Rational Advisor

While I recognize the economy is currently suffering under the weight of debt problems, many which may take years to fully resolve, I don’t believe it’s Armageddon

The media and the scaremongers would have you believe that the world economy is coming crashing down, that the end is near. But it’s not. It seems just like every time that the media said the world was going to end, it didn’t.

And this time, all I’ve heard is how much like the great depression this is, and we are heading into the most miserable depression ever.

Well… it’s very unlikely that the great depression will happen again - at least not now.

In the 1930s, the government raised interest rates and tightened the money supply. They increased tariffs, which angered trading partners and isolated the rest of the world from North America. Finally, they raised taxes. That squeezed businesses and individuals, hard. They’re not doing that now. well, everywhere except Ontario.

The final “nail in the coffin” during the depression was when the US federal government let their banks fail. It was just too much for the system to take. They’re not doing that now.

Today is a different story. Globally banks are being bailed out, and interest rates have been slashed over the past 6 months.

In fact, most investors should be looking at our current market with optimism, even though that’s not what you’ll hear - the mainstream media is still sadly focused on whether we’re entering another Great Depression!

It seems as if investors are running to cash - Cash is king, the Queen and the whole freakin Royal family, cash holdings are at 1990 highs in the US …that’s $8.85 trillion, earning less than 1%! That’s a ton of money waiting to flood into the market. Is 1% really the long term return now! It’s insane that we are so bad off that the best place to invest is T-Bills, those investments that pay the lowest interest rates. These people are storing away cash to protect from the storm, as soon as they start spending again we will see a recovery. This cash will not sit forever there. Cash will move and look for yield, and when it does it will be a tremendous amount of buying power. This surge of buying power would move the markets to recover much faster than people expect in this current level of pessimism.

So despite the harshness of the current recession and the unfortunate investor emotional breakdown in response to it , I do see the outlines of an escape path beginning to take form.

The natural and inherently self-correcting mechanisms always at work within a capitalistic system, do work out in the end. The problem is getting clarity - moving from fears of what is in the closet to actually defining reality. And I believe that the only way out of this crisis is less a dramatic, old-fashioned method led by one of my favorite economists good ‘ol Adam Smith.

A rise in wall street, would boost economic confidence improving economic activity which in turn would loop back to boost Wall Street - this is what is known as a positive feedback loop or Adam Smiths invisible hand (look it up)

Remember all companies and governments are predicated on growth. If they don’t have growth they will fail. If governments don’t spur growth, their countries will fail. And nobody wants that,e specially Obama and Harper.

One of the things we need to do is replace that cold word “Stock Market” to “Businesses”. Because that’s all a stock market is a collection of businesses. Businesses that you see and use every day. Then we can decide if we don’t want any part in these American or Canadian businesses.

Let’s look at some recent activity - Drug takeovers, Merck bought Schering Plough for $41B, Pfizer bought Wyeth. Why? Because lots of drugs are coming of patent, and these companies have to have more drugs in their pipelines. Another reason is Obama admin is doing drug reform. This will bring drug prices lower, even more reason to merge and keep costs down.

Recently GE’s CEO Jeff Immelt bought $400,000 of GE, and the head of GE Capital spent as well. We also want to see GE buy back its own stock. We’d like to see companies buying other companies for cash, because that would show that they are not worried about what it will take to weather this – this is one of the best indicators that the market is coming back.

At this point we are at that delicate juncture where hope encounters doubt and buyers’ resolve meets buyers’ remorse.

How this tussle is won will depend, ultimately, on investors’ belief in corporate profits through these trying times, and two looming catalysts could help decide that turn.

Banks will report first-quarter results come April, and their ability to show a profit before the familiar downer of asset losses and write-downs will help restore investors’ sorely-tested faith.

