-term support at in the 804 area - the bottom of the market's intermediate trading range - stocks are now poised to test November lows at 741 on the S&P. But Easy Money Options' Wayne Burritt thinks, if history is any guide, that the market may be poised for a bull run. "The recent technical action is shaping up much like the market's recovery after the dot-com fiasco. Back then, the S&P tested the 769 to 789 level three times in the eight-month period between July 2002 and March 2003. Each time the levels held and after the third was over, the market commenced a spectacular bull run. "In fact, from its jump-off point of 783 in March 2003, the market didn't stop until it reached 1576 in October 2007. That's a staggering 101% gain in just over four years. "Today, the markets are wrestling with similar lows in the 741 area. It made its first test in November and succeeded. It's now in the midst of a second test. If my thinking is right, it will test that low, recover and then test it once again. After the third, a new bull run could be in the cards." Wayne does admit that the fundamental pressures of today are much worse than following the dotcom bust...and that means the market bias going forward is certainly to the downside. However, Wayne has his sights set on a handful of companies that are prepared to move up - no matter what the broader market does. See here for all the details. *** Looks like Paul Volcker is channeling Gloria Gaynor... Volcker, former head of the Fed and hero of the inflation fight of the '80s, says of capitalism: 'I will survive, I will survive.' We did not read Mr. Volcker's speech. But we can imagine it. Capitalism, in its various forms, has been around for a long, long time. It is unlikely to go away, simply because everything else is a fraud and a scam. What a delight to see Mr. Volcker rise to defend capitalism. The old creed needs a lift. Every crackpot and malcontent on the planet is gunning for it - including Danny Ortega, here in Nicaragua. What is capitalism, after all? It is not a system...not a plan...not a program. It was not decreed by any half-wit tyrant...nor written into law by any earnest assembly. It has no constitution...and no boundaries. It is merely a recognition of basic principles. 'Thou shalt not steal,' it says in the Bible. Capitalism recognizes other peoples' property. The baker has a right to his oven. The farmer has a right to his land. The capitalist has a right to his money. What they do with these things is up to them. Will they make mistakes? Of course they will. Will they do evil and obnoxious things? No doubt about it. Will they occasionally lose their heads and overprice their assets...or run the whole economy into too much debt...or blow themselves up in a bubble? You bet. As Adam Smith described, they will also bumble along to create the wealth of nations. But larceny wasn't invented in the 21st century either. Naturally, people want what the capitalists have. Everywhere and always, the thieves will find reasons why they should be able to take it from them. They will respect the environment better, they say. They will invest in 'socially responsible' projects, they claim. They will heal the lame and make the blind see. If only they get their hands on your money! Here at The Daily Reckoning, we don't particularly like capitalism or capitalists. We just don't like anyone telling us what to do. So, doing unto others as we would have them do unto us, we make no effort to tell others what to do with their money. If they want to give it to Bernie Madoff or to Barack Obama, so be it - just count us out. If they want to invest in CDOs and MBDs...well, good luck to them; but don't look to us to bail them out. *** "Danny Ortega is not really the person making the decisions down here," explained a Nicaraguan friend. "It's his wife. And she's a witch." We thought she was expressing an opinion. Instead, she was merely stating a fact. "No, she's a real witch. She even organized an international witch convention here in Nicaragua. Witches from all over the world came to participate. You should see her. She wears rings on all her fingers. Each one is supposed to be a talisman of some sort. You have to watch out, or she'll put a curse on you. "Naturally, the whole country is a mess. These people have no idea what they are doing. But they are convinced that capitalism is bad. So they try to stop it. What that means in practice is that they make it very hard to invest in Nicaragua. Just look around. Do you see any new factories? Any new roads? Any new developments of any sort? "Well, maybe out here at the beach, where rich foreigners are building houses. But the rest of the country has come to a standstill. Of course it has, because who wants to invest in a country run by a witch?" *** "It's the same down here as everywhere else," explained a developer in Nicaragua. "During the boom, people were creating new developments everywhere. Most of them got to the advanced design stage. Lots were laid out and sold. But the infrastructure was never completed. Now, a lot of those places are just closing down. It's not a good time for us. "But I just think it is a lull. Over the long haul, Americans will still want a nice place to retire. And Danny Ortega should be gone - I hope - in a few years. There's no prettier or nicer place in the Northern Hemisphere. The coast is beautiful. The beaches are nearly perfect. And the prices are still very low compared to other beach areas. When the economy picks up, this place will come back to life and people will begin building again. It's not like Detroit. That city will probably never come back to life." Until tomorrow, Bill Bonner The Daily Reckoning --- Special Offer --- Options Made Simple Let's face it - playing options can be tricky. But they can also be incredibly lucrative. Well, in this report, we lay it all out for you. It's quite plainly, the easiest way to play options...ever. And the gains are just as big. Keep reading here. |
| Guest Essay: |
