Market Update: From the Editors of “Leeb’s Aggressive Trader”
This is a market that must be driving pure technicians absolutely crazy. No sooner does it look like stocks are about to break one way or another and the trend reverses. Looking at the internals we’ve never come across a more disorganized market, with no leadership to speak of. Stocks marginally undercut their lows last week and we’ve had another retest this week, but contrary to many investors’ expectations, share prices have not broken down. Our money is on stocks being near a bottom right now.
There has understandably been a great deal of comparisons between today and the Great Depression, the last time we had a deflationary crisis in this country. Before anyone jumps to the conclusion that history will repeat this time around, they should spend a few moments reviewing past events.
From its October 1929 highs, stocks nosedived approximately 50 percent before bottoming the following month. From that November low share prices then staged a rally on the order of 50 percent, erasing about half of the losses from the prior decline. .It was only then that the bear market began in earnest as the government’s ill-conceived actions started to take their toll on the economy. These moves included trade restrictions, tightened credit, higher taxes and balancing the budget.
For most investors, yesterday was horrible. But for those with access to advanced short-selling strategies, the profits have kept rolling in. Here's an example...
During times of economic stress, the most vulnerable companies are often those which deal in luxury or high-priced items – the kind of merchandise the average person only buys when he is feeling richer than he was a year ago.
Two weeks ago, it was an easy guess that the number of people feeling richer had dropped significantly. So we took a short position on the jewelry retail icon, Tiffany (TIF), using options.
The result: just 13 days later, we closed our position for a gain of 26.1%.
We imagine quite a few other people would have liked to get in on this trade, and others like it that are emerging each week. If you'd like to be one of them, check out our service by clicking on this link ...
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We’ve learned valuable lessons from the 1930s (and Japan in 1990s). Fast forward to today and the comparison to the Depression really doesn’t hold up very well. In the wake of the stock market’s slide numerous steps are being taken to avert a prolonged period of deflation. Governments worldwide have slashed interest rates and are spending heavily to stimulate their economies. And the message from last weekend’s G20 meeting in Washington and from a recent Barack Obama interview is that governments will take whatever steps are necessary to jump start the economy. There is no talk of concern about deficit spending.
We’ve certainly had a massive 40 percent decline in share prices. But even if the world is going to fall apart in the next couple of years we’ll likely enjoy one heck of a rally in equities in the meantime.
Markets typically bottom when the news is at its worst. Clearly the economy is in terrible shape right now. As a result we’re very likely in the sweet spot in terms of the stock market’s upside potential relative to its downside risk. And that position isn’t likely to get better. Investors look over the horizon and our work strongly suggests that things will get better sooner rather than later.
Of the major market averages the Dow Industrials are the most widely watched. While we think stocks are close to a bottom we won’t discount the possibility of the Dow slipping a bit further to say the 7,800 region in a worst-case scenario. We’re not expecting that to happen, but we acknowledge this is the downside risk. That said, the powerful rally we expect to unfold, be it today or at some point in the next few months, could carry the Dow back to 11,000, if not 12,000.
What’s needed is a spark to unleash the record amounts of liquidity locked up in the banking sector and the $4+ trillion in cash on the stock market’s sidelines awaiting some stability. Once market starts to rally, money managers aren’t going to be content earning 11 basis points on their cash. Instead, they’re going to come flooding into the stock market again.
Don’t know what will be the catalyst, or the starting date of the rally, but rational investors just can dismiss this market. We’re entering a period of seasonal strength, which should reduce the randomness present in the market right now. The fourth-quarter hedge fund redemption deadline has passed, removing much of the selling pressure. And the tax-loss selling should give way to bargain hunters leading up to New Year’s and the traditional torrent of cash getting put to work in retirement accounts.
We’ve made no changes to our holdings in the past week. At this point it’s pretty much a waiting game. We’ve positioned ourselves so that we have lots of time until expiration on most of our holdings. While there’s an awful lot of red crossing our screens right now, if you’re patient you’ll be richly rewarded when the rally unfolds.
