Rational Advisor

Invesco Trimark’s Judith Adams said recently: Judith Adams, manager of Trimark International Companies Fund.

“Our job is to take advantage of the fear and greed in the markets. Traditionally, these periods of market extremes provide opportunity for profit taking in periods of greed, and buying in periods of fear. We’re carefully looking at companies getting unduly penalized and, where appropriate, we’re taking advantage of the fear. We’re not panicking”

The markets recently have been focusing on large drops, we are seeing large number of days with indices going down in large increments, and a lot of panic is created by media and focus is attached to the large number of sellers.

Irrational investors jump on the bandwagon, and sell setting up further losses, without understanding what they are selling. Instead, just wanting to not hold onto to good businesses in case the price falls further.

“We don’t want to see further losses” is the constant message. we’ve heard this at every drop in the markets. Only to be followed a year or so later by “Why didn’t I add to the portfolio when prices were lower”.

What you have to realize is that these “stocks” are not just numbers on a screen, they are not just pieces of paper, but real businesses, with real profits, and real revenues providing real jobs to you and me. These are businesses that feed us, and provide us medicines to keep our ailments away.

And these are the businesses that are being sold of, cheaply.

Just remember that whenever someone is selling these businesses, someone also has to be buying. You can’t sell to nobody, you have to sell to someone. And usually its very smart investors, who have patience, and understand that they are buying businesses that will continue to provide future income and consistent income for a very very long time. And they are getting that income flow at a very cheap price.

Yes, someone is buying these investments that people are dumping. So, I care to focus on why they are buying these businesses, rather than focus on why someone wants to dump a sound business.

Just around my home there are new malls being opened, and in each mall, they have a bank, a grocery store and other businesses. These are long term commitments and leases that these businesses have to pay. And they’ll attract capital and investments from the communities that are situated in.

As irrational investors redeem their positions in businesses to add to GICs and cash. Realize that they have to purchase these GICs and cash accounts from - you guessed it banks! And these banks charge you a fee for it. Yes, GIC’s do have a fee, it’s called the spread. So, the more people that move to GICS and cash, the more revenues these banks make.

I prefer to understand what would make a sound investor buy, when all else around them are selling. What do they see.

Here are some of the things they have said to me

- Recessions and bad markets don’t last, but great businesses do.
- We are buying a dollar for sixty cents.
- The masses are the worst investors, that’s why the masses are not the wealthy, so we prefer not to follow the masses.
- We don’t know when it will end, but it will, and it has everytime.
- It may fall further, but that just means that something that is sound and strong is cheaper.
- Big companies will eat smaller weaker companies, they will take their customers and make them theirs. They will improve their processes, they will be stronger businesses in the future for going through today’s events.
- Governments will do anything to keep the economy and jobs around, after all they want to collect taxes. If everyone’s unemployed and businesses go belly up - who’ll pay the taxes.
- We all need food and consumer staples, we all need health care, and a roof over our head, and heat - doesn’t matter what the market does -we all need this stuff.
- If you think the world’s going to end - stop living now! gather all your canned foods, get into a shelter underground. Just let us that believe the world will survive stay in peace - it’ll take more than sub-prime borrowing to kill the world.
- I’m not buying for the next week, next month, I’m buying for the next three years.
- The concensus is mostly wrong, currently they think the worst will happen, and the big surprise will be that things aren’t that bad!
- An unprecedented fall in the market, leads to an unprecedented recovery - when we all wake up and realize that the world is still going on.
- We prefer to see the glass half full, becasue businesses will gather revenues to fill their glasses, and continue to deliver their goods to us.

So, As the masses were selling, who was buying - We were, and we’ll continue to add to sound investments with great balance sheets, strong franchises, good cash flow and dividends.

You can be an pessimist or an optimist. I prefer to see the world for the greatness that is out there.

I’ll see you on the other side of the recovery. Which will definately happen.

- Finally has owned up to, it’s their fault - Alan Greenspan said he made a mistake - unfortunately, we can’t take him to Jail.

- The Finance Minister fo Canada Flaherty, plans to guarantee bank lending - The Canadian Lenders Assurance Facility. Now, if someone goes belly up, the banks don’t have to worry, as the Government will provide them the capital. A very sweet deal for the banks. However, there will be some costs attached

- We have all the workings of a selling climax going on. those people that were over-leveraged, those Hedge funds that were doing nutzo stuff are now forced to sell out, as they get a doubly whammy of margin call and investors asking for their investments back - A forced liquidation of a leveraged trade. We’ll probably see half of the hedge funds out there close their doors forever, never to come back again and do their dirty deeds.

- Once the forced sales are over, we get to set the new level for improvement. There is lots of liquidity credit out there, available to good businesses. The actions of the central bankers should be able to heal the credit and bond markets.

