Stock Market Update -- Pigeons Coming Home To Roost

In a market like this, it is easy to feel stupid. Everyone I know has lost money and many people have lost all their money. To one degree or another we have all been impacted by a worldwide economic tsunami that has leveled everything in its path.

Everyone has known for months that serious problems exist. In the past, low stock prices have often signaled great opportunity. I mean we have been told for decades that we should "buy low and sell high." Many technicians and market timers were bearish for much of last year but most decided in October that record levels of investor pessimism and capitulation were signs of a bottom. The U.S. stock market is down more that 40 percent from those levels and making new lows.

Even most of those who remain cautious and say it is still too soon to buy have been saying for months that is is also too late to sell. So while they can technically say they were right on the market, most of their customers have lost big money by hanging on to stocks through this death spiral.

Most of the time, people who lose lots of money are traders or speculators who get caught on the wrong side of risky investments. But this bear market has been very different on two counts.

First, among the stocks that are down dramatically are the largest and most respected companies in the world. Many of the bonds that have lost much of their value were AAA-rated. People who thought they were invested conservatively have lost a fortune.

Second, the smartest people and investment professionals I know have lost the most money during the last year. Normally it's the novice investors who get hurt while the "smart" money typically seems to do better. As we have learned from the Madoff fiasco and other scams, the biggest victims this time have been some of the most accomplished and sophisticated investors in the world.

In addition, legendary investor Warren Buffett has suffered his worst year ever, losing well over 50 percent of his own and shareholders' money during the last six months alone. In addition, dozens of the brightest and most successful asset managers in recent years have suffered similar--and even worse--losses since October.

But it was telling that in Buffett's annual letter to his investors he made it clear that he believes that this is a time of great opportunity. He also shares my view (The Next Investment Bubble Has Started to Pop - Feb, 2009) that U.S. Treasury bonds are not a good place for conservative investors right now.

As Buffett put it:

When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s.

But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary. Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long.

For months now I have been advising clients that it is not time to be bearish or bullish--it is time to be smart.

As a result, I've been invested in exchange traded funds (ETFs) that own precious metals and are short U.S. Treasury bonds. Both of those investments are up for the year as are a number of energy and technology companies--solid, well-run businesses with good management, great products, and lots of cash.

On the other hand, the list of investments that are smart in here is getting shorter as it becomes increasingly clear that companies and consumers have started to save more, pay down more debt, and spend much less. In addition, foreign markets which in the past have often been strong when ours are weak are generally in even worse shape than we are.

As you know, I have avoided the financials, the automakers, and other sectors where companies are going to need to raise capital in this very challenging environment. That list should now be expanded to include companies that are most vulnerable to widespread spending cutbacks that will lead to earnings disappointments going forward.

I'm not up for the year, but I am doing better than the market averages. More important, I remain positioned to benefit from the economic developments we expect to play out. People--particularly retirees--should have enough cash set aside to pay their bills for the next couple years plus whatever additional amount they need to sleep at night. The rest should be invested in a smart way.

A whole bunch of past financial policy pigeons are coming home to roost and most of them aren't housebroken. The results have been messy and ugly. This is not about Obama and it is not about the proposed budget or stimulus package. It's about the policies of the past catching up with us.

At the end of the day, I agree with yet another part of Warren Buffett's letter:

The economy will be in shambles throughout 2009--and, for that matter, probably well beyond. But that conclusion does not tell us whether the stock market will rise or fall.

Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead.

Comments

[dsws]

Shorting treasuries still sounds ok, since they're pretty close to zero yield and can only go up in yield which is down in value. The problem is guessing when. But precious metals are probably at the point where you're late to the party if you get in now. And of course, for long-term holding they're dross, all storage and insurance cost and no productivity.

[quovadiszero]

China and the US are inextricably fused,which will bode well short term. History will pay close heed to those who took us to this recession party, but now the only message is to restore faith in the system. Pass not judgement until you have given this administration a fair chance.Lik­e most spoiled Americans we need to have all our problems solved with the utmost dispatch or we complain and whine. Enough of that, most people should keep some of these fividvanced comments inside their overweight heads and concentrate on being constructive in any way they can and if they do not like what they see run for office.Unt­il then the sickness of criticizim in this country is mind numbing,di­stracting, pointless, and yields little for the common good.

[DuganS1]

People have already given Treasury Secretary T Geitner a fair chance. He has been involved with this crisis from the beginning, yet is still unable to get out a real plan. It appears to me, as well as most everyone I know, that Geitner has no new plan and doesn't know how to fix the situation. I think Obama should admit choosing Geitner was a mistake, cut him lose, and move on. Right now the big hope is that the market to market rules will be relaxed next week. Why that wasn't done from the beginning is a big mystery.

