1929--1969--2009

The number 40 is special. At least three people have thought so; Moses, Noah and Jim Stack. Noah may have gotten the best deal of the three. It rained on Noah 40 days and 40 nights but at least he had a roof over his head. I appreciate that he was in a boat for 40 days with at least 1000 animals and three sons and that there must have been a lot of manure to be shoveled. I'll take 40 days on most any cruise (I hate them; leave me on dry land near the ocean) over losing 90% of my assets or 40 years in the desert.

Noah wandered in the desert for 40 years because a whole generation needed to pass before the people could enter the promised land. Jim Stack figures a whole generation has to pass after a true stock market crash before the next generation is ready to enter. Jim runs a grizzly old site called bearmarketcentral.com. Jim says that after the stock market collapse from 1929 to 1932 a whole generation swore they would never buy a stock again and indeed many of them never did. Only a few folks were willing to take advantage of the incredible bear market bounce from 1932 to 1937. By the 1950's a whole new generation started investing. After solid returns for 19 years, most of them got suckered into going all-in by 1969. I got lucky and caught a bounce or two and came out ok but the bear market that ended in 1974 was not a pretty sight.

One of the charts I remember from this era showed the savings and loan bankruptcies. Prior to this debacle the vast majority of home loans were made by building and loans which came to be known as saving and loans. There were more saving and loan bankruptcies in 1973-74 than ever before or after. (The industry was not totally wiped out but came close to total annihilation in the savings and loan scandals of the late 1980's).

The good news is that we are still 4 years away from 2009! To make a fortune, you must pay attention to what happened before 1929 and 1969. In both cases we had a beautiful bull market. In both cases the beautiful bull had to stop, catch its breath, graze for a couple of years, add 500 pounds and then charge ahead for the second half. In both cases, the second half of the bull made the first half look like a billy goat market.

A good fellow and good friend, Bill Leinbach, a successful broker for more than 40 years, loves to tell stories of the 1960's bull market. It has been 20 years since he had me and others rolling on the floor with stories I only wish I could tell. Bill bought Xerox before lunch one day, sold it after lunch, took the rest of the day off, bought his wife a new car with part of his profits and was in bed making love by 4:30 in the afternoon. (Forgive me Bill if I have butchered the story, I always thought you exaggerated a little but the charts prove the market was a lot of fun.)

It is impossible to understand all the effects significant events have on a markets behavior. It often takes hindsight to gain understanding. For example, when Kennedy was shot, November 22, 1963, "everyone knew" the stock market was going to get hammered the following Monday. Almost everyone of that generation can remember the scene of Lee Harvey Oswald getting shot by Jack Ruby. This is natural partly because the scene was replayed on TV only 50,000 times. The market was closed on Monday but re-opened Tuesday. How many folks remember that the stock market made its biggest one day move since the 1930's?! How many folks remember that the Dow Jones Industrial Average hit an all time record high two weeks after Kennedy was shot and that the market didn't hardly take a breath until 1969?! (A good read: The Bear Book, John Rothchild.)

Folks like Papa John (my Dad), who did very well trading Xerox, Control Data, Burroughs Computer and other "Nifty-Fifty" stocks in the 1960's, did not like to talk about the stock market of 1969 to 1974. I never learned how badly he was burned but his attitude reminded me of his WWII service. He saw things during the war that he did not like to talk about. As always, there were a few that caught the bear market bounce of 1971-72 but most of those went all-in to catch the worst of 1973-74. Papa John was a resilient old cuss and he was able to get back into the market and participate in the big bull boom bubble bust of the 90's but many walked away from the 1974 market to never come back.

For many more folks, the collapse from March of 2000 to October of 2002 is too fresh to even consider buying now. These folks have already missed a nice move. A bull that has paused for a little while. This bull is grazing, putting on weight and getting ready to make a big charge (I figure it will charge at least by November 1).