- what’s interesting is that we can now see some corporate bonds giving equity types of returns in their yields. This was similar to 1981/82 and in 1974. And these were very bullish signs.

HOW MUCH LONGER TO GO?

- What’s interesting is that last year, people were overly optimistic (and they were wrong), and now they are overly pessimistic…

- Dow Jones in its entire existence has fallen by 40% ten times, it has slid by 50% only once 1929 to 1932. Each time it has recovered.

- S&P 500 is trading 25% below its 50 day moving average, since 1928 that has happened only 5 times, including 1987, each was followed by a decent rally.

- since 1928, there have been four bear markets that have coincided with a US election, 1932, 1948, 1956 and 2000 - each was followed by a bull market.

- Hedge Funds have to unwind their leverage, they cannot sit tight, they have to pay their margin debts. Some 10,000 Hedge Funds currently exist around the world, and they have control over $2 Trillion. We could end up with only half of those Hedge funds remaining.

- We could see the unwinding slowing very soon. For many Hedge Funds Nov 15th is a critical day. Because that’s when their investors have to notify them for redemptions before the end of the year. Hedge Funds will have to sell to make sure they have that much liquidity. Because this has been a crappy year fro them (and many others), you can expect their unit holders to say “Uncle”. They will have to redeem. But once, that’s over, they don’t have too many assets or may be out of business so we can see a slowdown in selling due to these “Master of the Universe”! Remember they are not getting much buyers or investors of their funds - No capital, no hedge fund!

- Remember even a recession ends!

- Average US recession lasts about 10 months, and stocks hit a bottom about 3 months before the end of the recession/ According to many economists, the US entered a recession on July 1 (Canada hasn’t entered one yet). So according to the average, the end should be around April 2009, which means the bottom would be somewhere around March (RRSP season).

- The only two recessions that went beyond 10 months, lasted 16 months and they were 1973 (because of the Oil embargo), and 1981 (because of a sharp increase in interest rates to stave of inflation). Both the situations of Oil Embargo and high inflation are not here. Still, again the markets bottomed 3 months before the end of those recessions.

- Who thought Oil could drop by over 50% in three months - practically nobody! And yet that surprise did happen, even though the consensus was for it to go to $200 a barrel (some economists at a certain Canadian bank, starting with a C and ending with a C, is still convinced it will be $200 and above. Well, the drop was as surprise. The masses do not factor in surprises. the surprise now, would be, the opposite of what the consensus is - and the consensus is for a deep depression, a miserable market. The surprise is it could recover very quickly, all we need is some good consolidation news, mergers and acquisitions, Big guys taking out the small guys.

- Lastly, US election is coming, and Bush will be out! Probably one of the best things for a bull market - Just remember what it did after his Dad left!

WHERE SHOULD WE BE THINKING ABOUT INVESTING

- Canada looks pretty good, no federal deficit, no trade deficit, low inflation, low unemployment, low subprime exposure, strong banking system, strong (if unexciting) political system.

- Cash rich companies, the dividend giving type

- Takeover targets are good. Expect consolidation, there’s a lot of cash that needs to be spent to grow bottom lines in companies. - Barclays took over Lehman Bros investment arm, Warren Buffett spent money on GE and Goldman, Wells Fargo bought Wachovia - and none of them touched government funding. Watch for more to come

- Watch for companies buying back their own shares, because they are cheaper than buying a competitor.

- Be careful of REITS, Real Estate etc - in the last month US REITS have fallen about 45%. One of the top Global Real Estate Funds in canada is the United Global Real Esate Fund, it’s down 23% in 30 days! Real Estate recovery is still quite far away. in the Savings and Loan crisis, even though legislation went through to save teh banks and the real esate, US real Estate did not really recover until 10 year later, for 9 years it was basically flat. 1991 to 2000. we’re on the other side of the Real Esate curve, and it could take a while for sanity to return.

- Bonds are always good! especially Corporates.

“If you wait for the robins, spring will be over,” - Waren Buffett, NYT Oct 2008

When the stock market goes up one day, and then goes down for the next five, then up again, and then down again, in no discernible pattern, that’s what you call stock market volatility. , and it’s usage causes people to panic and refrain from sticking to their well thought out plans. They want to “wait” till “IT “recovers.

Most first time investors perceive the stock market to be more volatile because of its typical sharp, sudden price swings. That perception is often reinforced by a simple but often overlooked mathematical relationship. The higher the Dow Jones Industrial Average (DJIA)is, the same percentage change in the index today reflects a much greater move in terms of points. For example, with the DJIA at 800, a 2% change reflects a move of only sixteen points (not very newsworthy). But with the Dow at around 11,000, the same percentage change represents 220 points, and the media focuses on the 220 point drop, not on the percentage.

