Thursday, August 16, 2007


I send my many thanks to those of you who have added funds to your accounts in the past month. This action shows the mentality of greatness. Doing what is hard to do is a good thing in all areas of life and it is certainly a characteristic of disciplined, rational and successful investors. In family accounts, in the past several days, we have increased our exposure to levels I cannot recommend to my readers. I have increased to these levels of exposure while knowing that it will be at least another 45 days before the Congress passes the new bills and budgets. The potential acts of Congress hang over our heads like the sword of Damocles (sp?). The unwinding of the carry trade is still in progress.

However, the market is currently dramatically over sold. Yes, it could get worse but the chances of a bounce have increased. The statistics are compelling: (the following numbers flow through from the Hays Advisory Service)

Both the NYSE and the NASDAQ 21 day moving averages are over sold more than any time in recorded history (these numbers go back to 1940).

The total put/call ratio is at its 6th highest all time record level (data through 1965).


The big elephant in the room is the question, "What is different this time?"

The answer is that stocks are still relatively cheap. As Keith Hayes points out, many have compared what is going on now to the crash of 1987 and the credit crunch of 1989. He also notes that in each of those cases, stocks were not relatively cheap.

Is it time for the world economy to slow down a bit? Yes. The world has never seen a boom like the one of the past several years. Having a country the size of China grow at the annual rate of 11.5% is an incredible event. The fact that this just happened after 20 years of rapid growth is amazing.

How does the world go from too fast to just right? This is the $64,000 question. It is especially difficult when the public and the congress are frustrated by seeing lots of people get very rich off the cycle. The fact that the poorest of the poor have gained by a greater percentage than have the rich does not ease the envy. Christianity is just one of many religions that teach not to covet they neighbors wealth. This is yet one more teaching that is easy to break. The situation is that Americans, including many members of congress are ready and willing to "shrink the economic pie" provided the remaining pie will be distributed more equally.

The current down turn is partly nothing more than a warning to politicians to keep their "hands off". Raising taxes becomes far less appealing when facing an economic crisis. If the economy is weak, the idea of lowering taxes to strengthen the economy gains credibility.


Warren Buffet has been credited with the above saying. The housing binge was a big binge and by 2005 beach houses were jumping at annual rates of 30% or even more. It has now been about three years since the FOMC started started adding weight to the other side of the see saw. The FOMC acted 17 times and eventually stacked 5.25% interest weights on the "other end". In the past year, other central bankers have stacked more and more interest weights on the same end. The cumulative effect of these moves has finally tilted the see saw. Now, these same central bankers are scrambling hard to balance the see saw. They have now straddled the middle. They are piling big chunks of cash on the other end. This morning, the FOMC put 5 billion on just after Japan and Australia added a total of 3 or 4 billion.

Have you ever tried to balance a see saw in the middle? If you have a heavy kid on one end and a light weight kid on the other, you must move toward the light weight kid until the see saw starts to move. Then when it does move, you have to shift some of your weight to the other end. Only with practice and skill can you settle in the middle. On the other hand, circus acrobats can pull off the trick time and time again.

The central bankers of the world are real professionals. They have practiced this craft for many years and the evidence of high skill is clear. The economic cycles have gotten smoother and smoother. If you want to see some vicious stock charts you should view the records of the "panic years". I don't remember the details but as best I recall one of the big crunches was in 1907.

For those of you who are adding money regularly, I will continue to buy more and more. Your biggest gains will come from the more recent additions. For those of you who are not adding, I will hold positions, except to satisfy any margin calls if any. For family accounts, I will continue to add aggressively to airlines.

Most of you have substantial assets in 401-K accounts that will not be heavily withdrawn for many years. These funds should be allocated 100% toward equities (my non-professional and freely given opinion). For those of you willing to speculate, you should tell me you are willing to sell some of your winning positions to add to your aggressive positions.

The coming "bounce" is going to last a few years. You need to "catch" the beginning.


As any life coach, sports coach or philosopher will tell you, there is no gain without pain. I hope my relationship with you all will be strengthened as a result of us all having had to endure some pain together. Pain is "good". It is not an "evil" thing. We can only experience great joy as a result of enduring pain. I am so very grateful for my friends and family who have been enduring this market correction with me. They willingly share their pain with me. We will rejoice together when this ordeal is over.


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