Back to the Kennedy assassination. The economic conditions were ripe. Kennedy had successfully passed a significant tax, he had jaw boned inflation down (this time it was the price of steel that had gotten out of hand) and the bull had been grazing for two years. Only about half of the businesses had adopted the new technologies during the first half of the bull. The second half of a big bull boom bubble bust stampede was ready to go the only thing it needed was the classical wall of worry to climb. Who knows; Kennedy probably would not have increased government spending nearly as much as Johnson so the bull may have taken a zig, a zag or both along the way, but the market was ready to explode no matter who was president.

The parallels between the mid bull slow downs of 1919 to 1922, 1961-1963 and 2000-2002 are striking.

In the first great bull of the 20th century, the invention of the car assembly line in 1914 created prosperity and a market that would not quit; but in 1919 it did! The boom had caused prices to zoom; one industry in particular, the oil business, needed to catch up.

My great grand-father took advantage of the situation and bought 40 acres of land in Texas. Two weeks after buying the land, he sold half the mineral rights for the same price he had paid for the whole 40 acres. In other words he got all 40 acres of land and half the mineral rights as a "finders fee". Isn't it amazing how smart a move one can make one day and then mess up big time only 2 weeks later? He traded a fortune worth of mineral rights just to get his original investment back quickly. Isn't it easy to be critical of a man who was one of the smartest of his generation? The fact is that he, his children and grandchildren received a healthy stipend from his smart move. Even now, I get two small checks each quarter. Had he had the wisdom to have invested the check for half the mineral rights into anyone of the companies that became General Motors (Pontiac Motors etc.), I would really have a story to tell you.

The only problem I have with his oil well purchase is that families were too big in those days, my ownership is equal to three tenths (I inherited one tenth and bought the inheritance of two cousins) of one sixteenth of one third of one half of my great grandfathers share. Great-granddad only got one eighth to start with because the oil company kept 7 barrel's of every 8 to pay for exploration and production costs. In other numbers, I get about 2 hundredths of the oil revenue produced on this land and the well is about played out. My grandmother who owned a share 3.3 times the size of mine, received $700 a month during many years when that was a lot of money. I own about 4 acres of land 30 miles north of Dallas that I have never seen. I pay local taxes of about $600 per year and my checks total less than 25% of the taxes. I plan to post a picture of me, my family and my oil well in a few months.

Back to the "real" story. After about half the families had purchased cars, the market stalled. It took a little company that became known as General Motors to figure out that trade-ins should be accepted and installment financing should be arranged. The second half of the bull market became known as the roaring '20's. Even those, who made the "mistake" of buying General Motors in 1919 before the mid-bull bubble busted, made 2,200% on their investment by 1929. Calling the purchase of General Motors in 1919 a mistake is like calling my grandfathers purchase of an oil well a mistake and it is like calling the purchase of EBAY in January 1999 a mistake.

Same story, different characters in the 1950's and 1960's. The computer and other high tech inventions increased productivity dramatically which is another way of saying the inventions increased weath dramatically. (Productivity is my favorite word and we have lots of it in our current economic environment). The market was on a great run but prices got out of hand. Steel was in great demand and the industry tried to raise prices sharply, Kennedy used the bully pulpit to convince the industry that it was in its best interest to squeeze profit margins rather than customers. The adoption of the computer still had a long way to go and technologies like the Xerox machine was sitting in the same place the radio-TV-cell phone sits today. And yes, the P/E ratios were just too high!

Marty Zweig and many other knowledgeable investors have lamented that one needs to be extremely careful when P/E ratios get too high. However, if one steps back to take a long view, it is clear that P/E ratios stay too high for a very long time during a big bull boom bubble bust. In the roaring 20's the roaring 60's and the roaring 90's, the P/E's really did get too high and there was a major correction in each case. After the correction, P/E ratios were still too high! Even during a time when the majority of folks will not touch the market, there are wise old owls who recognize they are in a bull market and they hold the market at high P/E ratios.

At any auction sale, prices only go down so much until the market makers out bid one another. The relatively few big buyers are stong enough to hold at these levels. Latter on, when the crowd shows up, prices soar. Investors are confused. The majority are holding record levels of liquid assets in a combination of savings accounts, money market accounts and fixed rate instruments of some type. Those who are investing in equities are crowding into the foreign markets. The world markets have out-performed dramatically but remember the whole world is arbitraged. To put it in biblical terms the foot bone is connected to the leg bone and so on; the world market cannot walk off and leave its head behind (too far). Huge amounts of money are invested in 10 year bonds that guarantee a maximum return to maturity of 4.4%! It does not matter that 4.4% is well below the averages for a couple of thousand years. Investors on balance are too scared to enter the market.

