Rational Advisor

King Solomon was an early proponent of spreading one’s investments so the wisdom of diversification is as old as the Bible.

“Divide your portion to seven, or even to eight”, he said, “for you do not know what misfortune may occur on the Earth.”

sometimes investors forget this rule, but the investment markets often remind us that Solomon was right

Patience seems to be in short order these days.

Dispirited investors unmet expectations are leading them to the wrong conclusions about the sustainability of the market recovery, the positive outlook of most stocks, and the suitability of stocks within an investment portfolio.

In the worst cases, unrelenting changes are continually being made when all that’s really called for at this stage of the game is patience.

Would you pull the pitcher for walking a batter in the first inning? Woudl you rip a bulb out of th eground after a week, if it hadn’t bloomed? Would you stop exercising if you didn’t drop 15 pound following your first day at the gym?

I hope I needn’t go on with the oh-so-clever metaphors to make the point that patience is imperative to realizing, any susbtantial result. It’s no different with stocks.

Impatience is an understandable byproduct of the information age. Advertising messages tell us, “you need to have it now”,”faster is better”, and “why wait?”.

The internet was supposed to bring instantaneous access to market information and therby the “key to unlimited wealth”. But what its lead to is a lot of impatience, and excessive trading, rash decision making, market timing and undue stress.

The market is recovering, as is the economy, but full realization of significant returns is down the road.

It is often the case that the best time to buy stocks, is when pessimism prevails. Conversely, when optimism reigns supreme, markets tend to top.

“He who gathers money little by little makes it grow”

Yep, believe it or not, here it is the best deal of the century, by a complete house for $1

http://www.mytwodollars.com/2008/08/13/forclosure-hell-houses-selling-for-1/

“Better a Hundred Bin Ladens than one Adolf Hitler, when you look at things from the long term life looks Good” - Bill Bernstein, Financial author

Another topsy-turvy week ended with a fizzle

The indexes fell as concerns mounted about a slowing global economy and the effect on oil and metal stocks.

You have the whole strengthening (U.S.) currency which takes money away from commodities and you’ve got demand destruction because of the slowdown in the overall economies. This correction in commodity prices is decreasing inflation risks, which takes the interest rate risks away for investors and gives the economies and the financial system more time to recover and ultimately a stronger rebound in the economy when it comes rather than short circuiting it with inflation fears and rate hikes. That risk being reduced is significant.

The main direction of oil has been down since hitting a record of just over US $147 on July 11 on the belief that economies around the world are slowing down, if not in recession. Last week, both Germany and France reported declines in second-quarter gross domestic product, their first quarterly decreases in years.

Energy and materials stocks still account for 47 per cent of the value of the broad Canadian index, down from about 54 per cent a month ago. So, when the price of natural resources falls, the Toronto index has a hard time gaining.

Russia’s Alpha Bank said in a report last week that crude oil could fall below $100 within weeks and not reach the $200 price level that some have predicted for another five or 10 years. But some forecasters still expect a return to the $145 level later this year.

The high price of oil still affects things. Prices are still high enough to hurt economic growth, and thus corporate profits, over the next several months. That could affect other sectors of the market.

Also, while the price of oil expressed in U.S. dollars has been falling, the US dollar has risen 5 to 10 per cent relative to other currencies, including Canada’s. So the savings will not seem quite so great outside of the United States. This is why even though the price of Oil has come down, we have not seen a similar drop at the pumps.

An OPEC forecast of lower demand also put downward pressure on prices.

In its monthly oil report, the organization forecast world appetite for oil this year overall will fall by 30,000 barrels a day. While forecasting demand growing by a daily one million barrels a day this year, and another 900,000 barrels in 2009, the report noted that world demand growth next year will also be “the lowest since 2002,” with demand growth from the major industrialized countries actually declining.

They’re basically saying we could have an oil glut because demand is slowing. It’s obvious that high prices do slow down demand and the market works.

The OPEC report came two days after the U.S. Department of Energy highlighted the ongoing drop in U.S. demand for energy as Americans struggle with high costs for gasoline, food and other goods.

Oil’s steady decline has continued despite the simmering weeklong conflict between Russia and Georgia over two breakaway provinces.

Russia’s invasion of Georgia may have reasserted its military might, but its stock market is anything but strong. Russian stocks are now down 30% from their highs.

Only weeks ago, the conflict in Georgia would likely have sent oil prices soaring. But the market has largely ignored the fighting because traders have already priced in the geopolitical risk, analysts say. Crude’s month-long nose dive has also made it harder for bullish traders to spark a rally, despite a possible threat to oil installations.

