Thursday, September 3, 2009

The Bear Market is Not Over; Bill Jenkins on Why Fall Will Live Up to Its Name

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The Daily Reckoning
Thursday, September 3, 2009

  • We are entering a dangerous month...
  • To have a booming stock market, you need a booming economy...
  • A look back at the Whiskey Rebellion...
  • Bill Jenkins on why Fall will live up to its name...and more!

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    The Bear Market is Not Over
    by Bill Bonner
    Baltimore, Maryland

    Yesterday might turn out to be an important day. The market should have bounced. It didn't. Instead, it fell 29 points. It's September, too...a dangerous month. And this rally has already run longer than the rally following the '29 crash.

    Mr. Market can do what he wants, of course. We're just trying to read his mind. If we were Mr. Market, what would we do? We'd give investors a fright!

    Two things make us think the bear market is not over.

    First, there is market history. Bear markets do not end with stocks still trading at nearly 20 times earnings and the dividend yield barely at 3%. And they don't end when people are hoping, praying and expecting them to end. They end in despair...after people have given up hope. They end with dividend yields over 5% and prices at only 5 to 8 times earnings.

    What's more, stock market trends tend to follow long cycles. The last bear market bottom was in '82. It came after 14 years of disillusionment and disappointment. By the time stocks were ready to go up investors were sick of hearing about them. And then, you could buy some of the best companies in America for only 5 times earnings...and get paid to hold them, with dividend yields over 5%.

    By our calculation, the bear market in stocks began in January of 2000. Since then, stocks went up in nominal terms. But adjusted for inflation, investors made nothing. Still, they didn't seem to notice...and remained enthusiastic about stocks. Then, in 2007, a new down-cycle began...continuing until March of 2009, when the Dow hit a bottom at around 6,950. But was it THE bottom...or just a temporary bottom?

    Most likely, it was a temporary bottom...a ledge from which investors could leap...before falling further down.

    We say that because stocks never went low enough to qualify for a genuine bottom...and investors never showed the kind of disgust that you usually get at real bottoms.

    We say that, too, for a second reason - the economy. In order to have a booming stock market, you need a booming economy. Earnings need to go up. That justifies higher prices. It also contributes to the positive mood among investors that persuades them that things are getting better and better...and that stocks deserve not only higher prices corresponding with their higher earnings, but also higher P/E multiples. That was the kind of mood that sent the Dow up from under 1,000 in August 1982 to over 14,000 twenty-nine years later.

    But now the tide as turned. It rushes out between our toes and takes with it our fondest hopes. After expanding during our entire lifetimes, credit is now contracting. And that means more savings...but fewer sales, fewer jobs, and fewer profits. Can working people reasonably expect to earn more money next year? Five years from now? No. Can businesses expect rising sales and profits? No. Will the feds balance the budget, cut taxes, or increase benefits in the years ahead. No. No. No.

    The outlook is not rosy. It's grim. As we reported yesterday, household discretionary spending is at a low it hasn't seen in 50 years. A half- century of economic progress wiped out! Real unemployment is closer to 16% than to the official 9% - and it's rising.

    Yesterday came a report from August: companies had cut more jobs than expected.

    And even economists who are silly enough to believe the stimulus is working still say unemployment will likely remain stubbornly high for years to come.

    So let's add this up. Fewer people with jobs. Those who have jobs are paying off debt. Less consumer spending (back-to-school spending was disappointing, say the press reports). So, lower business earnings.

    What would make stocks go up under those circumstances?

    We also get word that insiders are selling stock heavily...and that consumer bankruptcies are up 24% over a year ago.

    New economic boom? Not likely. New boom in the stock market? Not likely either.

    But stocks don't stand still. If they can't go up...they will go down.

    What will cause a break in the stock market? Who knows? Here's a possibility: The Chinese stock market could crack. Maybe it already has. China is the great hope of the world economy. When it becomes clear that China is a bubble economy...and not a genuine growth economy...Western investors are likely to lose heart. out!