Irrational Investors due to their emotions, get caught up in these swings and panic waiting for things to improve before they will invest. Always waiting as if there will be some green signal that identifies the bottom of a market.

And in so doing, they miss out on great opportunities. Recently Warren Buffett in a note in the New York Times said “If you wait for the robins, spring will be over,” He’s trying to say that if you’re looking for signs of improvement to invest, it may be too late. “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.” That’s the crux of his investing strategy. To take advantage of bad news and fright in the markets. And this is just the opposite of what our emotions want us to do. When we feel fright, our caveman emotions want us to run away from it. When in fact, it’s better to understand the reasoning and then to take advantage of it.

In our discussions with sound and rational investment managers there are three investing principles that came to mind:

1. Ignore the stock market. The stock market is just providing a price on businesses based on the mass psychology of the investing public, and usually is not a good indicator in the short term of the businesses true value. If you plan on having an investment program for a number of years, what happens in the market on a day-to-day basis is pretty much irrelevant.

2. Don’t worry about the economy. Stop discussing and debating whether the economy is poised for growth, or tilting toward a recession. Wise investors like Buffett and David Dreman dedicate almost no time or energy to analyzing the economy. Instead they focus on the underlying businesses that they are investing in and their revenue and cash flow.

3. Most good rational investment managers are buying businesses, and not the stock. They look for consistent operating history and favorable long-term prospects. What about its management? Is it rational, candid with shareholders, and able to avoid the herd mentality? Look at the financials, focusing on return on equity, not on earnings per share. These managers seeks out companies that generate cash in excess of their needs and companies with high profit margins, which reflect not only a strong business but a management with a tenacious spirit for controlling costs. Other financials to look at: retained earnings, estimated cash flows, and the value of a business. Once they have determined the value of a business, the next step is to look at the stock price. Most of these managers rule is to buy the business only when the stock price is at a significant discount to its value. Note that only at this final step do they look at the stock’s price.

Savvy investors don’t follow the herd: they have a game plan. And that’s exactly why they’re successful.

Stock market volatility will always be a part of investing, but a focused strategy will help weather the more stressful periods when the market is more volatile, since you’ll be focusing on the bigger picture. Success in the market does not depend on predicting the future. Volatility is more dependent on mass hysteria—fear and greed—than on underlying economic or financial events. Those are not reliable emotions on which to base long-term investment decisions.

And remember, don’t wait for the Robins to indicate that Spring has arrived.

“The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”- Warren Buffett, 1990 Chairman’s Letter to Shareholders

Just another normal week in the equity markets – now that the new normal features wild and sudden price swings and more than the usual dollop of odd trading behaviour. That’s what happens when hope mingles with panic and bargain chasers run headlong into fleeing mutual fund investors and hedge funds are hit by a wave of margin calls and withdrawals ($31-billion U.S. alone in the third quarter).

Here’s the drama check: There was historic intervention as governments injected billions into banks around the globe. There were violent flip-flops, The VIX volatility index wailed to a recent record above 81.

Crude has plummeted 51% from the all-time high it set in July.

The months-long oil collapse has largely been triggered by the demise of investment banks, said Fadel Gheit, a senior oil analyst with Oppenheimer & Co. Banks have drastically curtailed their highly-leveraged businesses, such as commodities trading, due to “the tightening credit, the diminishing appetite for risk and tougher government regulation,” he said.

Reduced speculative activity could keep oil prices closer in line with supply and demand for months to come. When the global economy stabilizes, “there’ll be a base for oil prices, but definitely lower than the current level,” Mr. Gheit said.

To be sure, these global government work outs take time and none of the emergency funding that was talked about will find its way into the financial system for a few weeks yet.

The question, of course, is whether a market that has already surrendered all its bull-market gains has sufficiently discounted the coming gloom. Here, it helps that investor sentiment is shot. The expectations bar is set pretty low when your benchmark is the Great Depression. In fact, a Merrill Lynch survey of 172 global money managers conducted just before Oct. 9 showed that 69% believed the world is in recession, up from 24% in August. A record 87% see company margins slipping and 43% now say stocks are undervalued — the highest in more than a decade.

It also helps that banks last week were charging marginally less to lend to each other, and a world suddenly on “Libor watch” makes credit shocks less likely.

In recoveries from past market plunges, trading has remained volatile even after the major indexes reached their lows, so it is widely expected that Wall Street will ratchet higher and lower for some time.

Despite the dizzying swings, the market has started building a base, which is the first step on the road to a genuine recovery. And if history is any guide, this will occur months before the economy gets up off its sickbed.

Similar sentiments were evident in a column in last Friday’s New York Times by renowned investor Warren Buffett, who recommended buying U.S. stocks. The billionaire said that his entire personal fortune may soon be invested in the domestic market in anticipation of an economic recovery.

