The Market:

As of February 1, 2009

Caution: The information on this website provides a starting point for further analysis. It is NOT a recommendation. You are responsible for your own due diligence. I may or may not trade these securities depending on my portfolio’s requirements.

Never forget that 50% of a stock’s move is correlated with the market, and an additional 25% is correlated with its sector.

The Market will tell us its future direction, not pundits. Investor’s Business Daily indicators discussed in the ODDS-ON Investing™ pages provide technical indications of the market’s future direction. This is the background against which we manage individual stocks.

With this in mind, it is still useful to have a view on economic and political factors that will impact markets even though our interpretation of these geo-political factors should not typically over-rule the market’s technical indicators.

Geo-Political Background:

Unlike the US recession that followed 9/11, this is a global recession caused by excessive leveraging of the US consumer, US financial institutions and the US government. Unlike the event driven recession after 9/11, this is a structurally driven recession that will not have a quick turnaround, and the length of the turnaround will be increased by new policies of an inexperienced administration with no checks and balances to speak of.

After 9/11, only the US was in recession which was caused by an absence of spending due to the US consumer’s physical fear of travel and public places. They had liquidity, but were gripped by physical fear. As soon as the physical fear subsided, consumers spent, the stock market recovered and the recession disappeared. This time, the recession is global and will last longer because the overleveraged US consumer cannot borrow to buy the world out of recession the way s/he did after 9/11.

It will take several years to re-liquefy the banking system, get banks to lend and for the consumer to reduce debt to levels at which s/he can again borrow to spend. Anticipate that GNP will decline through all of 2009. Recovery will probably be delayed until at least the first half of 2010. If history holds, the market will anticipate recovery by about six months.

For the rest of 2009, the Fed and the government will be printing money to bail out banks with “toxic assets” and to finance trillion dollar deficits. The result will be inflation and stagflation similar to Jimmy Carter’s term in office. If taxes are raised it will be worse as it is a mathematical certainty that if taxes go up, free cash flow at companies goes down; therefore, stock values go down. It’s not rocket science; it is simple math. See Enterprise Value on the 2nd Most Powerful Formula in Finance page.

This economic trajectory means that corporate hiring and profits will fall in 2009, and unemployment will hit above 9%—comparable to the 1980-81 recession. Reduced jobs translates to lower corporate and consumer spending. None of this analysis considers the impact of an international incident.

When the economy recovers, we will see $75 plus oil within five years. The reason: Spin aside, so far there is no practical energy policy coming from our government (democrats or republicans) that will materially reduce the $700 billion per year that we spend to import oil.

All of this is all bad news for our children’s economic freedom.

One other observation: Warren Buffett now has a dog in the hunt. He is no longer an independent investor. He has decided to take on a role as an economic cheerleader for Obama administration deficit spending and has recommended higher taxes at a time when the economy is in a material downturn. For the sake of cash in our own pockets, we need to recognize that while Buffet’s investing disciplines have merit, we can no longer assume that Buffett’s contemporaneous counsel on the stock market and values is objective.

Remember, as an investor your goal is to put cash in your pocket, not to endorse a political agenda or hope that one succeeds. Hope belongs to another dimension of life.

Market Indicators:

NOTE: This website cannot and does not want to duplicate the timeliness or content of Investors Business Daily indicators. You should follow IBD indicators first hand on www.investors.com.

As this is being written (1/25/08), IBD is indicating that the market is in a correction.

What should you do?

Note: The terms Active Trader (less than three months), Investor (two years) and Mutual Fund Investor (Not moving in and out of the market) are defined on the BUY, HOLD and SELL page of this website.

Cash remains King in all its dimensions. You should by now have identified your Anchor Mattress. This is a safe place to invest your cash that enables you to preserve capital, with low credit risk, yet not take interest rate risk as inflation heats up. If you have done a good job identifying your Anchor Mattress, you can sleep at night and will be more objective in your investing decisions.
As an investor, let market action and chart patterns of individual stocks, not pundits (occasionally including me), guide you on what to do. We may be close to the bottom, but the realities of 4’Q earnings (Being announced in January) and GNP may put another 10-15% down leg on the market and at least test if not break through the lows on November 20, 2008 of Dow: 7552, S&P 500: 752 and NASDAQ: 1316.
Patience. No one can ever hit the exact bottom or top and there is no merit in attempting to catch a falling knife. This recession is going to take time to work out, and there will be plenty of buying opportunities after the market stabilizes. Once the market turns, it will continue to be a stock picker’s market, as it has been for the past eight years. This is not a time for buying and holding a large cap index like the S&P 500.

Take a deep breath. Use this as an opportunity to learn. Reread the ODDS-ON Investing™ pages of this website. Read The Successful Investor by William J. O’Neil. Read Rich Shareowner, Poor Shareowner to understand how managers create or destroy value in a company, and refresh your understanding of the PEG ratio. Check out the Resources & Links pages of this website.

Reality Check: If a stock falls from $100 to $50, it has lost 50% of its value. To rise to $100 and break even, that stock must increase 100%. Hold to your sell disciplines.
If you are in cash, stay there. Cash remains King…Your cash should have resulted from: (1) the IBD market indicators signaling distribution days, and (2) the fact that good stocks have broken down through their 50-day moving average (sell signal) and (3) there have not been new stocks creating bases and breaking out (no real buys). So, even though there are some stocks have PEGs below 1 (indicating stock price below Enterprise Value), and growth rates above 20%, the fact that we do not have a buy signal on the market or individual stock chart patterns indicating that institutions are buying the low PEG stocks should have kept you from buying even the good values. This all dates back to the correction that began in October, 2007 and turned into a bear market in 2008.
What if you are a mutual fund investor ten or more years from retirement, who doesn’t actively follow the market or actively manage your mutual fund portfolio? With the market down 50% since October 2007, you are buying much lower than a year ago. I would continue to average in to well managed mutual funds discussed on the Mutual Funds Picks page of this website.
What if you are a mutual fund investor close to retirement and making monthly contributions? I would review whether I am in the right style of fund for me and then benchmark the performance of my fund(s) with similar funds listed on the Mutual Fund Picks page of this website. If there was a material difference and no material brokerage cost to switch, I would do so now. I would also build up about three years worth of post retirement expenses in cash (Remember to reduce your cash requirements by any cash retirement pay you will get such as social security.) If you are making monthly contributions to your plan, I would either put them in a money market fund to build up to cash target, or continue to average in.
If you are a mutual fund investor, with an asset allocation target, consider rebalancing your portfolio to your asset allocation target when the market signals an upturn, and review if your mutual funds are five star Morningstar funds in their categories.
Attend the Parkland College Rich Shareowner, Poor Shareowner™ Investor series.
Rebuild your stock/ETF watch list.
Stock Market history teaches: don’t get complacent. But on the other hand, this too shall pass.
The biggest risk right now is the turn that will come in interest rates…I wouldn’t be long bonds.