To OTC Journal Members: 
 

It's Noisy Out There

You're sitting in your easy chair in the den catching the evening news. The kids are talking non stop. A plane is passing overhead. Your wife is telling you about her friends new hair style (snore), and you're trying to take in the evening news.

If you're like most people, you have the ability to filter out the background noise and focus your attention on the task at hand- watching the news. The best stock market investors also have the ability to filter out the background noise- The noise that causes confusion and takes one off focus. The best stock market investors have a plan and are not easily swayed from their plan, no matter how loud the noise around and extreme levels of chaos. 

It's nearly impossible to filter out the noise today. This is the loudest noise I have ever heard in my 22 years plus in the markets. It's nearly impossible to filter out the noise when the market is crashing everyday, every one around you is losing money in big gobs on the long side, all classes of assets are crashing, and the politicians are warning the world is coming to an end without a $700 billion investment.

Only the best investors in the world can keep a cool head in this environment, filter out the noise, and recognize the opportunity. Warren Buffett is considered by most to be the best investor in the world, and he's keeping a cool enough head to invest $10 billion in two predatory opportunities. As he said "The opportunity was so good, I got my checkbook out and wrote a check". When he writes a check for $5 billion, do you think he actually gets out a book and writes a check long hand and signs it? It wouldn't surprise me if he did.

There are always two emotions in play in the stock market. There is generally a balance between fear and greed. Currently, the greed factor in the market is nearly non existent. Fear totally rules the markets, and nearly all classes of assets are falling apart. Last Wednesday stocks were down, commodities were down, and gold was down. There is a complete disconnect between classes of assets. Fund managers are being blown out of positions all over the place as major institutions are closing their doors and forcing liquidations.

I've written about the fear levels as measured by the VIX. I wanted to share this information that I dug up from a contemporary. The VIX- the measure of fear in the markets, is extremely high right now. Consistent readings above 40 are absolutely amazing. Here's a list of cataclysmic events which caused the VIX to spike to its current extreme levels. One interesting note- they all seemed to happen around this time of the year. Remember, the last four important lows in the markets have been made in October.

Now- here's the really important part. What happened to the market six months after these extreme levels of fear? Check out this table. 

These are measures of the S&P 500 six months after these massive fear spikes. Look at those numbers in '97, '98, '98, and '01. Also, note there is not one single instance of the market being lower six months after these massive fear spikes.

Here's a couple of anecdotal thoughts. Two major factors got us to this point- the massive run up in oil during the first half of 2008, and the implosion of an overleveraged American investment community dependent on residential real estate values.

Everyone's interesting in pointing fingers on the cause of the sub prime mortgage disaster. It was a shared massive speculative hallucination across all sectors from consumers to the most sophisticated institutional investors. There's plenty of blame to go around. 

Today, I was at a 10 year old's baseball game talking to a friend who manages real estate investments. He told me his company had structured a pool of funds to acquire foreclosure homes. They were going to accumulate 4 bedroom homes in the $300,000 range, use them as rental properties for 5 to 7 years, then remarket them. They had one pension fund that was buying 200 homes monthly. That's one smart pension fund.

Here's the point of today's edition. The two main factors that got us into this mess are being corrected. Oil's parabolic rise is over for the time being, and the world seems to believe the BRIC (Brazil, Russia, India, China) nations no longer exist.

Residential real estate has crashed and America is swimming in inventory. The government now has $700 billion to stabilize the banking system, and vulture funds are swooping in to buy cheap real estate. 

The market is now pricing in a worst case scenario- the end of the world. The media is pouring gasoline on the fire with its one sided coverage, feeding the beast.

Here's my forecast. I believe the important low will be made this week. Here's two important lows I believe are coming. The DOW will briefly trade below 10,000, blow everyone's brains out, and send the media into a frenzy. That will be the turning point.

Oil is going to trade down to $87. It's gunning for that level, and it's going to happen. If the $87 area doesn't hold, it could head lower. 

I've got some trading ideas for these blow outs, and I'll share them when (and if of course) they happen. 

In the meantime, I continue to believe investors should own FXI (The China ETF) as long as it remains above $30. Down from nearly $75 earlier this year, this ETF holds the DOW stocks of China.

The market will turn its attention back to growth when the greed factor comes back, and growth won't be easy to find in US Equities. If you think there will be less refrigerators, cars, and new homes in China in 2 years, don't invest in this idea. If you do, it's a good one to scoop up before the investment community remembers a slow down in China means GDP growth goes from 14% to 9%. 

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