At least a couple of the bloggers that I read and respect have made an issue of the fact that the sentiment is too bullish. This measure is of those that are in the market. The fact is that you can't get the majority of the people to even discuss the stock market right now. (The long term put-call ratio is actually pretty positive.)

The bottom line is that if you buy the big bull boom bubble bust, one day, you will tell your grandchildren about it. If you wait until the bubble phase is reached, when everyone is getting rich but you, you will have to tell your grandchildren about the bust.

FREEDOM IS ON A ROLL

The picture in today's paper of Iraqis protesting terrorist was worth a thousand words. Lebanon's recent actions show that democracy is ready to spread. Syria is clearly trying to avoid provoking the US. Even France is giving up on some of it's socialistic ideas.

The next big trade agreement that needs to be passed is called CAFTA. With its passage a free trade zone would be passed for all of the Western Hemisphere. The benefits to all countries would be large.

The congress surprised all by passing class action tort reform quickly. The democrats want to be able to make the case that they have supported Bush when he should be. From now until late August and maybe until October, the democrats and republicans will be playing a field position football game. Pushing social security reform over the goal line will determine if the 2005 game is won or lost. The democrats have shown a willingness to trade a little to improve their red-zone defense.

National events may give old George an extra pass receiver or two. Some really good things could happen in the Middle East. On the other hand, a weak domestic economy could help pass tax cuts or make the previous tax cuts permanent.

Many have learned not to underestimate Bush. Bush is on a roll as is Freedom.

TWO TALL STRAW MEN

Lindsay Graham and George Bush have used the possible solution of solving the social security problems with an increase in payroll taxes as a Tall Straw Man. The strategy has worked well. A few months ago, Americans in general thought little about the need to revise the plan. Now, individuals are writing editorials saying the plan needs to be fixed and the way to do it is to tax the rich. Others are writing that the way to fix the plan is not to raise the taxes but to do something else.

David Broder, one of the TV talking heads and an editorialist for the Washington Post, is promoting the democratic Tall Straw Man. Most of the budget cuts Bush proposed were in broad categories of services. Broder takes the spending caps proposed and applies them to specific programs to make it sound as if Bush is stealing from the widows, orphans and single mothers. The attempt is to gain leverage for the horse trading ahead.

The democrats want the public to be so upset about budget cuts that they will fight harder to "save" social security. Bush wants to pass reform and is willing to trade off with special interest as might be needed to get the more important task done. Polls are showing a wax and wane pattern. The public is now more concerned about budget cuts and more aware that something must be done to "save" social security.

Obviously both sides believe they can "win". I am a biased republican. My economics and business background and my republican bias make it clear to me that reform is a "win" for the whole country. I am also a fair poker player having won on balance for 37 of the past 38 years. It is clear to me that Bush has the stronger hand. When push comes to shove, I believe compromises will be reached. The compromise will include private savings accounts.

Unfortunately, the accounts will not be available until near the end of this business cycle. Smart investors will invest fairly aggressively now and then very conservatively when the accounts are finally available. Drop me a line if you would like get a little advice from an old retired guy.

WATCHOUT--FRIDAY'S PAYROLL NUMBERS

A number of traders are nervous concerning Friday's payroll numbers. Last week, new claims were very low. As you might guess, payroll numbers work upside down and backwards from the way new investors think. If you remember Econ 101, then you know that inflation and payroll are inversely related. If the payroll numbers come in strong, fear of inflation is heightened, interest rates go up and stocks suffer.

Oil is moving up again; trading at $53.05. We are approaching another inflexion point. US short rates need to go up or the dollar needs to trade down. It would be good news for the market if unemployment claims go up.

BUY SIGNAL

One of the blogs that I enjoy most is the Random Roger Blog. (http://www.randomroger.blogspot.com).