    [We don't recommend getting anywhere near stocks. What we do recommend is getting your share of the bailout - it's not just for banks and the dying auto industry. Your first 'bailout loophole' income check could be in the mail in a matter of weeks...and they won't stop until the US economy recovers. You could make up to $17,500 in extra income - this year alone. See here.]

    More news from The 5 Min. Forecast:

    "Hopes of recovery got a firm slap this morning, courtesy of the data patch," writes Ian Mathias in today's issue of The 5. "Here's the quick and dirty:

  • The US service sector contracted for the 11th month in a row, the ISM said today. After Monday's ISM manufacturing gauge, which showed surprise growth, traders had their fingers crossed for a score above 50 in today's ISM service sector reader. Not so, said the group. Their index stood at 48. In other words, 70% of our economy was still shrinking in August.

  • Retail sales fell 2.9% in August, the 12th straight month of decline. Despite of the "back to school" rush, only low cost brands showed signs of life last month... Costco, BJ's, Gap, Aeropostale, Target and TJ Max all outperformed.

  • Jobless claims from last week came in at 570,000, worse than the Street expected. Coupled with yesterday's worse-than-expected ADP jobs report, the outlook is none too rosy for tomorrow's government employment data.

  • Personal bankruptcies shot up 24% in August, year over year, putting the US on track for over 1.4 million filings this year.
  • "And here's the one statistic that troubled us the most this morning: Student debt grew 25% in the 2008-2009 school year, says the latest from the Department of Education. So much for 'the great deleveraging.'

    "Total student loans outstanding exceeded $75 billion during the period, up from roughly $60 billion the year before. An estimated 66% of US college students borrow money for school, with the average individual debt load of $23,186 by graduation.

    "So let's get this straight...the next generation is borrowing more than ever, at a faster rate then ever, during extremely worrisome credit conditions, heading into the worst employment environment in recent history, while on the verge of inheriting the biggest federal debt burden the world has ever known?"

    Wanna make sure you get The 5 - in its entirety - sent to your inbox, every Monday through Friday? You becoming a subscriber to one of Agora Financial's paid publications, such as Penny Stock Fortunes. Their latest report details a strategy that allows the ordinary investor to cash in on extraordinary profits - in just seven simple steps. Get all the information here.
    And back to Bill, with more thoughts:

    We like the Bedford Springs Hotel. It is a 19th century resort...with class. It was in ruins in the '80s, then bought by investors...who spent $120 million restoring it. They went broke 18 months later.

    Not hard to see why. When we were there the place was almost empty. Still, it had a full staff...and beautiful appointments.

    "Hey...this is pretty nice," we said to the desk clerk. "No one is here."

    "They come on the weekends. We have a full house this weekend...and a full house in October, when the fall foliage is at its peak."

    " looks kind of quiet now..."

    "Yeah, it is quiet most of the time."

    "It is such a nice place, I think I might want to live here. I know you'll take care of me. I could live quite well here."

    "Maybe you could give me a good price...and I'll move in."

    "You need to talk to the management..."

    On the wall of the Bedford Springs hotel is a short note telling us that George Washington stayed there when he put down the Whiskey Rebellion of the 1790s.

    In fact, Bedford was his Western headquarters. But the real action was farther to the West. Bedford was more like a staging area, as near as we can figure.

    The Whiskey Rebellion is a worthy subject for recollection, though a sordid chapter in American history. Accounts of it vary, depending on which history book you read. It is usually seen as a test of the new country...a test which Washington and Alexander Hamilton met with vigor and resolve. But by our reading of the history, the new republic failed on every count.

    After the war against England, the federal government was in debt. It needed money. Hamilton saw an opportunity to raise money by taxing the small distillers out on the frontier. They were too far from Philadelphia to cause trouble. He figured they would resist. But this would give him an opportunity to march out at the head of an army, assert the power of the central government over the riff raff, and gain for himself a marshal victory that might elevate his stature closer to that of his boss, George Washington.