There’s no guarantee this decline will continue, since oil’s price is driven by such a complex mix of factors — including shadowy, but massive flows of speculative money.

There are many economists who have long believed that prices well above US $100 a barrel were far higher than could be sustained by global supply and demand. It seems they had a point.

Forecasters at the National Bank of Canada expect oil to head toward equilibrium somewhere between US $75 and US $80 a barrel over the coming year, a level that should be sustainable over the long run, says assistant chief economist Stefane Marion.

A new forecast published this week by the Economist Intelligence Unit predicts that oil will fall as low as US $85 late next year, averaging US $91 in 2009.

At the Toronto-Dominion Bank, a June forecast was that oil ought to settle near US $100 next year.

It’s true that demand is still rising in fast-growing economies like those of China and India. But fuel subsidies that shielded consumers and businesses in those countries from the true cost of their behaviour have become so costly that they are being phased out. It’s not unreasonable to believe that these countries might respond over the coming months by tapering off their growth in oil consumption.

If this happens, it’s possible that oil will, indeed, drop below US$ 100 and stay there, at least for a while. This would be good for the global economy in some important ways.

First, it would reverse the drag on global economic growth brought by skyrocketing cost of oil.

That would be particularly welcome in the U.S., where consumers are already shell-shocked by a meltdown in housing prices and a rise in unemployment. And any relief of economic pressure in the U.S. can only help the manufacturers of Ontario and Quebec, now suffering from the slump in their key market.

Second, lower oil prices would reduce the inflationary pressure that’s preventing central banks from stimulating growth in slowing economies all over the industrialized world. If oil starts dampening inflation instead of fuelling it, interest rates can come down as much as necessary.

Gold bullion moved below the US $800 level. The December gold contract on the Nymex closed down $22.40 to US$792.10

The dramatic sell-off - gold has slashed more than $100 off its prices since Aug. 1 - There are a bunch of bearish factors that have dented the metal’s safe-haven appeal: The once-limping U.S. dollar is strengthening against its rivals, crude oil is easing from record levels and signs suggest the worst may be over for the flagging U.S. economy.

Where could gold end up, we’ll probably see close to $680 at some near point.

According to Canada Mortgage and Housing Corp, Housing starts are forecast to decline in both this year and next as high prices crimp demand.

Bob Dugan, the chief economist for CMHC said “Starts this year are expected to ease in seven of 10 provinces, with only Saskatchewan, Ontario and Newfound and Labrador forecast to see starts rise.”

The situation will change in 2009, however, with Manitoba expected to be the only province to see higher housing starts.

Canadian average home prices have fallen for the second month in a row, raising concern by economists that the housing market may have been caught in the undertow of a U.S.-based slowdown.

Average home prices nationally fell by a significant 3.6 per cent to $327,020, from year ago levels in July, according to figures released by the Canadian Real Estate Association yesterday. In June, prices fell by 0.4 per cent, the first time the market recorded a decrease in nearly a decade.

The bulk of the declines were in the western provinces, with cities such as Calgary down by 7.8 per cent and Edmonton by 5.3 per cent. Vancouver market saw a 1 per cent drop, all helping to bring the national average down.

A drop in prices is typically preceded by a fall in sales. In this case, sales volumes in cities such as Vancouver were down by a 44 per cent, and Calgary by 13 per cent.

Sales are also down in the Toronto market, by 12 per cent, for the seventh month in a row. But prices are narrowly hanging on in positive territory, up by 1.5 per cent in July, over the same time last year.

But there’s no guarantee that will last. The provincial economy isn’t exactly holding up too well, so we certainly can’t rule out a future price decrease in the Toronto market It’s not improbable since the trajectory is downward and the market is definitely past its prime.

So far, no one is saying the Canadian market is going the way of the U.S. market, where a credit crunch has seen median home prices year over year fall by 14 per cent, and where some hard-hit areas have seen values drop by 50 per cent.

So what’s an investor to do right now?

Investors should look at whether they are overweight in commodities, downsize over-performing sectors and have some cash, be defensive still because the correction in commodities is still ongoing.

Review whether their mutual funds and other investments have too much exposure to Energy and Gold, emerging markets such as China and India.

Interest rates seem to have the ability to come lower, this means having Bonds in the portfolio could be a good idea. Especially in Canadian oriented investments.

