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Making Sense Of Lower Lows and A Brutal Bear Market

3 March 2009 No Comment

We broke key levels recently which has sent the markets to lower lows.  From the peak, the Dow is off over 50% now.  Needless to say, lots of investors are feeling the pain.  Hopefully, you took some steps to avoid some of the recent pain even if you still took a hit in 2008.  The question is… what now?

First, how many bottoms have you heard called on CNBC or other market experts over the last year?  Clearly, they’ve all been wrong.  I’m not saying we’re not near a bottom, but I better hear better evidence than just “stocks are cheap” or “the market is dealing with bad news better than it used to”.  That is a load of crap.  What do I use to find a bottom?  I find the Dow / Gold ratio, macro economic fundamentals, etc. to be more valid than a so called expert’s opinion on television.

What do the fundamentals say?  My opinion is that they say we require a serious restructuring of our economy which means a severe recession.  Instead of accepting this tough medicine, the government is prolonging the issue and making it worse.  The government spending may take effect and cause a short term bounce sending the Dow up a few thousand points at some point this year, but I’m convinced if this happens, it will be a false rally.  I don’t see any catalyst for future growth on the horizon.  If the markets stay flat for the coming years, the only way to make money will be through trading (which most people aren’t able to do successfully).

So, what has my market activity looked like?  Well, if Covestor could fix their issue with my Zecco account, you would be able to see every single trade and holding in my account (they assure me it will be fixed any day now).  Since you can’t see it, here are some of the main points of my recent activity:

  • Short stocks such as Macy’s (M), SImon Property Group (SPG) – took profits in most of the position
  • Just initiated a short position in Amazon (AMZN) – I’m convinced a P/E above 40 cannot hold in this environment
  • Added some shares to my Philip Morris Int’l (PM) position – The stock continues to go lower, but this is the only long position I’m really adding to at this point
  • I’ve had a nice run in gold stocks such as GDX, GLD, NGD, AUY so I took some profits a few days ago and am already looking to possibly get back in.  I’m still very heavy in gold stocks since I think this is one of the only places to make money in this environment.  I’m anticipating gold to reach at least $1,200 very soon.  It won’t go up in a straight line though, so pull backs might be nice buying points.

How Low Do We Go?

Hard to say, but I would imagine we have room to go even lower.  Are we any closer to solving the financial crisis?  Unemployment is rising, consumption will continue to go lower which will kill retailers and our overall consumption based economy, and I belive commercial real estate is likely to be slaughtered in the next year or two.  Unfortunately, this thing just needs time to play itself out; and that is very painful for many people especially those near or at retirement.  If you’re in your 20s like me, keep watching the markets.  Pay attentiong because we’re in an historic bear market, what you learn today will help you the rest of your investing life.

I still think we’re going to approach the Dow / Gold 1:1 ratio.  Currently we’re still over 7:1.  Does anyone have a Gold to Real Estate ratio chart that shows the median home value priced in gold over the last century?  That would be an interesting chart to look at it.  If you know of one, post it in the comments.

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