Come April, the US government will also have completed its “stress test” of 19 major banks. Traders reckon at least one bank — preferably more — must fail for the test to be credible and achieve its objective: Imposing a stiff-enough hurdle so banks that pass can gain our trust. How the US government capitalizes test failures and handles their stockholders can make the difference between Buy or Sell.

how persuasive are stocks this time around? Four times during this bear market, stocks rallied more than 10% before gusto gave way to grief. What’s different about this fifth attempt?

Unlike its predecessors, this charge is spearheaded overwhelmingly by financial stocks. Exxon Mobil accounted for the S&P’s heftiest gain in each of the four prior bounces, but this time that task is shouldered by J.P. Morgan, followed by Wells Fargo, General Electric and Bank of America, notes Birinyi Associates. Financials led us into this quagmire and peaked four months before the market did in 2007, so might financials not lead us out?

There were other signs: Comparing early momentum, market breadth (or the brigade of advancing stocks versus declining ones) was strongest this time. Europe and emerging markets also rallied but with less chutzpah than before, a hint this rally is largely carried by the U.S., the country that tipped the world into the credit crisis.

Most important, the 18-month-old decline is more mature now, and the cumulative weight of fiscal stimuli far greater by this fifth bounce than at any time before.

Markets like history don’t always recognize game-changing events or, in the lingo of Wall Street, inflection points. Such a change, I think, took place in early march when the US Federal Reserve announced its plan to pump more than a $1 trillion into the economy by the purchase of $300 billion of long-term U.S. Treasury securities and an additional $700 billion or so into Fannie Mae and Freddie Mac guaranteed mortgage-backed securities and other debt. Please note, they didn’t drop interest rates - how much further could they have dropped them anyways.

In effect, what they said is, “no more interest rate drops”, so, if businesses are waiting for lower interest rates to borrow - too bad. borrow now, and do your acquisitions and build your businesses. Now the government will stimulate by buying their own bonds back! This is a crucial message lost on most people.

This is the beginning of a financial surge by the Fed that not only will bolster the economy by bringing long-term interest rates down, but also augurs well for stock prices in the months ahead.

The news alert flash caused a “Holy Volatility Batman” comment from me, and the announcement kicked slowing financial markets into overdrive. Stocks and bonds rallied and crude oil futures went ballistic. The American dollar went into an immediate tailspin lower and before the end of the day our dollar would jump 3%.

Am I concerned over the Fed’s printing new money and thereby creating inflation and weakening the dollar. Not really, looming deflation is now the bigger enemy. Fed buying is the only game in town in the wake of the seize-up in private credit markets and the huge wealth destruction that has taken place in both the corporate and consumer sectors. Now, at least, there’s some hope for both the economy and the stock market. And it’s about time.

We are currently seeing some of the best opportunities in our lifetime. The problem is that it could be a better opportunity next week or the week after. But in five or ten years, whether you bought it this week or the next week or the next month won’t matter much. You don’t have to buy at the very best day.

If I had to guess, I would say that somewhere in the next 12 to 18 months we will have a record 12 month return. Mainly because of the flood of cash that will come back, that’s currently on the sidelines.

Twelve-year lows are rare, at least for the trendsetting Dow Jones Industrial Average. Thomas Lee, U. S. equity strategist at JP Morgan, says the event has only happened twice, on April 8, 1932 and Dec. 6, 1974. The 12-year low in 1932 was three months before the end of the bear market, while the 1974 low turned out to be precisely the low.

Most investors angst had been generated by the fact that they didn’t have a strategic investment plan with comfort ranges. The absence of strategy allowed extreme excursions in their portfolio and the cumulative emotional impact caused them to react irrationally.

I believe a well-defined investment strategy is the single most important element in achieving financial success. It establishes the checks and balances necessary to keep the portfolio in line and creates the discipline required to remove emotion from the process.

We’ve had many bear markets, but remember that crashes, panics and slumps are the investor’s friend. High returns were attained by stepping up and buying during crashes.

We do not remember another time when virtually “all” risk assets prices seemed as ridiculously cheap-priced as they do today?