I think our long-term investment strategies are similar although he is apt to use funds where I am apt to use individual stocks. I am more the gun-slinger but we each practice similar portfolio diversification techniques.

Yesterday, Roger posted a blog that was a beautiful sight. Seeing the blog was one of those moments when you stop what you are doing and say, "Wow! This means the next move is going to be big".

The blog was about the latest IPO for stock-income funds. I followed the link but cannot even remember the name of the fund or other details now. There were several interesting signals including that it was not the first new fund of this type and it was the largest yet--fully subscribed.

Whenever there is strong demand for a specialized fund and there are new similar funds opened, the end is near! The strategy of the fund will soon be a poor strategy. I should be able to think of many precise examples. This phenomenon has happened many times. Each year, the most naive of mutual fund investors are likely to move to types of funds that did well last year. The new EFTs for Gold partially prove the point. Gold was up strong for maybe three years before GLD and ??? was started. Since then the price of gold has pretty much stalled. I am currently playing NEN for a bounce but the whole group looks "heavy".

In the current back and fill market, the income fund Roger wrote about is particularly noteworthy. For some months now, with the exception of energy, the market has "sloshed" back and forth. Even energy had a big down day Monday when the rest of the market was strong. Like so many other indices, the oil services index approached the old top and then collapsed. The Dow and the S&P have made similar moves. In other words, most groups are trading in relatively tight ranges--nothing breaking out. The NASDAQ 100 has in fact under-performed most other groups. Many a QQQQ option is bought and sold but this EFT has been relatively stable.

The stock-income funds write (sell) put and call options to capture option premiums. It is significant that the long-term treasury bond made a big speculative move a couple of weeks back and is now trading down. Very few investors want to get locked into 30 year rates of 4.5% but there are a lot of investors who would be pleased with an 8 or 9% steady income stream in the current market. In my experience, those who expect to average better than 9% in an option income fund are misguided, but again 9% would be excellent for an income buyer in today's market.

The problem will be when the market moves big. The option writer will get stung. Another problem is that when the strategy becomes popular, the premiums die; the net income captured becomes small relative to the risk of missing a big rally or only the option income is small relative to stock declines.

I treat the popularity of option writing as a strong buy signal. The idea being to go the oposite direction of the crowd. I cannot recommend that you buy risky options, but buying stocks without writing calls should beat the call writing accounts. However, remember that I am a semi-long-term investor. I hold positions for years. I like to mention my beach condos that I bought an average 12 years ago because I currently offer them for sale. But I have 25 year old shoes in my closet. I have silver and gold purchased 38 years ago and stocks purchased 20 plus years ago.

The US stock market is going to make a major move up between now and January 1 of 2006. Indeed I believe in the BULL BOOM BUBBLE over the next 5 years and a BIG BUST by 2011-20012. What I take from this most recent buy signal is that the next move is going to explosive. When it happens, a lot of short-term traders will sell into the move. The option sellers may re-purchase options at a loss to avoid the costs of trading out of the stocks. The funds that are committed to this strategy will then sell call options again only to lose again. They may hold the stocks through-out the rally but only net a small portion of the gain.

The problem is that it is too early for the market to get a read on the likelihood of Social Security reform. I believe Bush and Greenspan are going to apply more and more pressure as the year progresses. The real pressure will only come when it is time for congress to pass the budget. Theoretically this needs to be done before the fiscal year begins on October 1. In practice, the congress has been known to fight long and hard when a major change is proposed.

The budget actually has nothing and everything to do with Social Security. Bush has the votes to pass the budget; he will have to do some horse trading to pass social security.

Social security reform will be very positive for the market. Many believe that passing reform is at best a 50/50 proposition. I believe the odds are at least 80/20. I am discounting the passage now! I am basically going "all-in" now. I may be early but I will not miss the big move.

SMART CARS AND VERY SMART CARS

Market Moves on Small Decline in Oil

Yesterday, the market made a very broad based move up in conjunction with a small decline in the price of oil. Last week, I graphed the oil and airline sectors to show that oil and airlines move together in the mid to long-term. Yesterday, the energy sector was one of few moving down and the airline sector was up a whopping 4.79%! A big part of this move was a result of the agreement reached by CAL and union officials to cut $500 million in annual costs!