“If you wait for the robins, spring will be over,” wrote Mr. Buffett. “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”

In his article, Buffett tells the world why he is buying U.S. stocks now. A simple rule dictates his buying: Be fearful when others are greedy and be greedy when others are fearful. When Buffett speaks, we should all probably listen.

Warren Buffett has been moving his personal investments from safe U.S. treasury bonds into U.S. stocks, he wrote in an opinion piece in Friday’s New York Times.

“If prices keep looking attractive, my non-Berkshire net worth will soon be 100 per cent in United States equities,” he wrote.

“To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions,” he wrote. “But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records five, 10 and 20 years from now.”

“Let me be clear on one point: I can’t predict the short-term movements of the stock market,” he wrote. “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

Warren Buffett and other savvy investors are, as of right now, positioning themselves to take advantage of the current fire sale in the stock market. They’re certainly analyzing financial data, looking for sound businesses whose stocks are battered by the current bear market but whose businesses are sound, strong and profitable, making them excellent candidates for strong long-term growth.

Let’s start off with the recent quotes and what they mean

Recent wise words (2008)

1. “A crisis always feels bottomless, and it usually isn’t,” - John Dorfman, US Value Manager - Bloomberg Oct, 2008

John Dorfman, here is saying that almost always crisis, when you are going through them feel like they have no end. “This sub-prime thing is going to end capitalism as we know it”, “Banks will fail and never come back”, “it’s the end of the US”. Almost through every crisis we get similar views, and yet the world tends to manage through it quite successfully. When you look at any chart of the markets, you’ll notice that the crisis are mere blips in the uptrend.. These blips look like major crevices, and scare the bee-jeezus out of investors. However every successful investor has taken advantage of these dips to add to their long term plans.

2. “Be fearful when others are greedy and be greedy when others are fearful.” - Warren Buffett, NYT Oct 2008

This is the crux of Warren Buffett’s investment program. And in this he’s really taking advantage of mass stupidity, and lemming like behaviour. Most people are not wealthy, and this is because they follow what “most” people do - which is read the paper and listen to the news on TV. The rich tend to do the opposite of the masses, this is why they are rich. if they did what the masses did, they would be like the masses. So, when the masses are fearful like now, this is when rational heads like Warren Buffett, David Dreman and others get into action. Yet, when the masses are excited like at the peaks is when these investors shy away.

3. “If you wait for the robins, spring will be over,” - Warren Buffett, NYT Oct 2008

Another great quote from Warren about not trying to time when the crisis is over. Too many times we look for some sort of magic signal, some green light that it’s okay to invest. there is no starting flag to say when the markets will recover. Its best to not try to time it.

4. “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.” - Warren Buffett, NYT Oct 2008

This is really point number 2, explained better. By taking advantage of people’s fears about certain companies and the investment arena, rational investors get to purchase those investments at a reduced price.

5. “The most common cause of low prices is pessimism – sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”- Warren Buffett, 1990 Chairman’s Letter to Shareholders

Similar to points 2 and 4. But this was written in 1990, at the height of the S&L crisis. When investors thought it was the end of the banking world, when Orange Country in the US declared near bankruptcy. The point discusses that sometimes the pessimism is pervasive - everywhere, and almost everyo9ne is shouting doom, the end is nigh. And yet that’s the exact environment that allows attractive purchases. It’s Optimism by the masses that are the enemy of rational investors, not pessimism by the masses - that’s our friend.

Not so recent wise words (551 BC - 479 BC)

Confucius says -

1. Everything has its beauty but not everyone sees it.

Some people because of all the turmoil in the markets are not seeing the beauty in the attractive prices around us. They are not seeing the purchase of continuous revenue streams at cheaper prices. There are many businesses that even in these tougher times have continued to pay out their dividends, that have continued to increase their revenues - and we get to purchase these revenues at cheaper prices. And I’m glad that not everyone can see the beauty, because if they did, we would not get such attractive prices.

2. Our greatest glory is not in never falling, but in getting up every time we do.

We make a mistake if we don’t learn from our mistakes. We make a mistake when we refuse to do something just because we fell from it. We are bound to make mistakes, its human nature. And the most awful thing you can do is refuse to learn from it, and instead blame the whole system. The markets have come down, and many have panicked out of it, running to the safe harbor of cash. But, cash won’t help them retire at above inflation rate returns. Only businesses that grow their revenues and provided dividends at a greater than inflation rate can do that. So, pick yourself up, and return to the battle field.

3. The superior man, when resting in safety, does not forget that danger may come. When in a state of security he does not forget the possibility of ruin. When all is orderly, he does not forget that disorder may come. Thus his person is not endangered, and his States and all their clans are preserved.

