Special Mid-Crash Report

By on September 26, 2006

Originally published in September 1998:

INDEXES ON 8/28/98

DJIA 8,051.68

S&P 500 1,027.25

NASDAQ 1,639.68

My, how things can change in a month! With the market buckling under the pressures of excess productive capacity and deflation many bulls are still clinging to false notions that this bear is being caused by investor fears of the devaluation in Russia or the President’s credibility problem. Even Louis Rukeyser (of Wall Street Week fame….Friday at 8:30 p.m. on your local public broadcasting station) is beating the drum in an attempt to gather some buying support after sending out unsolicited offerings for a very bullish sounding newsletter. He likes to point out that trade with Russia is less than 1% of U.S. exports and can’t have much of an effect on our economy. But you start adding 1% here (Malaysia), and 1% there (Thailand), and you start talking real percentages. Mr. Rukeyser is a little too biased to offer up a credible weighing of the evidence. Even his elves (no more than overpaid guessers), on balance, are still bullish, which is ominous in itself, since we are not likely to see a bottom until they give a -5 reading.

The problems in Russia are a symptom of, not the cause of the stock price deflation we are witnessing. What ails Russia is what sent the whole Asian region into a tailspin….and that is greed and avarice. The problem stems from the most basic of human needs…the need to make a buck. CEOs are always under extreme pressure to keep earnings growing. One way to do this is by cutting costs. Another way is by building new factories. And this is where the root of the problem lies. Companies have built too many factories, creating excess supply, which is depressing prices in a big way. Banks in Asia and other parts of the world funded this expansion with cheap money. Why did they do this? Because they were also under pressure to show a growth in loans, which keeps their earnings growing…to a point. Now that prices are too low to make a buck, many companies that built the factories can’t make good on their loans which is causing a banking and monetary crisis. Currencies have to be deflated so the countries that are really hurting can attempt to export their way out of the problems. This whole incredible cycle is spinning out of control throughout the world. The dominoes keep falling…and we may be the last to really feel it, because dominoes, even if they are tiny, can sometimes gang up on the big domino if the conditions are right.

I’m in the mood for ranting, because I see so much junk being spewed forth in the newspapers, on T.V. and radio (just listening to a Wade Cook info-mercial makes me ill!)….that I just can’t take it anymore. We have these muckety-mucks in Washington saying that Japan has to get their act together like we did…as if they had something to do with it! This smacks of the most ignorant arrogance. Japan’s problems stem from the demographic profile of the country. They have too many old people! Their demographics are almost the complete opposite of ours. The only reason our stock market boomed and theirs busted was because of that fact. The only reason our crime rate is down is because of our demographic profile. There is less testosterone in our population than there was 10 years ago. Of course the politicians aren’t going to let you in on that fact because they want to take credit for it. Which is only natural….like its only natural to want to make a buck.

I need to calm down and weigh the evidence for a continuation of the decline, or the resumption of the bull market. It is likely that Alan Greenspan will make some effort to stem the destruction of paper assets because we wouldn’t want too much irrational austerity. So expect some easing of interest rates very shortly. With the 30 year bond trading at a low 5.35%, the likelihood of a further decline in stock prices is still real, but a continued waterfall decline like we’ve recently witnessed is probably not in the cards. A resumption of the mindless purchase of stocks is not likely either. The neophytes (and there are lot of them) who have entered this market in the past 5 years, and just experienced their first major drubbing, are not likely to buy with abandon. I’m sorry Laszlo, but the Dow will not hit 10,000 this year, nor will the S&P 500 hit 1150, Ms. Cohen. The technical damage to this market, if you follow these kind of things, has been extremely severe with all the major indexes plunging below their 200 day moving averages. So I’ll stick to my predictions, since I’ve been very lucky lately, and say the Dow will probably settle in around 7,000 to 7,500 before tepidly starting another bull market. What do I do in this kind of market? The same thing I’ve done over the last few years….mindlessly dollar cost average into index stock funds in my 401(k) since I’m relatively young, and use the Tactical Timing System in the other two accounts (I do have another account which I consider my play money, but it isn’t doing very well so we won’t talk too much about that ;-).

401(k)s Boon or Bain?

A very informative article on the problems inherent with self directed retirement plans can be found at http://www.worth.com/articles/Z9809F04.html

Portfolio Updates

Observations on the stocks held in the portfolios can be found at: http://members.aol.com/stocksystm/holdings.htm

Portfolio Activity

The Tactical Timing System issued a buy signal on Thursday, August 27 with the Dow at 8,165.99. To comply with the system, the following were purchased, except as noted due to limit orders, on August 28 (each have approximately a 5% weighting after purchase).

Aggressive Portfolio:

Templeton Dragon Fund (NYSE: TDF; 6), purchased at 6 1/16

Tricon Global Restaurants (NYSE: YUM; 38 5/16), purchased at 38

Callaway Golf (NYSE: ELY; 9 7/8), purchased at 10 1/2

Conservative Portfolio:

LSI Logic (NYSE: LSI; 12 13/16), placed a limit order at 12 1/2, wasn’t filled, considering a market order

Cracker Barrel (NASDAQ: CBRL; 27 7/16), purchased at 27

Dentsply International (NASDAQ: XRAY; 22 7/16), placed a limit order at 22, which wasn’t filled. Will purchase at the market on Monday, August 31.

Recommended Allocations

Aggressive portfolios: 90% equities, 10% cash.

Conservative portfolios: 70% equities, 30% cash.

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