I know, the US market has declined by 20% from it’s all time high. And Oil prices are still too high, the housing market continues to fall, and autos are still in a real mess. Jobs have been lost almost every month this year. The Banks keep on writing down assets and need help. The airlines can’t even afford to give you peanuts, you have to buy everything on their, including the pillow. Israel is threatening to bomb Iran (sounds like a beach boys song “Bomb Bomb Bomb, Bomb Bomb Iran, Bomb Bomb Bomb, Bomb Bomb Iran, Oh yeaaa…”, Russia after Georgia, tomatoes are full of salmonella and 9 out of 10 people believe the world’s going to end (Only 9 out of 10???

Is it really the end of the world?

Although things look dire, most economic reports have consistently proven to be better than the fears.

No doubt, the economy is seeing a slowdown, but it’s not collapsing.

What has collapsed is Consumer confidence and investor sentiment. What we have is generalized fear!

The US consumer confidence index recently declined to one of it’s lowest levels ever recorded. Currently this index is about 10 percent “below” its worst reading during the entire 1982 recession – a recession widely recognized as the worst ever since the Great depression! By comparison, on 1982, annual real GDP growth was -2.7 percent (today it is +2.5 percent); the unemployment rate peaked at about 11 percent (today it is about 5.5 percent); job losses from the peak amounted to 2.8 million jobs or 3.2 percent of the job base (compared to only 0.4 million job losses in the US, or about 0.32 percent of the job base today); the core rate of inflation was above 10 percent (today it is around 2.3 percent); and the 10 year US Treasury yield was above 14 percent (today it is below 4 percent). Is today’s environment really 10 percent worse than, or even nearly as bad as, it was in 1982?

Even if economic news remains alarming, it’s how to see how this miserable confidence and sentiment could get much worse. And this may be the best news there is. Since current economic sentiment is already much worse than even a bad economy reality, financial markets may offer greater upside and less risk than widely perceived.

Non-Financial companies continue to enjoy positive profit growth (even though it is lower than some analysts trumped up expectations) and healthy balance sheets, what is lacking is not the ability to hire, but rather the confidence! Corporate confidence has remained cautious throughout this recovery causing most to avoid “over-hiring”. Consequently, the job losses this year seem mainly due to “suspension” of new hires rather than the more common “surge in layoffs”. However, the slowdown in job creation, like much of the rest of the economy remains highly concentrated among the housing and auto industries. Should job conditions show signs of stabilization, rather than further erosion, the entire outlook for economic growth and thereby confidence could improve quickly.

Oil price pressure has been a major negative on inflation. However, many oil crises have been seen since the late 1990s, which were supposed to send the consumer into recession? Somehow the consumer survived.

Non-energy prices remain remarkably tame. In past oil crises, core inflation often surged, combining with energy prices to destroy household purchasing power. Today, the consumer is still enjoying “deflationary electronics pricing” falling apparel prices and lower new sticker auto prices!

Macroeconomic policies have been persistently and aggressively accommodative since this crisis began almost a year ago? Money supply growth has accelerated sharply, both short-term and long term interest rates have dropped, the yield curve which was inverted is now positively sloped. Remember economic policies typically have about a one year lag time and thus these measures have not yet begun to positively impact economic activity. But they soon will!

Since early this year, we think the stock market has been in a bottoming mode. Similar to the triple stock market bottom after the dot-com bust when the S&P 500 challenged the 800 level three times (July and October 2002, and again in March 2003).

The stock market has held about at previous lows despite an impressive set of negative forces:
- a surge in oil prices
- a technical test of a bear market 20 percent sell-off
- continued mortgage and banking fears
- continued fears of the auto sectors collapse
- geopolitical scares such as Iran, and Russia

Considering these forces, the stock market has perhaps held up better than widely perceived. At minimum this is a very significant “third test” of the crisis lows, and should the market hold and rally from these levels, it may well indicate that the worst is over.

The world seems a scary place – ongoing wars, imminent was risk in Iran, still high oil prices, collapsing stock markets, falling house prices, bank write downs, no jobs, lower profits and a widespread recession belief

What idiot would be investing in this market?

And yet, this is precisely why you should be in the market. Sellers know it is going to be bad and have already sold. They are sitting on the sidelines with their “dry buying powder” waiting for the storm. However, if the sun unexpectedly comes out, a lot of the buying power will need to find its way back into the stock market!