[metalpipe]

I have personal experience in long term investments. They always hurt in the beginning, and take a leap of faith and a pound of courage, but tend to reveal their wisdom and returns over less time than I expected.

I think Obama is taking a systematic and incredibly adept political approach at making long term investments in our future. He should be an inspiration to us all. The big players on Wall St are stuck in yesterday's mind set where quarterly reports tell all and short term gains are the only gains of importance. I think Wall St should be nationalized.

[lgellman]

It is so tempting to pretend that Obama or Geithner can come up with a policy or a plan that is so good that everything will start getting better. But unfortunately the mess we´re in is largely the result of Ïbad bets made with huge leverage by millions of individuals and our largest financial institutions. The amount of wealth that is vaporizing as a result is staggering and it seems clear that the domino effect is not over.

Having said that, I can think of no one I would rather have as president right now than Barack Obama. When Dorothy found out that the Wizard of Oz was a fraud, she became angry and accused him of being a very bad man.

He replied that we was a very GOOD man--just a very bad wizard. I think Obama is the same.

[jsarets]

Larry, did you know that the Wizard of Oz is an allegory about monetary policy?

In the original story, the ruby slippers were silver slippers. Oz is ounces of gold, represented by the yellow brick road leading to the Emerald City, or Wall Street. The scarecrow represented farmers, the tin man represented factory workers, and the cowardly lion was William Jennings Bryan.

The moral of the story is that we don't need the wonderful wizardry of Wall Street's money and its illusion (at the time) of being backed by gold. The people already possess everything they need to prosper, a relatively abundant silver-backed money being the suggested alternative. All we have to do is believe in ourselves instead of believing the hype.

[DuganS1]

So far Obama has done a poor job dealing with this crisis. He has talked about new taxes for all Americans (carbon tax for low income folks), plus cuts in spending or new policies that will hurt companies (healthcare, defense companies, utilities, and multi-nationals). This a very poor strategy in getting the market to recover. How can you help the market and attack it at the same time. This is a strategy not seen since FDR, and we all know how long that depression lasted because of it as private investment was scared off.

[jsarets]

I think Wall Street should be decentralized.

Anytime any sociological system fails, there's always a bunch of reasonable-sounding people that suggest that problems like this can be avoided in the future if the system in question is centralized in some manner, and people believe it more often than not.

Extraordinary progress in communications technology over the past century is revolutionizing society and creating profound structural changes in the global economy. A hundred years ago, the ubiquity of energy illuminated the world, and today the same is true of information.

Not only does information travel much faster and wider than ever before, but the volume and flowrate of information has become overwhelming. The central hub doesn't receive information much faster than anyone else, and it's impossible for the hub to process the vast quantity of it.

Furthermore, while it is all too common to be too big to be permitted to fail, it is impossible to be too big to fail. Size is not the ultimate solution to risk management. Financial institutions have long known that diversification is an essential part of it.

Unfortunately, while there may be diversification within each financial institution, there's hardly any diversification among the precious few of them. We need far more institutions, and we need each of them to balance diversification with specialization. We need them to be experts about individual industries or communities.

[BobLablah]

"This is not about Obama and it is not about the proposed budget or stimulus package. It's about the policies of the past catching up with us."

Actually the stock market is priced based on projections of the future, not on the past. There is absolutely no doubt that the policies of Obama reduce the attractiveness of stocks in the future, leading to this huge decline that has occurred since his election. I guarantee if he would stand up and say he changed his mind and cap gains rates will not go up and he will not try to socialize medicine and student loans and raise the cost of energy the market would rebound.

.

[jsarets]

The future is a consequence of the past to a much greater extent than it is a consequence of the present.

It is unquestionably ludicrous to suggest that the capital gains tax has more to do with the financial crisis than real estate prices or securitized debt.

When institutional fund managers look at the market, see real estate prices that won't return to recent levels, and the see the role of non-bank lending becoming much more limited.

They see the end of things old, not the start of things new.

[privategirl]

You sound like you're making a lot of sense.

[strangerinthenight]

Not on this particular instance. The subprime rear it's ugly head as early as 2006 - and if the past is our guide, the Democratic Congress and Senate had ample time to prepare for the worst. Instead, Congress just didnt want to face the problem. Therefore, that past mistake is the consequence of the present economic meltdown.

And worst, Senator Dodd is the Chairman of the Banking Committee, and he just failed to monitor the lending practices and subprime Ninja mortgages.

In essence, we learn from past mistakes, but this President, Congress and Senate believed in oratorical narratives and not cold reality. Instead, we are borrowing from China to finance this spent-spen­t-stimulus package that will widen the vortex that will swallow the middle class down to the black hole.

I don't see the mark of an experienced President. If only his oratorical genius can save the day.