General Quarters Still In Effect
About a year ago, I sounded the alarm just days after the Dow Jones Industrial Average made a new all-time high. I entitled the newsletter “Man Your Battle Stations.” In that newsletter, I envisioned (actually, all anyone can do is make an educated guess at best) a very sharp sell-off and suggested holding no equities except those related to precious metals. (Since then, mining shares have been killed, proving I put my pants on one leg at a time, too, and those speculators who only buy those stocks are likely not sending me anything for Christmas). But, if you followed my advice back then, the lion’s share of your capital would have been in cash, so the metals hit should not have been as devastating (unless you’re a gold bug, hello).
Widespread losses of anywhere from 25 to 50% or more are not uncommon. Certain sectors like the financials, housing and the like have been hammered and have even seen the wipe out of a company’s entire equity. While that is not likely to continue at the same pace, it is still far too early to go back into the water. Investors should remain on the sidelines for the most part and only peek out of their fox holes as we get closer to 10,000 on the DJIA.
Calling All Buyers
There are enough fundamental problems in the stock market to last for quite a while, but one that hardly gets any play these days is the great wealth transfer. Nearly 80 million Baby Boomers have begun reaching retirement age and these folks were going to sell their equities and move into fixed income or the like creating a bonanza of business opportunities (at least that’s what was hailed within the financial services industry). Also, these folks had financial plans (my readers already know why I don’t believe traditional financial planning doesn’t work, and this is living proof) that had assumed rates of returns in the 8 to 10% range. Not only have these Baby Boomers not seen such a return in years, but they are now facing a two-headed monster: falling equity prices and far lower fixed income rates of return. In addition, those in the work force under age 65 are in it up to their necks, trying hard to stay afloat, and are in no position (don’t have the disposable income) to take these shares off the Boomers’ hands even at today’s prices. This will be another weight on the stock market for a considerable period ahead.
Points of Interest
- The FDIC problem list of banks spiked 30% in the past quarter. Banks remain off limits still in my book (but can become buying targets down the road). Unless many white knights come riding to the rescue, banks in general will likely have to dump assets to maintain satisfactory capital levels for regulators and creditors. Commercial banks are likely reluctant players as this unfolds. Keep in mind that on average, commercial banks attempt to hold about $1 of capital for every $10 of assets they own (investment banks are about $20). Another big loss this quarter or next could see large scale fire sales once again.
- On September 3, 2008, Boston Fed president Eric Rosengren said the U.S. economy is facing strong headwinds from a developing credit crunch and interest rates need to be lowered to help. TELL ME SOMETHING WE DON’T ALREADY KNOW! Many Wall Street regulars are saying not to worry as this downturn is similar to 2001 and that wasn’t bad. They argue the treatment of the current malaise is almost identical to 2001: aggressive Federal Reserve cuts and tax rebates. Unfortunately, it’s not even close. In 2001, it was an implosion in the technology sector and a slump in business investment that dragged the economy. However, consumers continued to spend without abatement and the dramatic drop in interest rates fueled the housing bubble. This time around, businesses have held up grudgingly, but a plunging housing market (the Mortgage Bankers Association recently reported that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June) and a consumer who has finally started to sober up are some of the main culprits. These are some of the many reasons why I can’t envision strong economic growth any time soon.
- Look for a weaker second half for 2008. In the first half, foreign trade accounted for more than 90% of the growth. I have no doubt it will be much smaller this half since Great Britian has ground to a halt while the Euro zone actually contracted as did Japan. Income growth is going to be a new negative. The government continues to lower its estimates of wage and salary income and the big spike up in energy prices earlier this half won’t help.
- I suggest you view this interview where guest Jim Rogers, CEO of Rogers Holdings, tells a CNBC reporter what should happen to most of them (get another job).
While the speculative excess is being deflated out of the price, don’t think you’ll ever be pulling in for gas and buy it for under $2 again. The “Peak Oil” theory is real and energy costs will remain a significant factor and drag on the economy for years. There are nice commercials running now about all of the alternative energy that exists, but it will be years before they become a way of life. I suspect oil can trade as low as $75, but either side of $100 is likely to become the average for the next year or two.
The next crisis is the oil of the 21st century: water. Goldman Sachs estimates that global water consumption is doubling every 20 years and this growth is unsustainable. Climate change is altering the patterns of fresh water causing frequent and severe droughts.
U.S. Dollar –
Nothing goes in a straight line. The U.S. Dollar was tremendously oversold and is enjoying a bear market rally. Only on a close above 85 basis the U.S. Dollar Index would I rethink my continuing bearish stance.
Precious and Base Metals –
I continue to favor precious over base and while both have retreated, base metals have fared worse. I continue to believe gold is the real money for the 21st century and think by spring 2009 we can be back above $1,000 (if not sooner.)
Mining and Exploration Shares –
It’s been a near disaster and I’ve been on the wrong side since May 2006. It’s just so hard to look at a gold price of $700, $800 or $900 and not like juniors. There’s nothing useful I can add, as I’ve been crushed looking for a bottom for months. The only thing I can do now when I think of the juniors is, “Our Father, who art in Heaven……….”
For direct answers to your market questions, please email Peter@Grandich.com with “Interview Request” in the subject line, or call Peter at 732-642-3992.
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