| The Daily Reckoning PRESENTS: The list of similarities between the crisis in the markets now and the one the United States faced in the 1930s is ever growing. And while it is easy to focus on the negative aspects of both then and now, Chris Mayer has been hunting around for success stories of the 1930s - and details one, below... THE MAGICAL INVESTMENT CORPORATION by Chris Mayer "For the record, I must make a correction to the statement that all investment trusts look liked monkeys at the time of the boom and crash." So writes Fred Schwed in his 1940 investment classic Where Are the Customers' Yachts? The boom in this case was the one that peaked in 1929. The crash was the famous collapse thereafter. "Once upon a time," Schwed continues, "there were two small trusts, managed by the late John W. Pope, which were of such stuff as dreams are made on." No one remembers John W. Pope today. But for a time there, he was something special. Pope was one of those fellows that seem to make the best of a bad situation. He had the misfortune to start his investing career in 1928. Yet he would go on to distinguish himself brilliantly in his short career. Schwed took to calling his investment management firm "the magical investment corporation." That was because Pope made money during what Schwed called "that impossible time in finance, 1929- 1931." I've been hunting around for success stories of the 1930s - investors or traders who found some success during that difficult period. John W. Pope is another to add to the list. One prominent Wall Streeter called him "one of the ablest statisticians in the New York district." (This was back in a time when people called security analysts simply "statisticians.") Pope ran a very different kind of investment firm. It was the opposite of nearly all other trusts at the time. "Everything about the intellect and philosophy of the youthful Mr. Pope was the reverse of what I have explained a Wall Streeter to be," writes Schwed. When Pope started managing money, he was only 29 years old. But he already had some different ideas about how to invest. Schwed writes how Pope's fund in 1930 was mostly in cash and short-term loans, "which, strangely enough, was precisely where it should have been." Pope's message to his clients that year also contained "an incredible statement," which Schwed reproduces: "It is the belief of the management of this corporation that a diversified list of carefully selected securities, held over a period of time, will not increase in value." Pope seems to have been one of the few people to see the trouble on its way. Looking over his fund's holdings, Schwed comments how "frequently his trusts had only one single large position, and that would be on the short side." In other words, Pope bet against companies more than he bet on them. He made a lot of money doing that, and it sometimes got him in trouble during a time when the reward for making a lot of money meant that a lot people thought you should be thrown in jail. For instance, once Pope wrote to his clients telling them to sell Fox Theaters. Upton Sinclair mentions Pope briefly in his book Upton Sinclair Presents William Fox. Sinclair writes that Pope "did not like the looks of the picture and that their statements did not represent the true condition. For that, charges were brought against him before the New York Stock Exchange." Another author, Martin Armstrong (The Greatest Bull Market in History), relates how anyone who made money during the 1929 crash was a candidate for punishment: "The cries to punish someone, anyone, for their losses were, indeed, numerous. It became common to talk of huge bears who were in control of the market, squeezing the very lifeblood from the market drop by drop. "One such early victim was a young broker, 32 at the time, named John W. Pope. He was reported to have been a soft-spoken chap, quite independent and a student of values... John was accused of forcing Fox Films down." The NYSE interrogated him in a way Time magazine described as a "harrowing trial by statistics." But our man Pope pulled through. As Armstrong writes: "John W. Pope pulled out his charts and his studies of Fox Films and demonstrated that the stock had been seriously overvalued in comparison to historical measurements." It was an impressive enough display for the powers that be at the NYSE. Pope was completely cleared of all charges. Fate had dealt poor Pope a bad hand, though. He died in 1931 after an illness of some sort. He was only 32 years old. Pope was "a sort of Keats or Shelley of finance," Schwed writes. "It can now never be known whether his amazing track record could have been sustained; whether, indeed, he would have continued to be, as he was then, the brilliant exception that proves the rule." I found Pope's obituary in The New York Times, published Nov. 22, 1932. "John W. Pope Dead; Youthful Financier," it read. "Made Fortune Since 1929." The Times called him a "spectacular figure in recent financial history": "Mr. Pope was little known up to the time of the falling market in October 1929. He was generally believed in Wall Street to have accumulated a substantial fortune as a result of his activities on the short side of the market." That ends just about all I could dig up on Pope. I thought I would share his story with you for a couple of reasons. The first is to show you that being short can have its rewards in times of trouble. I am not and have never been a particularly good short seller. However, I know several who are very good at it. One is my friend Dan Amoss, who edits Strategic Short Report. There are few people I would entrust with my own money. Amoss is one of them. So if you are looking to add the protective (and potentially very profitable) strategy of going short, I would recommend you give Amoss' service a try. The second reason is to say that it can be worthwhile to heed the short sellers even if you never plan to short anything. They are often very diligent in their fundamental research. They are often short stocks that have real problems. Knowing what they are is helpful if only to avoid them on the long side. If you listened to Jim Chanos, a well-known short seller, you would never have owned Enron, for example, or even lesser blowups like Kodak. If you listened to David Einhorn, another famous short seller, you would never have touched Allied Capital - or any of the so-called business development companies (BDCs). They are not always right, of course. But they are right often enough in big ways. And if you know what they look for, it can improve your own ability as an investor - again, mainly to avoid losers. There are not many books dedicated to the art of going short. But probably the best place to start is Kathryn Staley's The Art of Short Selling. It covers some basic strategies, and gives plenty of anecdotes and history. Among certain short selling principles is one that reads: "If you can't read it, short it." Companies with complex accounting are usually hiding something. Banks and insurers are notorious for complex financial statements. Also, "If you can't fix it, short it." Some companies have broken business models that just don't work anymore because something fundamental has changed. (See the fiasco with America's investment banks. Amoss, by the way, was short Lehman, and his readers cleared a 462% profit. Not a Strategic Short Report subscriber? Now might be a good time. See here.) Usually these things are good fodder for shorts. There are plenty of others I won't get into here. There is one other reason to share Pope's story with you: He is part of a short list of people who did well in the aftermath of the great crash of 1929. As I've said, I've been searching out stories like these to see what I might learn. Even if you never plan to short anything, I hope you find Pope's story of interest just for its own sake. Regards, Chris Mayer for The Daily Reckoning |
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