8-24-09

Your Questions

"You've mentioned several times that stocks don't represent good value here. Can you talk more about why?"

Let's look at some historical examples that we know represented a time when stocks were cheap. The two key figures for value are the P/E (price to earnings ratio) which means how expensive the stock is in relation to what it's actually making, and dividend, which is simply the premium the holder of that stock is paid for the risk of ownership. My thanks to Richard Russell for this:

On June 13, 1949, the P/E for the S&P 500 was 5.4. At the same time the dividend yield was 7.6%.

On December 6, 1974, the P/E for the S&P was 7.5 and the dividend yield was 5.1%.

On April 21, 1980, the P/E for the S&P was 6.8, and the dividend yield was 5.7%

On August 12, 1982 the P/E for the S&P was 6.9, and the dividend yield was 6.3%.

Now, the S&P is just 2.18%. and the P/E is over 12.

            This is the sort of hard evidence you won't hear from the usual channels, because those 'usual channels' have their sponsors to consider. It's tough being patient, but it will be it's own reward if you have the cash when the time comes. We have a ways to go yet and the longer the government fights it, the longer this adjustment will take.

          "But the Dow is flying. Isn't NOW the time to join the party?"

          See above. Last week I wrote that the immediate direction for the Dow is Up and it didn't disappoint despite a shaky start to the week. I'm talking about the direction over the next year when I say ultimately, we're headed further down.

            On Friday (I write this at the weekend before you receive it) the Dow broke out to a new high for the move above its August 13 peak of 9398.12 which is positive. If the Dow Transports index does the same, that will confirm higher levels ahead. That level is 3774.12.

            "You've mentioned this before: the Dow Industrials and the Dow Transports needing to confirm one another to indicate a higher or lower level ahead. Explain"

           Yes and this is all about what is known as Dow Theory- letting the market tell its own story rather than second guessing it. Most of the time, it works.

           The Dow Industrials represents the largest publicly traded corporations in America and the Dow Transports, as the name implies, represents the largest corporations in the transport sector.

           The thinking behind such confirmations is that the two indexes are related at a fundamental level; the transport companies are the ones shifting the goods for the industrials, so they should move in tandem. If they don't, one of the indexes is probably "lying".

          "What other evidence do you have of a higher short term but much lower long term?"

           Recently, U.S. corporate insider selling reached its highest levels for the week ending August 11 since June 5, 2007 which as when the great recent decline was just about to start the following October. Insider selling usually happens a little early (meaning higher prices usually follow), but ultimately (as you might expect), company insiders are proven right in the end.

          "But I've heard a lot of talk about China leading us into a recovery?"

           China has been on a tear this year. The government there has forced (yes, forced) banks to lend money that's set off a wave of construction. They've been buying up commodities like crazy. However, these new skyscrapers are mostly empty. The commodity purchases are merely a diversification out of their US dollar holdings to hold something of real value instead.

             In short, an inflationary bubble has been set off in an attempt to keep the uneasy population at work. China's weakness and it's strength, is it's size. Such a massive population out of work is calamitous. If you could make them all spend money in malls, China would rule the world. But it's not happening, not this decade anyway.

            You can profit from a fall in Chinese stocks when the bubble bursts (it's showing signs of starting already) with this fund that makes money shorting Chinese stocks: FXP.

            "So is there anything positive going on?"

            Well remember, as I just demonstrated, bad news can mean a profit opportunity; I'm continually urging you to understand that you make money from market moves in either direction.

            But I'm positive about gold, biotech stocks, natural gas, short funds like the FXP and the SRS (short real estate funds) over the next year.

            "So you still like gold. But why does the price seem to be in stasis?"

            The price of gold is always a hard thing to fathom, but generally speaking, it works inversely to the perceived value of the US dollar, since the US dollar is the world reserve currency and gold is the ultimate store of value.

            Inflation (increasing prices) is bad for the dollar (thus good for gold), and deflation (falling prices) vice versa.

            This whole inflation vs. deflation debate is THE critical question for investors over the next decade! Thus, gold and the dollar are the star attraction.

            This government (and most all world governments) wants inflation. Inflation diminishes debt, deflation amplifies it (because cash is worth more (because it buys more)). Deflation is absolutely the nightmare scenario that terrifies central bankers.

            Massive deflation is taking place- this is the price lowering you see all around you. But governments are fighting it as best they can by printing money, spending and borrowing.

            Thus, the gold price is in a tug of war between the natural forces of deflation and the government's attempts to inflate.

            Some of the best minds I know are divided in this critical debate which should tell us that we just don't know yet. The best you can do is accumulate cash AND have a generous helping of gold to prepare for either situation.

            Where do I stand? It's my belief that governments will stop at nothing to defeat deflation and they won't care if they destroy the currency in the process. What I do know is what history knows and that is the "law of unintended consequences." The government hopes it will be able to administer just enough inflation to beat the deflationary beast that will be unleashed in full force when the Chinese market finally tanks. They will create too much inflation though.

            My bet: we see deflation win at first (causing gold to drop in price), but the situation will then reverse as governments fire up the monetary printing press at maximum. When inflation does come, it may happen so fast that those who think they'll wait to get their gold will be too late. Think Argentina.

            The market rarely accommodates us and our plans and predictions.

            "How do you think the Obama administration is doing?"

            I had high hopes for Obama when he came in, but lately I'm actually very disturbed in that he makes continual noises of a Socialist dictator. He doesn't like opposition to what he wants to do and tries to discredit those responsible, dismissing them as fringe groups (case in point this recent healthcare debacle). He's a lot more popular abroad than he is here and make that's gone to his head.

            Keep those questions coming!

            Until next time...

           
            Mark Patricks

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