Monday, November 17, 2008


Hind sight is always easy. This big bear market started in 2000 when the technology bubble broke and when the average PE ratio was at 42. The charts show that we are living through rare times; in 1938 and in late 2008, the 10-year cumulative return on the stock market was negative! A once in a life time event that has been seen twice by a few percent of the worlds population.

The crash started in 2000 but did it end in 2008? The "old pig farmer" will not try to guess if 2008 is a bottom, he will simply note that prices are cheap and thus he will buy low in order to sell high. He may not have much to invest but he will put in all he can while prices are low.

Those who had money and the fortitude to invest in 1938 enjoyed fantastic 10-year cumulative returns again and again all the way to 1959. Indeed, from 1949 to 1959 the average stock went up by 600%, on top of the 170% average return from 1939 to 1949.

In the current situation, what evidence do we have that the market is ready to turn up? Actually there is much evidence but it is not what the media is talking about.

In 1938 a major economic recovery was brewing but the outlook did not look so good. Indeed in 1938, Hitler was actively engaged in preparations for war. He had formed an Axis with Italy in 1936 and in 1938 he expanded the Axis to include Japan, he forced the annexation of Austria and he made preparations to invade Poland. The US response was a weak comment or two. The public was so fed up with stocks that dividend yields on major companies paid more than bond yields (yes history repeats or at least rhymes). Today, scores of well capitalized companies pay dividends that exceed the returns people are scrambling to get in money and bond markets.

After 1929, unemployment rates soared to the 25% area and remained there for years. The "wipe out" of 1929 still makes the tech bubble pop of 2000 look tame. Ironically, the bubble that popped in 1929 was largely an auto bubble. Car sales had gone from mild in 1914 to wild by 1929. Of course, the car industry came back and a significant part of the run-up to 1959 was the auto industry run-up. The death of industry after 1929 was mostly the "old stuff" that was no longer needed, things like buggy whip makers and wagon works.

After the 2000 crash, it was mostly companies that went busted, the Internet did not wipe out newspapers or telephone companies but forced them to gradually adopt the digital model. Today, we are on the verge of the next big wave in the Internet story and there is capitulation occurring. My favorite example is the decision by the owners of US News and World Report, a major magazine, to stop publishing a hard copy. In 2009, there will be billions fewer hard copy pages sold in the USA than in 2008. The momentum toward digital media is surging.

Ford owned the auto market by 1919, GM took a big lead by 1929 and both companies suffered while the Great Depression played out. Saddle companies that stayed in business, despite declining sales throughout the 1920's were forced to quit when the down turn hit. The most parallel comparison today is that Yahoo owned the search market got slammed when the bubble popped in 2000 and has since watched Google take over the market. Google shares have been slammed right along with Yahoo shares just before the great surge of mobile computing starts the next big wave. Google and Yahoo (perhaps as a subsidiary of MSFT) will see dramatic growth over the next 20 years, like the auto companies did from after the great depression. It is the "other stuff" that will go out of business.


Five weeks ago, banks were hurting. They were in such a scramble to attract deposits that one month and three month CD rates reached 5.1%. Six month CD's only paid 4.75%. Last week, the 1one month CD fell to 1.6%, the 3 month to 2.3% and the 6 month to 2.9%. The markets are quickly returning to "normal". The yields on hundreds of corporate bonds peaked on the 27th day of October. Commercial paper is once again being bought and sold.

Pendulums always swing to the other side of "normal". The UK is now on the "other side" by several measures. The weakness of the UK economy has caused the pound to fall from $2 in mid July 2007 to below $1.50 yesterday. This decline may not be over but the UK government is going all out with fiscal and monetary stimuli. The last UK Funds rate cut from 4.5% to 3% was the action of a chef with a meat clever. It was accompanied by several tax cuts. The US has provided the stimulus of soaring money reserves and bail outs to banks but there have been no tax cuts, except the acknowledgment by Obama that planned tax increases will have to wait.

The UK 5 year rate has fallen from 4.4% in August to 3.24% Friday. The 5-10 year spread has jumped to levels not seen in many years, only exceeded by the spreads reached in June of 2003. Yield curves are now forecasting economic rebounds in the UK, the EU, the US and elsewhere.

We live in exciting times. This week it will become clear that there are not enough votes in congress to use TARP money to bail out GM and Chrysler. The auto companies will likely win a speed up in the distribution of the $25 Billion loan but even that assistance is likely to come with stipulations. The drawing of a line in the sand, in regard to government spending, will be great news to the market place. The best way to bring growth back to the US is to realign our pay rates and tax rates to global realities. We are competitive in many markets but It makes no sense to pay GM auto workers $70 plus per hour. No company can enjoy long term success against Toyota or Hyundai while paying so much.

A line in the sand will cause home mortgage rates to fall. The prospective returns on real estate and invested capital will soar. The attitude shift will take time to spread but investors who add money to the market now will enjoy year after year of financial blessings.

The Bear has swung a might second blow, but each decline in commodity costs, including the cost of money, feeds the Bull and makes him stronger. The Bear is old and worn out. Long live the Bull.