Financials are extremely cheap relative to energy stocks. Monetary officials have been attempting to help financial fundamentals and pessimism is indeed very high! S&P energy stocks are more highly priced relative to S&P financials than at any time since at least 1965! This implies financials are cheaper today compared to energy stocks than during the height of OPEC crisis that was combined with the world debt crisis, or during the banking S&L crisis of the early 1990s!

The pain investors have felt since the October market top - bad as it has been - still isn’t as awful as the average 30% bear market drop nor has it gone on as long. And it pales in comparison with some of the blackest periods of market history, like Oct 19, 1987 or, the 2001-2002 bear stretch.

The average bear market since 1929 has been about 18 months. Since 1956, however the average duration has been about 14 months. The average decline since 1929 has been 38.2% versus 31.8% since 1956. It has taken the S&P 500 about 5.2 years on average to recover from its bear market highs since 1929. since 1956 the average recovery time from a bear market comes to about 2.8 years.

Although speculators need to figure out the exact hour when the stock market will bottom, fortunately for investors this question is not that important. Rather investors need to consider how they will feel sometime over the next 24 to 36 months if they buy today.

Although past perfromance seldom guarantees future results, however, one thing willr emain true - investors who are greedy when others are fearful will reap benefits over the next few years.

Everyone take a deep breath. Now, exhale!

I’d like to thank my good friends Lisa and Jamie for sending this link

I think you’ll find it interesting

attached is the link followed by the summary from me

http://www.bloomberg.com/apps/news?pid=email_en&refer=home&sid=asNu6HYGu7eI

Value Stock Losers Poised to be Winners

- Value investors such as Bill Miller, Martin Whitman and David Dreman, who have experienced tough markets are poised once again to trounce the stock market.

- If history is any guide, the value investors’ emphasis on shares trading at low prices relative to cash flow and earnings will provide returns superior to the holdings of so-called growth managers.

- Growth investing, beat value strategies for the first time this decade in 2007 and by 15.5 percentage points so far this year, the widest margin since 1980

- The five prior times since 1952 that growth beat value two years in a row, the Value group recovered and won by 17 percentage points annually on average for seven years.

- Cheap stocks are becoming more attractive because of tumbling commodity shares, which had led the five-year bull market that ended in October,

- “This is one of the worst periods I’ve seen for value,” said Dreman, 72, who oversees about $15 billion as chairman of Dreman Value Management LLC in Jersey City, New Jersey. “The more it underperforms, the more it normally snaps back. The probabilities are very strong we’ll have a major upswing.”

Rational

So, who is keeping the analysts accountable?

On March 17, Goldman Sachs analyst Arjun Murti put himself and his firm on the front page of financial papers around the world by forecasting oil prices would hit U.S. $200/barrel.

Yep, that venerable firm came out with the target price of $200 a barrel, and at that time it l;oked like as if they could sway the public opinion to get it. They were creating the hype, because guess who their best clients were - hedge funds and speculators. Those guys and gals that spend a lot of money on commissions to the brokers. So what would the brokerage firm say “Oil is going higher”, meaning Buy more. And the financial papers love chasinhg and fueling crazy stories, pumped it up

He was the first of many to make this call and in his defense oil prices are higher today than when he made his prediction and he didn’t stale-date his forecast, so oil might still end up hitting his mark. Certainly though, anyone who loaded up on energy stocks a month ago will have a few questions for this guy. Try phoning them, you probably won’t get a hold of them.

OPEC saw the speed with which people started embracing vehicles like the Toyota Prius and manufacturers like Nissan/Renault, GM and Ford started planning the alternate fuel vehicles. If the prices stayed that high the demand would crash. The OPEC chief himself came out last week and said the price should be around 80 bucks. Two weeks before the same chap was talking about 200 bucks by the end of the year.

The pyramid comes crashing down. But don’t fret in the next few weeks we’ll hear from

- The Kurdish rebels
- The broken pipeline
- War status in Georgia - Russia
- The Iranaphobia coalition
- The Olympics is over committee, China will increase demand - For you guys, China is going to convert coal to oil in 2009, removing that demand from the world oil stream. China, like Brazil and the Scandanavian countries without oil reserves, will have reduced its dependency on foreign oil and the drain of its currency to foreign interests.
- Our friend Jeffrey Rubin from CIBC that was calling for $200. His silence is deafening…

We get so caught up in our world, we think this is big, and that it all revolves around us.

Just to get a good perspective on how Earth fits into the solar system take a look at these pics on the size of the earth, relative to planets and stars.

We are but a mere spec in the universe.

go to the link below

http://fwdemails.com/2008/08/04/comparing-sizes-planetsstars/

Rational