It’s always wise to prepare for discomfort, when you feel the most comfort. What hurts is the surprises, and the fact that we did not realize it. this is what causes is to flee sound investments. In actuality, surprises will always happen, and sometimes the magnitude will be greater than what you expected. However, preparing for these and taking advantage fo them is probably our greatest tool to achieving financial success. Be prepared for disorder, and realize it is a normal and par for the course.

4. Study the past if you would define the future.

Probably the most important quote - it doesn’t mean look to past returns to predict future results. What it means is understand past risks. Past Risks have been very good predictors of future risks. So, when picking an investment get an idea of it’s volatility by studying its past volatility. Do not look at the past return as if it will predict the future return.

Rational

What can I say, it’s the FART Tax

now, they’re talking about taxing, the gases that Farm animals produce

read it for yourself

http://news.bbc.co.uk/1/hi/programmes/from_our_own_correspondent/7646857.stm

Personally, I think there’s going to be a serious shortage of cork in New Zealand. Forget about Oil, Gold, markets etc - Buy Cork Futures!

what are they going to tax next!

Panic selling is what we are seeing. Markets have seen their steepest ever falls as investors dismiss moves by governments and central banks to calm things. It’s all about Psychology over reality, and currently psychology and emotions (Signmund Freud) is triumphing over reality (Benjamin Graham)

The Chicago Board Options Exchange volatility index, or VIX, shot above 80 – another record high in what has been a series of record-breaking days and a sure sign that the level of fear among investors is at extreme levels.

The growing flight from risk has also pushed commodities sharply lower.

The straw that broke the markets back recently has been the liquidation of mutual fund holdings by retail investors. This has forced the hands of savvy managers to make selldecisions, when in fact they want to purchase.

The falls came in spite of a co-ordinated rate cut by six central banks, the unveiling of a never before seenbail-out plan for UK banks, and a move by the US Federal Reserve to lend directly to borrowers in the commercial paper market.

The U.S. is weighing two dramatic steps to repair ailing financial markets, according to the Wall Street Journal: guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits. If the two moves come to fruition they would mark the government’s most extensive intervention yet in the financial system.

Another thing that’s affecting the markets is computerized program trading. Because computerized program trading is based on algorithms, and they all use the same or similar algorithms, they magnify market moves by an order of magnitude. This makes the markets very volatile.

Traders have also attached significance to the fact that history’s previous great stock market crashes had all happened in October.

A Crash Course in History

Please note, I am using the market indices to explain the volatility and notyour portfolios.

The current selloff is very similar to the 1987 drop.

What the market has done over the past few weeks duplicates what happened in the one-day 1987 crash, when the Dow Jones industrial average fell a record 23%. In the past ten trading days, Standard & Poor’s 500-stock index has fallen about 20%. Could past be prologue?

The S&P has fallen about 42% from its record high exactly 12 months earlier. Since 1926, the average bear market has seen a retreat of 38%. But what’s really remarkable this time is how fast much of the damage has occurred. The S&P closed September 26 at a 22% loss from its peak. That was miserable. But what followed was much worse. Since then, the S&P has lost almost as much as it lost over the entire previous year.

In 1987, the Dow peaked on August 25 at 2,722. But the Dow was still at 2,508 on Tuesday, October 13 — a loss of just 8% — when the slide began in earnest. The Dow fell 95 points on Wednesday, which was almost 4%. Thursday, it fell another 58 points, and Friday it lost 108 points.

The big drop came Monday, October 19. It was a 508-point crash caused mainly by leveraged derivatives-portfolio insurance-(computer trading) which, ironically, had promised to insulate big investors from the risk of a sharply falling market. As Wall Street fell, portfolio insurance triggered selling in stock futures in Chicago, setting up a feedback loop.

In other words, the 1987 crash was, like the current crash, caused by financial instruments. The exotic mortgage securities billed as low-risk by Wall Street’s geeky rocket scientists are far more complex, but ultimately they had the same kind of nonsensical stupid thinking behind them: They basically offered a way to leverage up to great returns with no apparent risk.

On October 20, 1987, the financial markets nearly collapsed. Stocks simply didn’t open for trading when the market did. No one was willing to buy. Ultimately, however, the market rallied, and October 19 turned out to mark the bottom of that bear market. There wasn’t even a recession, even though everyone and their uncle said there would be one. In one and a half years, the market reached a new high — and kept rising for another ten years. (The more broadly based Standard & Poor’s 500-stock index hit its bear-market bottom on December 4.)

Given the depth of panic in the stock markets, I think we may well be near the bottom. Of course, I can’t be sure. Indeed, I thought it was time to buy a week ago. But the wisest hands I know among fund managers are all finding terrific bargains among the highest-quality stocks.

What we are seeing is classic market panic.

