The Year of the Bargain

It is no secret that the economy is in a recession that will be with us for a while longer.  But I do believe a significant and overdue bear market rally is underway.

How many times have I said over the past 6 months that:

1. The stock markets will begin their recovery 6 months before the recovery in the economy is reflected in the news.
2. That the money the Feds are pumping into the economy takes 6-9 months to get traction and have an effect.  The question is 6-9 months from when?  How about the $700 billion TARP bill last October. We are now 6 months past TARP.  Hmmm.

Time for liftoff for the markets? I think so.

The spark that ignited all the rocket fuel (cash on the sidelines) under the stock market the past few weeks appears to be several glimmers of hope in scattered economic reports, including retail sales and housing.

In the housing area, statistics have turned positive for the first time in a long time.  The combination of low prices and low interest rates have made housing more affordable than in many, many years.  Investors are finding real estate bargains to be irresistible and are starting to dip their toes back into the real estate market.  Prices could still slip a little lower, but right now you have the best combination of quality properties and low prices that I can imagine. 

Next year, prices may be a little lower (my research shows prices bottoming next year, but the steepest declines are behind us) but the choicest properties will have been snapped up already.  That makes 2009 the year of the bargain in real estate.

I expect a lot of fits and starts in the markets as corporate earnings continue to suffer from the recession, Europe has a rougher time than the US due to the inflexibility of their economic system, and a significant foreign country will have its currency collapse.  But trend in the US stock market seems to have changed with even the March 30th drop stopping right at a key level of support.  We will only know for sure as the advance unfolds, but I think the stock market highs for the year will be substantially higher than where we are today. 

It is normal for rallies to recover half of earlier losses even if the stock market ultimately resumes its decline.   Recovering only half of the decline we’ve just experienced would bring a 65% gain.  History strongly suggests that we could see a big run up in the market over the next year.  Those kinds of gains are worth reaching for.  I’m thinking it will be a fun ride to make up for some of the discomfort of the past 18 months.

Market historian Jason Goepfert of Sundial Capital Research says that the way the market has acted lately it would be unprecedented to not see generally higher prices over the next one to three months.  Pretty much everything I’ve looked at recently helps confirm that outlook.

The bear market has made some investors so fearful they are frozen in inaction.  This is understandable for investors who have suffered life changing losses, but fortunately that does not pertain to my clients. We have weathered the storm pretty well and are now in a position to reap the performance benefits of staying invested and taking advantage of the opportunities that have developed.

Account updates

The stock market appears to have finally found a bottom on 3/9.  Total decline from the high on October 9, 2007 has been 56.78% for the average investor represented by the S&P 500 Index of stocks.  Those folks will need a 131% gain to break even.  Fortunately that is not us because those kinds of gains take many years to earn.  
The “drawdown” from peak value to low point, from our growth model*, was 22.63%, meaning we only need to make a 29% gain to be back in the black.  For balanced and income accounts* the 18-month declines were much smaller, so reaching breakeven will be easier, too.

Earning 29% is much more easily done than having to earn 131% to break even.  This is the benefit of the active management I practice.  It may not always be pretty because we do experience some losses, but by keeping them as small as possible, we greatly increase your long term chances of investment success.

The first chunk of what was needed to get us all back to even (I invest this way for myself, too) has been gained during March.  I think you will be pleased when you get your monthly statement.

Flexible Income* accounts staged a turnaround in early March and their current holdings, primarily high yield bonds, have earned about 2.5% in the past two weeks and are currently in a nice steady uptrend.  Strength in high yields often accompanies strength in the stock market, so this is doubly encouraging.

Our growth accounts* were entirely out of the stock market in early March, and I began moving back into the market just 3 days into the

current advance.  We are close to fully invested right now, with holdings in banks and financials, retail, emerging markets, and technology and commodities.  If for some reason these sectors of the market begin to fail, I’ll just move us back out of the market and be patient.

Thanks for your patience during this difficult time.  I am confident that your patience will be rewarded.  

And please tell your friends to call me if they are having a difficult time in the markets.

I Will Work For Free.

Occasionally I am asked to manage money for non-profit organizations, and when it happened last week, I offered to do the work for free as my way of giving something back to this community.  After all, Prescott has been very good to me for 23 years now.

I don’t remember making this offer publicly before, but I will now. If you have a favorite non-profit that could use help managing their savings, I will be happy to speak with them.

My style of active management is not suited for all organizations, just like it is not suited to all investors.  However if your group has reserves or endowments that are earmarked for long term investment and they prefer a risk reducing approach like I use, my pro-bono work may be appropriate for them. 

Just call the office at 778-4000 to arrange an appointment for me to meet with the group’s representatives.

College Classes

Upcoming schedule is . . .

Basic Investing For Retirees, June 3, 4, 10 and 11 from 1:30-3:30 each day.

Advanced Investment Analysis Using Charts, June 17 & 18 from 1:00-4:00 each day.

Please tell your friends about these popular courses.

The Lighter Side

When a survey was taken among doctors about the Government’s bailout/stimulus efforts here is what they said:

• The Allergists voted to scratch it, and the Dermatologists advised not to make any rash moves.
• The gastroenterologist had sort of a gut feeling about it, but the Neurologists thought the Administration had a lot of nerve, and the Obstetricians felt they were all laboring under a misconception.
• The Ophthalmologists considered the idea shortsighted, the Pathologists yelled,  ‘Over my dead body!’ while the Pediatricians said, ‘Oh, Grow up!’
• The Psychiatrists thought the whole idea was madness, the Radiologists could see right through it, and the Surgeons decided to wash their hands of the whole thing.
• The Internists thought it was a bitter pill to swallow, and the Plastic Surgeons said, ‘This puts a whole new face on the matter.’
• The Podiatrists thought it was a step forward, but the Urologists felt the scheme wouldn’t hold water.
• The Anesthesiologists thought the whole idea was a gas, and the Cardiologists didn’t have the heart to say no.

In the end, the Proctologist left the decision up to the folks in Washington .

*    The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed.   Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account.  Not all trades are profitable.  It should not be assumed that current or future holdings will be profitable.   A list of all trades in these accounts for the past 12 months will be provided upon written request.

**  The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market.  Investors cannot invest directly in the S&P 500 Index.

Information in this newsletter is derived from sources deemed to be reliable, however we cannot guarantee its accuracy.  Please discuss any legal or tax matters with your advisors in those areas.  Neither the information presented nor any opinions expressed herein constitutes a solicitation for the purchase or sale of any security.