Oil is not about to tuck its tail and run away. Demand is still strong. However, the seeds of change have been planted and it is only a matter of time before prices will moderate.

One of the seeds planted and growing like a weed is the Smart Car. This European Micro Car is making an assault on America. Zap (ZAPZ) has worked a deal to distribute the cars in the US and orders have soared. Last week orders were for $55,000,000 up from $40,000,000 the week before. The Zap web site is http://www.zapworld.com. I am not planning to buy shares or the vehicle but I do appreciate the fuel savings--still a trickle but growing quickly.

The Canadian version called the Smart ForTwo will be the smallest production car in America at 98 inches long. The car has a 40 horsepower engine and it gets 56 miles to the gallon. The Zap version has to be retrofitted to meet US standards and like any new and exciting product is dramatically over-priced. Since October, Canada has pre-sold 1200 cars at a base price of $13,400. This sounds reasonable until you remember this is an over-sized golf cart. My guess is that you can't buy a base priced model.

The point is that the market is adjusting quickly to the reality of tighter oil supplies. The big fuel savings will come from the completion of nuclear and coal fired power stations. Many are in various stages of design or construction. The "big daddy" nuclear stations will take 10 years or more to come on line.

The growth of Smart Car sales is important from the point of view of life style change. Americans moved from the farm to town and then to the suburbs. In Harry Dent's book, The Next Great Bubble Boom, a new trend is discussed. Harry calls it "to the exurbs/small towns". In many cases whole towns are being built where only Smart Cars can travel. In particular, the Smart Car is great for "retirement towns". Eighty year olds are comfortable driving a light weight Smart Car 20 to 35 miles an hour on streets with other Smart Cars. Smart Car is actually the Mercedes Benz brand but all the majors are producing or planning to produce similar vehicles.

In these communities, it is a short distance to every thing from the grocery stores to the office buildings. The fuel savings are more substantial from the fewer miles driven than from the savings per mile. With the advent of super high speed broadband internet connections, many companies find they can accommodate satellite offices in small towns and achieve substantial savings in total costs per employee.

TECHNOLOGY KABOOM AHEAD!

For ages, there has been talk of the smart home, the smart car and the smart office. The technology is now available to make this happen and it is happening. Various products are already in the dramatic adoption phase. The costs of the technologies have gotten so low that it is now a matter of picking and choosing the end products.

Examples are everywhere. The TV is merging with the computer to make media centers. As many as 100 micro-computers are in the latest cars. The cost of a long-distance call that was about 50 cents per minute in today's dollars 20 years ago has dropped to zero!

Cars and other products are getting smarter all the time. The latest BMW is almost impossible to steer into a fishtale and if the sun is shining in one side and not the other, the air conditioning automatically adjusts. Nissan is working on "lane departure prevention". The latest Acura RL has been describe as a media center on wheels. Sensors are being embedded into roads which means car navigation systems can avoid traffic accidents, stalled vehicles or construction delays.

Many of the newest products seem to be "boy toys" but there are features coming that will save lives and dramatically enhance productivity. A car that won't swerve out of its lane, adjusts its speed with the traffic and knows where to turn, almost drives itself. To top it off, GPS navigation systems are coming down in price and adding features that provide quick payoffs.

Trucking companies now know immediately if a driver is going too fast, changing lanes too quickly or stopping at a beer hall. Insurance companies are offering major discounts to companies that adopt monitored safe driving. Even consumer auto insurance companies are getting into the act. Norwich Union is currently testing a GPS system that monitors everything from speed to braking habits to running yellow or red lights.

One may protest the invasion of privacy but if an insurance company offers my family a substantial discount for safe driving, I am ready to sign. My family has been very fortunate. Between our daughters, Marilyn and I, we drive 4 cars that have an average of 147,000 miles each. We have had no major accidents but three of us have gotten speeding tickets. We know better and would not mind having an additional financial incentive to reduce our speed.

Stock Market Boom Ahead.