Here’s how we expect the situation to unfold. In a few weeks, Treasury’s plan will start up. Uncle Sam will begin buying up banks’ toxic debt, getting it off their books, sequestering it for resale later. If the reverse auctions planned aren’t clearing away enough of the rubble to get banks lending again, Treasury can and will step in even more directly — taking the route the U.K. plans — buying banks’ shares to provide the liquidity needed to keep wheels turning.

By year-end, credit markets should be functioning better. Commercial paper will be moving again. Long-term lending — corporate bonds, and so forth — will start picking up. It will take more months to return to normal, however. Wide interest rate spreads will linger well into 2009. Typically 50 basis points, the gap between T-bill rates and those for three-month euro dollar loans, for example, is now about 10 times that much and getting wider. That won’t reverse. And corporate bond issuances and bank lending won’t return to more normal levels until confidence in the credit markets is restored.

Clearly, the markets are not going to go to zero - even though there seem to be a lot of smart people that feel that way. At some point, investors will have to recognize that there are stocks out there that have been unfairly punished and are dirt-cheap bargains.

In fact, it’s harder and harder by the day to argue that the market as a whole is overvalued. The S&P 500 is trading at just 9.5 times 2009 earnings estimates.

Once fear begins to subside, he thinks investors will flock back to big companies with relatively healthy businesses that look attractive.

Closer to the Bottom

There’s reason to believe that the stock-market averages will hit bottom sometime in the next few months, even if the economy is still in the middle of a recession.

The lesson of history is this: The average U.S. recession since the late 1940s has lasted 10-12 months, and stocks typically hit their low point about three months before the recession ends. So, if the U.S. entered a recession on July 1, as many economists now suggest, and the recession was to last until April 2009, a typical bottom for stocks would occur some time in the next few months.

Granted, much depends on the ability of the Federal Reserve and the U.S. Treasury to put rescue measures in place that will unlock today’s frozen capital markets. And there are nagging concerns that the next disaster may lurk in the unregulated $60 trillion market for credit-default swaps. But the fear that sent the market down so sharply may have driven stocks close to their ultimate lows.

Recessions certainly have been both shorter and longer than the 10-month average. On a positive note, five recent recessions were shorter. The 1980 recession lasted a mere six months, and there were four recessions that lasted only eight months, according to data from Bespoke Investment Group.

Though a typical recession would end by next spring, economists are paying increasing attention to longer downturns, specifically the two recessions since 1940 that each lasted 16 months. The November 1973 to August 1975 downdraft was sparked by the Arab oil embargo, while the July 1981 to November 1982 recession was triggered by the Federal Reserve hiking interest rates dramatically to curtail runaway inflation. In each case stocks bottomed about three months before the recession ended.

The good news today is that stocks appear to have gotten out ahead of any recession, falling so sharply that they might already have priced in pretty horrible times ahead. The Dow is down almost as much in the past year as the 45% it fell in the 1973-1975 recession, and its 12-month decline far exceeds the 24% it lost in the period leading up to and during the 1981-1982 recession, according to Birinyi Associates.

Today’s 40% drop also far surpasses the average bear-market slide of 30% since 1940. Markets that decline for more than a year average a loss of 42%, says Paul Desmond, President of Lowry Research Corp. The Dow has fallen by more than 40% 10 other times, with all but one such drop occurring between 1900 and 1930. It slid by more than 50% only once, between 1929 and 1932, when it shed 89%. That bear was bracketed by the Great Depression, which lasted for 44 months.

A recession is labeled a depression when economic activity shrinks by 10% or more. From August 1929 to March 1933 U.S. economic output contracted by more than 30%. That’s what made it “Great.”

But back in the ‘Thirties, the financial markets lacked many of today’s safety nets, like deposit insurance, and the Federal Reserve didn’t loosen the purse strings quickly, as the Fed lately has done. Also, the stock-market rally leading up to the Depression was much more frenzied. From 1921 to 1929, the market rose almost 500%. In the rally from 1987 to 2000, stocks jumped 574%, but did so over a much longer period. From 2002 to the market’s peak in October 2007, the Dow rose 94%.

Given stocks’ swoon in the past 12 months, prices look much more reasonable today. The companies in the Standard & Poor’s 500 trade for an average of 11.6 times the profits that analysts expect them to earn next year. And the index trades at 17.1 times the companies’ most recent earnings. That’s only slightly below the market’s 60-year average price/earnings multiple of 17.8, according to Birinyi Associates.

The current P/E is still high compared to the low P/Es of previous major recessions. During the ‘74, ‘80 and ‘82 recessions, the S&P’s trailing P/E dropped to between 6.8 and 7.2. But in the ‘70, ‘90 and ‘01 economic downturns, the P/E ranged from 12.9 to 23.5.