Market Update: From the Editors of “Leeb’s ETF Trader”
Backing down from the plan to buy illiquid assets from the banks and deciding to use the TARP funds for protecting the U.S. consumer, Treasury Secretary Paulson opposed using the funds for reducing the foreclosures. "The rescue package was not intended to be an economic stimulus or an economic recovery package,"' Paulson said while testifying in the House Financial Services Committee in Washington. The Troubled Asset Relief Program "is not a panacea for all our economic difficulties."
The market clearly did not like when Paulson first deviated from the TARP's original objective; opposition to using the funds to save the automakers is also not helping the markets today. Fears are running wild, with uncertainty being one of the reasons.
However, fundamental reasons for a relief rally are as strong as ever. The markets are extremely oversold; and we're entering a seasonally strong period. T-bills are yielding just 0.07% (meaning that you would get a whopping 70 cents return on a $1,000 invested in them). Yet investors keep piling into these instruments, foregoing return potential for a safety. This is not going to last.
Whether we see the DOW soon at 11,500 or it tanks to 7,500 there is a strategy to rebuild your nest egg while you still have time to enjoy it.
I have a confession to make: Even though the strategy doesn't exactly mesh with all of my existing advisories, for the last year or so, I've been trading options on ETFs. And, I might add doing quite well at it.
It's a strategy that's exactly right for this uncertain market because you can use it to make profits whether the market goes up or down! It makes it easy to play both sides of the market.
While I actually launched a new service, Leebs ETF Trader back in April 2006, I didn't think it appropriate to aggressively promote the new service to income investors. I did not want to appear to be undermining a solid risk-averse approach to maximizing income.
But, I'm writing now to alert you to this new service because. . .
The financial world has changed in the past few months, and these extraordinary times call for additional strategies, and. . .
Because word of our success with ETFs has prompted a few LIP subscribers to tell me. . ."Give us more!"
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Money markets are at record highs, with $4.5 billion currently parked in them. President-elect Obama has pledged to do whatever it takes to get the economy out of recession, and is readying his economic team. The amount of stimulus that's coming is going to be unprecedented. And oil, one of the causes of this massive slowdown, has declined at a pace that also has no precedent. Once investors get over the "fear factor", they will turn on the dime.
Inflation data, while fueling the fears of depression, takes inflation off the mind of policymakers for a while. Yesterday, the Producer Price Index was reported to had declined 2.8% in October, the sharpest month-to-month drop on record. This record drop in wholesale prices was in large part caused by the drop in energy prices. Finished energy goods sold for 12% less than in September, led by a precipitous drop in gasoline prices at nearly 25%. Finished food products also lost 0.2%. The core PPI, which measures all products in the index excluding energy and food products, actually rose about 0.4%. Today, consumer inflation as measured by the CPI fell by the most on record, further increasing the chances the Fed will further cut rates when it meets on December 16th.
The volatility in trading and the fear that grips the markets is reflected in the VIX, which is again nearing its record-high levels. For the purpose of trading, the two strategies are viable: using the high volatility priced in the options to by employing buy-writes, or waiting for a sign of the bottom. If the Dow were to break down though the 7,800-8,000 level, paying for insurance would make sense. Until then, the powerful rally remains a very strong possibility.
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Stephen Leeb was
interviewed by Gene Marcial, senior writer at Business
Weekmagazine,
September 10th, 2007. Click
Here
Stephen
Leeb was recently interviewed by Diane King of
Reuters: Global oil prices on the rise Click
Here. July 11th,
2007
Stephen Leeb was recently interviewed by Phyllis Goffney of CNBC on his outlook of the stock market. To read this interview, please Click Here.
Dr. Stephen Leeb was featured in the April 23, 2007 issue of Timer Digest and was ranked #7 in the Top Ten Timers. To read this issue, please Click Here.
Dr. Stephen Leeb was interviewed by Peter Clayton of Total Picture Radio To read the article Click Here.
To listen to the interview Click Here.