    Washington himself may have had mixed feelings. He certainly had mixed interests. The tax was set up so to force small distillers to pay 50% more tax than large distillers. Washington was one of the largest whiskey makers in the country. He might be happy to see the small fry pushed out of business. On the other hand, he had spent much of his life out on the frontier. He knew how tough the frontiersmen could be; he probably wasn't eager to tangle with them.

    But the tax was proclaimed throughout the land, and the whiskey distillers took offense. After the war against Britain they had gotten the idea that they lived in a free country. Certainly, out on the banks of the Monongahela there was little to make them think otherwise. They were used to doing what they wanted, free from any sort of authority. So the sight of tax collectors trying to take their money (of which they had was still a subsistence/barter economy out in the woods) probably set them off. At least one of the federales was attacked by a mob of them; his hair was shorn and he was tarred and feathered.

    Then, Hamilton called up the New Jersey and Maryland militia...and set out for the West. He forgot, however, to provide sufficient victuals for his men...and soon the soldiers were cold and hungry. Naturally, they did what soldiers do under the circumstances; the robbed the locals. Thus did Hamilton's army continue its march - in disorder, disgrace and larceny...stealing provisions from the people it was meant to protect from the scofflaw distillers.

    Once on the field of battle, the whiskey men were ready for a fight. But cool heads prevailed. After a pow-wow, the feds arrested a handful of men...of whom two - a "simpleton" and an "insane" person, according to Washington - were charged with treason. Washington pardoned them, seeing no profit in hanging mental defectives. The rest paid a fine and were let off. One man died in jail. The rest went on their way.

    Thus was the rebellion brought to a close. The distillers moved their stills out to Kentucky and Tennessee, where the feds couldn't get at them. And the feds went back to doing what they always do - making a mess of things.

    Until tomorrow,

    Bill Bonner
    The Daily Reckoning

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    The Daily Reckoning PRESENTS: Don't look now, but September is upon us. And so far, so good. Everything is progressing like clockwork. No humidity. No A/C. Absolutely beautiful. Or is it? Bill Jenkins explores...

    The September Syndrome
    by Bill Jenkins
    Pylesville, Maryland

    As just about everyone knows, the stock market crashed in a big way in 1929. Analyst Nick Guarino reminds me that it rallied 15 times before it hit bottom fours years later, having lost 90% of its value.

    And the truth is, when adjusted for inflation, the market didn't break even again until 1960. (If you're a "buy-and-hold" investor, you MUST account for inflation. It is the single biggest "invisible" tax in our wonderful Fed managed economy.)

    But before people could get too happy with making money again, along came President Johnson and the "Great Society." I don't know who it was so great for - the market began crashing again in '66. Once again, adjusted for inflation, it didn't get back to breakeven for another 30 years.

    So, 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines. Of course, they didn't fall straight down. That's the "trick" of the whole deal.
    "We are now in just the second year of this disaster. We are witnessing an almost perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode."

    Each rally draws in a few more people, a little more money, until there are no suckers left. Then when the bottom hits, it has takes 15-20 years to "recover."

    It will take a very long time to recover from what we've been hit with: Exxon/Mobil lost two-thirds of its profits... that's 66%! The "World's Company," GE, saw a 47% collapse in profits. Toyota, the recession- impervious carmaker, posted its largest yearly loss EVER and is looking at losses this year, too. Insurers have been hit. Computer giants have taken a whacking. Even Disney is down over 25% in the third quarter.

    These are not "bumps in the road." They are "driving off a cliff." By some estimates, inflation-adjusted earnings are down 90% in the last 20 months.

    We are now in just the second year of this disaster. We are witnessing an almost perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

    At the end of June alone, there were over 5,300 commercial properties in the United States in default. That's more than double the number from the end of 2008 - and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

    So don't let the recovery pundits fool you, even though they're out in force.

    No doubt you've heard the optimists: "The Recession is over." "The Recovery has begun." "Better get in on the ground floor now if you hope to recover all that retirement money you lost last year."