Keeping cool

I have been saying that we are in an irrational exuberance negative bubble (similar to a recent oil bubble or internet bubble of 2000, only in reverse. As was the case when momentum buying created irrational enthusiasm in anything housing, credit or commodity based, redemption and fear-based selling is causing the opposite effect of excessive despair - Irrational fear has gripped the investing public.

The hardest thing for most investors to do is to go against the crowd, to keep a cool head when other investors are losing theirs.

Don’t lose hope. A financial panic causes people to lose their ability to reason. But just because a panic can end in utter economic disaster doesn’t mean that it will. Just as banker J. Pierpont Morgan could quell the Panic of 1907 by walking onto the floor of the New York Stock Exchange and buying bank stocks, so too could decisive government action contain the Panic of 2008. You may not know the outcome of this drama for weeks or months to come.

Will this decline go on another six months? Another year? It’s possible, of course — and probable, if government rescue efforts fail to gain traction.

But I have little doubt that buying stocks when panic is so widespread will look like a wise move in a couple of years or less. For those who own stocks, it’s way too late to sell. For those who can afford to invest more in stocks, I think this a time to do just that-as was October 19, 1987.

I am inclined to believe that, the more things change, the more they really stay the same. Though, at an outer level, recent events are undeniably without precedent, at a deeper level, the same forces that always make the market tick are still at work.

Here are some good things to think about

* Ottawa is buying $25-billion in insured mortgage pools in an effort to boost lending by the country’s banks and reduce borrowing costs for Canadians.

* Global interest rate cut followed weeks of central bank moves aimed at unclogging credit markets.

Amid the sell-off, some analysts pointed to possible opportunities in the coming weeks.

Tim Bond, head of global asset allocation at Barclays Capital, wrote in a report last week: “We believe global equity markets are starting to offer a long-term buying opportunity that is typically only seen once in a generation. We are not calling the bottom in the bear market today, but we do suggest that the low will be seen within the next two or three weeks.”

He went on to suggest that returns from equities purchased during this interval may well be extremely high over the next 12 months and could – if history is any guide – average double-digit long-run returns over the next decade.

This global slump is going to take a while to unfold, play out and finally end. But I believe that a few years from now, we’ll look back on this period as one of the great buying opportunities of a lifetime — like Dow 777 in the dark days of mid 1982, when a Newsweek cover story speculated on whether another Great Depression was at hand.

The fear then was understandable, because U.S. unemployment rose to almost 11% that fall, before the economy and markets began to recover. Other great buying opportunities? How about the days immediately after the crash of October 1987. Wise investors did a lot of buying then too, which they’ve never regretted. I don’t think this is the end of the world as we know it.

This is not a Benjamin Graham market, the father of value investing. This is a Sigmund Freud market. eventually though Benjamin Graham will make more sense.

Rational

Here’s my response to some very good questions

Thanks for your questions, they are good and important ones

Here are the main points you made

1) those who were warning us about the depth of this crisis many months ago have been shown to be correct — these include economists like Paul Krugman (recent Nobel Prize winner), financier George Soros, and bonds manager Bill Gross at Pimco. indicate that we are just at the beginning of the beginning of the crisis.

these are credible investors and commentators on the markets.

a) You have Nobel prize winning economist in Paul Krugman (while I’m at Nobel Prize winning economists, let me remind you of the two Nobel prize winners that ran Long Term Capital http://en.wikipedia.org/wiki/Long-Term_Capital_Management). Krugman’s specialty is trade, and yes, trade does have an impact on global economy. But our managers are investing in companies that are there to make a profit. A company will do, much like we would do, anything to survive, they will adjust to economic events, they will increase or decrease pricing. They will make a profit, or die, or be taken over.

b) George Soros, most famous for his currency call,a and the running of the Quantum Fund. George is a speculator demanding to not be a speculator.

http://www.pkarchive.org/trade/soros.html. He’s realized that the times for speculating is over - something we’ve been saying for a while as well. True investors are not speculators.

Soros’ 2008 book, The New Paradigm for Financial Markets, describes a “super bubble” that has built up over the past 25 years and is now ready to collapse. This is the third in a series of books he’s written that have predicted disaster. As he states:

I have a record of crying wolf…. I did it first in The Alchemy of Finance (in 1987), then in The Crisis of Global Capitalism (in 1998) and now in this book. So it’s three books predicting disaster. (After) the boy cried wolf three times . . . the wolf really came.[18]

He ascribes his own success to being able to recognize when his predictions are wrong.

I’m only rich because I know when I’m wrong… I basically have survived by recognizing my mistakes. I very often used to get backaches due to the fact that I was wrong. Whenever you are wrong you have to fight or [take] flight. When [I] make the decision, the backache goes away.

http://en.wikipedia.org/wiki/George_Soros

What George is asking of us, is to be cautious - less speculative. Not to stop investing.

c) Bill Gross, One of the world’s best Bond Managers. Please note, I am always a fan of including Bonds in an investment. I am in agreement with Bill’s thoughts to be concerned about government mishandling and liquidity issues. He’s also not saying to stop investing, just to be careful, and also include Bonds.