I could make a very long list of other new technologies that are experiencing fast growth. High tech advances are everywhere. After the explosion of the 90's, a pause to consolidate was needed. All "booms" must come in waves. Part of the reason is that there is always a "chicken before the egg" cycle that must be followed. The internet grew dramatically using copper telephone wires. The second phase required installation of high speed cable and fibre-optic lines. The high speed lines have opened the doors to thousands of life changing innovations. In the past several years, companies have spent billions preparing to offer the next generation of products.

A similar cycle has played-out in the wireless market. What, maybe 100 years from long-distance one way voice radio transmissions to routine and common two way transmissions? Suddenly, the capacity is there to make two way video transmissions. The number of new portable communications devices coming to market is large. The Sony PSP is not a game machine! Yes, one can use it to play games with anyone anywhere, but one can also watch one of hundreds or "made for cell phone" news, weather or mini-series "shows". The monthly service fee for one "cell phone TV service" is $13 to $18 per month. The Sony PSP is also a remote TV camera that is wirelessly connected to the world.

Another huge technology that is being adopted at a fast pace is "shopping and payment systems". The self service touch screen is an important component. Fast food and grocery stores are two of the early adopters. Systems that allow customers to receive information and input maximum choice will change our lives.

What is the bottom line of all this innovation? Innovations only occur when there are people who have money to buy the products. I made this point to a 47 year old friend on the basketball court last night. He had to agree that he is moving into the time of his life when he should have the most disposable income ever. The "baby boom" after WWII occurred 59 to 46 years ago.

Our kids are grown, we are making money and we are ripe to spend. We may spend on Smart Cars or electronic medical implants (another booming market) but we will spend.

I try to always invest first and buy later. Sometimes I never get around to the buy part because it is too much fun hitting the invest part correctly. For example, when studying the cell phone market, I came to realize that Nextel (NXTL) had the best product. I bought the stock for any family at a time when it had a negative book value. We have made better than 7 times our money but never got around to buying a Nextel phone.

I suggest you would be wise to invest before this next tech boom. It only takes common sense to recognize which industries are being hurt and which are being helped. Those that are being hurt must innovate or die. I predict that a lot of small newspapers will die in the next several years. Ironically, hundreds of thousands of "online" "newspapers" will be started during the same time. Big resource rich companies with the sense to innovate, such as Dow Jones and NY Times, will withstand the onslaught by adapting. Dow Jones is down about 25% in recent months. It paid big bucks to buy CBS.MarketWatch.Com It will gradually figure out how to monetize its large customer base.

Pick and choose carefully but choose. Tend to choose the leaders in each sector. They are leading for a reason. Don't be afraid to ask for a portfolio review. One of the all-time best investors, Ben Graham, said, it is easier to attain satisfactory investment results than most people believe but it is far more difficult to produce superior results than most people believe. My wife knows how many years hours I have studied the markets. Working as an Account Executive for 10 years was a valuable experience that I don't recommend; the family and personal costs are high. It takes experience to recognize key indicators. I received a wonderful boom indicator yesterday. I would be happy to share ideas with you or assist you with a portfolio review.

NOW THAT'S CONTINENTAL!

Continental Air (CAL) has negotiated agreements with a couple of its unions. Management anticipates savings of $500 Million per year. The company has 67 million shares outstanding. A savings of $7.46 per share?!

Because the industry is in a distressed state, I have hedged my bets. I have spread my investments into four legacy carriers; CAL, DAL, NWAC and AMR. The airline business is one of very high operating leverage. It is a business that requires very high financial leverage. These factors make earnings very volatile. In my humble opinion, the next swing is going to be very strong. The past two quarters the company has lost an average of 16.5 million dollars. The savings announced average 125 million dollars per quarter.

CAL has the power to earn $6.50 per share or more by next year. I don't think the stock will be selling for $11 per share if it makes $6.50 per share. The company has negotiated an extension on its purchase of Boeing planes. CAL will not lose out on the purchase deal if the union passes the contracts.

I did not take the time to look up the dates of the votes because I wanted to let you know quickly that a deal has been struck. My guess is the stock will move up another couple of points in anticipation of a positive vote.

Written for education and entertainment purposes. Distressed stocks are risky, to buy or not to buy is the question you alone can answer.