    Just look at the evidence, they say:

  • Markets up 50%. In the greatest bull run since the Great Depression, stock indices are forging higher. The numbers are swelling. Ride the wave!

  • Housing numbers are turning north - Over the past six months, there have been some the fall in some housing numbers are slowing, and some have turned up. Building permits. Existing home sales. New home sales. New housing starts. Pending home sales. Hmmm... nice!

  • Manufacturing looks like it's exploding. Earlier this week, the Institute for Supply Management manufacturing index posted a stronger- than-expected rise at 52.9. Well above expectations, and well into the 50+ territory that signals expansion. Looking better and stronger than it has in 2 years. It would be a mistake to bet against it!
  • But you probably know what I'm going to say right now: Don't believe a word of it!

    No market goes up forever. Isn't that one of the first lessons we learn when chasing a bull market?

    This one is no different. Could it go higher? Sure. But just how far can you stretch a rubber band? Eventually, it is going to snap back.

    And, as it happens, we're heading right into "snapback" season.

    Historically, the month of September is the worst month for stocks. Hands down. Indices fall more in this month on average than in any other month of the year.

    In fact, the S&P has declined in 11 of the past 20 Septembers. You may be inclined to say, "That's not so impressive." But an average decline of 10 points is something worth noting. Additionally, 40% of those falls consisted of declines that were 75-125 points. That's huge. No other month has such an anomaly. And it seems to me that this September may be ripe for the picking.

    In fact, the first day of September was a real whopper. And Monday (although technically an August day) was not so august for US equities. Thus, as the calendar turns over, we have two days in the down column.

    But as bad as September is, October has the reputation for being a real bloodbath. It certainly possesses a number of the largest down and crash days. But in order for a crash of monumental proportions to take place, there has to be some lofty level from which to fall.

    I get physically sick when people tell me how they are moving (what's left of their money) back into equities. I try to reason with them; I try to warn them. It breaks my heart to see pensioners barely getting by. You remember all the drama from recent years, how we were told that the elderly were forced to choose between food and medicine? Do you remember the seniors who were reportedly sharing their cat's food so they could buy their prescriptions?

    And that was during the go-go boom years. I cringe when I think of what lies ahead for them.

    Will it start this fall? Has the band stretched far enough? Has Wall Street suckered in all the money that will venture out into the street? That's all they're after. Draw everyone out of the woods. Get all those who believe that it's time to buy and hold into the game again. A 50% rally? Child's play! This time the Dow is headed for 18,000!

    Better tread carefully. This is without question the area of thinnest ice. One misstep by the government, a foolish line slip or a negative surprise, and the entire "recovery" falls like a house of cards.

    Keep your money, and your exits, close... and don't be afraid to take profit.


    Bill Jenkins
    for The Daily Reckoning

    P.S. Just as the equities historically show a propensity to tumble at this season of the year, the US dollar does not historically fare well, either.

    But times are not what they have been. Living in the risk- appetite/risk-aversion era, we know that when the equities have fallen, the dollar has risen. So I continue to look for more weakening in the euro and pound but strength in the dollar and yen.

    To that end we are sitting on some nice positions. And with continued direction and maybe even with a little help from the September Syndrome, they should pan out very nicely.

    To learn more about our positions, click here.

    Editor's Note: Bill Jenkins, founder and managing editor of Master FX Options Trader, knows the Forex currency markets inside and out. After 20 years and a string of losses following other people's crack advice, Bill created his own system for cashing in on tiny currency fluctuations between the British pound and the US dollar. Now you have a chance to benefit from his "lifetime" of hard-earned experience.

    As Agora Financial's resident currency specialist, Bill's advice has led readers to gains of 33% in a week... 70% in four days... and 100% practically overnight. And we've broadened the service to include the euro, yen and other currencies in these volatile trading markets.

    When Bill is not helping people enjoy big wins with simple currency plays, he's a church minister and owns his own contracting business

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