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In The Teeth
of The Summer Bear |
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I knew it was going to be a tough
summer, and it has been. We're in the middle of it right now- the worst
of the bear market, and it's been an ugly one.
True, there are a lot of head winds
preventing the market from making upside progress. If you think your paper
and/or realized losses in penny stocks have been tough, consider Merrill
Lynch's move today.
The venerable and highly regarded
Merrill
Lynch sold $30.6 billion of face value in CDO's (mortgage
backed securities) for $6.7 billion- about
$.22 on
the dollar. These portfolios were considered a relatively safe
investment, and Merrill Lynch's clients lost 80% of their investment dollars.
Merrill Lynch is taking a $4.4 billion write down and raising
another $8.5 billion in equity.
Setting aside the Bear Market for
a moment, consider that it's seasonally the worst time of the year when
stocks generally make their lows. If you don't believe in the seasonality
of the market consider the following facts:
In a study conducted over the period
from 1970 to 2000, the following was determined. If you bought the entire
DOW
index each and every year over those 30 years on October 1st, and simply
sold it six months later on the last day of March, you made about 9% on
your money per annum. If you bought the Dow on April 1st, and sold it the
last day of September, you made an average annual return of less than 1%.
Ouch. In the new OTC Journal site, which is coming soon, I cover
the seasonality of the markets in great detail with a video presentation.
While it's difficult for most people
to do, about now is probably the best time of year to put away stocks for
a move into the end of December. Most of the smaller stocks I follow are
so oversold that they will rebound on fairly light volume. Some will trade
up without any real fundamental improvement. Others who deliver the goods
will do really well from today's levels between now and the end of 2008.
In light of certain developments
in the markets over the last couple of weeks, I'm willing to be they will
all do pretty well between now and the end of the year.
That change is the price of oil.
For those of you who follow the OTC Journal, you know I have consistently
stated this year's parabolic rise of oil to the tune of $10 per barrel
a month is not sustainable. It had to give way sooner or later and go into
a corrective phase.
In the last 18 months oil rose $100
a barrel, up from $50 to $150- that's an unprecedented rise
for any commodity. Over the last couple of weeks we have gotten back about
30 points- who said there was no speculative money pouring into oil? Sure-
it was purely driven by the fundamentals- come on.
This meteoric rise in the price of
oil, coupled with the crises in the housing market, has thrown the US into
a recession. In a recession, any stocks related to consumer spending don't
trade well- SPKL, PNWIF, and EFSF to name three that
come to mind.
However, I think we're in for a return
to a Bull Market as we work our way through September and into the Bear
Killer month of October. Why?- because I now believe the Goldilocks economy
of low inflation expectations and moderate but consistent growth will come
back.
The Merrill Lynch's of the world
are dumping their mortgage portfolios as fast as they can leading to a
bottoming in the financials. By year's end, most of the bad loans should
have been dealt with, and financials will rebound.
It's probably going to take into
'10 before the housing market rebounds, but it will come back.
Oil is probably the biggest story
right now. Technically, I see Oil finding its way down to about $112. Right
now were at a 38.2% retracement of the entire move up from $90, so we'll
probably get a rebound.
The $112 level is a big confluence
area where a bunch of technical indicators line up. It's the 38.2% retracement
level for the entire move from $50, and the 61.8% level of the move from
$90. It's likely the market will eventually gun for $112 then level off
in that area.
We're not in a recession because
of the price of oil. We're in a recession due to the parabolic rise in
oil this year. It was truly shocking. Our economy can adjust to $112 oil
and prosper as we spend billions on new alternative energy strategies-
the next big bubble. We buckled from not knowing how high we would
go.
We're probably at or near the bottom
now, so if you've endured the pain as I have, take heart. The market is
thrashing around from day to day trying to complete the bottoming process.
I know very few investors have the
vision or courage to do it, but we are close to the time to swoop up bargains.
I don't know which stock will do the best from now until the end of the
year- pick your favorite, and have at it - slowly. You have no buy side
competition. These stocks are so blown out right now they'll move up pretty
easily when buyers come back.
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