He’s also been impacted although mildly in this storm.

Being negative on the markets, and credit markets really does Help Bill Gross, as it makes people run towards Fixed Income.

2) We now hear reports that the Credit Default Swaps cover close to 70 trillion of questionable debt. The total sum of the bad debt is about 53 trillion.

This may well be true, but why stop at $53 Trillon, why not make it $106 Trillion, and then we can say that the world will come to a stop! Because of debt. Please realize that even though there’s a lot of debt out there, there are businesses that run on no-or-low debt. And their are products that no matter what happens you will continue to use - Shaving cream, tooth paste, soap etc. Even if the whole capitalist system is destroyed, we’ll till need to take a shower! In short, business will continue to run and people will continue to spend on the necessities.

3) We should completely get out of the stock markets. The amount of deleveraging that will have to go on in the next few years will be staggering. Even if no more homes are foreclosed, the amount of bad mortgage debt presently sits at about $18 trillion.

yes, you can go completely out of equities - you can buy Bonds, and this may well be a good choice. However, I still think that there is a need for products made by companies, not products made by Bonds.

4) given the most recent numbers that have come to light, do we give new credence to George Soros and those like him? Where is there a voice to counter Soros, other than fund company economists and managers who have an interest in promoting that nobody bail out?

People like George soros, Krugman and Gross, do have a place in the world, and we should listen to them. They allow us to have a balanced view.

There are many voices to counter these people, and they are voting with their actions - one such voice is Warren Buffett, who ended up doing a whole bunch of purchases, and by the way, he doesn’t need to promote anything.

5) In short, I need to have more confidence, and I need more information.

There will never be enough information to share . The only piece of help I Can give you is to think about all the worst times since WW!! and how often we have been told that it is going to be miserable and yet we stumble through it

I have two favorite economists that I have absolute belief in

1) Adam Smith http://en.wikipedia.org/wiki/Invisible_hand, Adam says people come together in times of trouble to repair things for the better good

2) Hyman Minsky http://en.wikipedia.org/wiki/Hyman_Minsky, Hyman says - reversion to the mean, things go much higher and lower than people expect, then come back to a rising mean.

One of the sad things that have happened to investments over the last decade is the tendendancy of a growing number of investors to be trend followers., buying on upward momentum, without any regard to valuations (eg late 1990’s - techs, 2006 - Oils and energy), and then selling when stocks are falling, again regardless of valuations (summer of 2002, and now). What this does is create a scenario where markets overshoot on the upside and downside.

And that’s the reality of now. And it doesn’t matter how you were correlated, becasue when sanity leaves the markets for stupidity to enter. All correlations and asset allocations designed to insulate investors don’t help.

I’ve watched in dismay as solid companies, with great balance sheets, lots of cash, and sound businesses get decimated and increasing number of investors run to cash, as if that’s going to earn a better return in the future.

One thing I’ve learnt through going through so many gyrations in the markets in the past, is that every one feels like the worst ever at the time. The market crash of 1982, when I came to Canada, had a recession to it, and stocks fell like no tomorrow, in 1987, it felt like the end of the world in one day!, the S&L Crisis of 1990’s was when we faced the multiple threats of government uselessness, and a looming war with Iraq, as well as more than 1,000 bank failures, and then the late 1990s when we had the Asian Flu, and finally the ground shaking tech wreck of 2000. Each of them was supposed to be the show stopper. The it’s-never-been-like-this-one.

But as we all know, that these events were exceptional times to move out of cash and into stocks that had good businesses.

So, is this what we are going through worse than those in the past. will the markets come back from this mess. Will the markets be stronger?

Just a few months ago the media was feasting on, nay egging on “High Oil prices”, with some analyst saying $200 Barrel, and more… It was the Oil peak scenario, we’ll never see it come down again… And just like idiots we believed them.

Now, the media has fcused on “economic distress”. Of course, the emdia will spin all this stuff into another reason why we are headed for a modern-day end-of-the-world..

What the media doesn’t focus on is the good news
- the non-financial corporations record amounts of cash
- the low non-financiasl corporate debt level compared to the last two recessions
- Or that the GDP per capita in “bankrupt” USA is the highest in teh world, 35% greater than Germany
- and other good stuff!

No, that would make people see the real side of the world. That would make people happy! And happiness doesn’t sell Ads, only misery does.

So, just be careful who’s telling you what. Realize that there are good companies out there.

And there are good people out there, and we’ll get through this calamity as well.

Rational