Bear Market Report
By Lance Spicer
6th July 2008
Well, as they say…..&%$# happens! The market has turned sour as it does every 5 to 7 years and we find ourselves in a Bear Market. This time, it’s over zealous US banks lending to people who can’t afford the repayments and oil speculators driving up the price of oil because they think supply will be a problem in the future. Coupled to this we have seen a rise in all commodities sparking fears of inflation. Put all this together, and you have a bear market. Last time, back in 2002, was due to “irrational exuberance” driving up stock prices of “tech” stocks to unsustainable levels. When investors realised the Internet was not going to provide instant wealth, everyone retreated and dumped all their speculative stocks, as well as dumping their good stocks…. Sounds a bit like what they are doing as I write this report. For example, commodity prices are holding steady or rising, but people are now panicking and dumping mining stocks…. Why? Because they are panicking…. They want their money out of the market and now!
In every bear market, the good stocks get dumped with the bad ones. But have you ever thought about things this way….. while you are panicking and dumping shares at a rate of knots, have you ever wondered who was buying and them, and why?
“What “nutcase” would be buying stocks now?” … “The stock market is collapsing!” Well, there are a whole bunch of investors out there who don’t have this opinion. They are the “sneaky” minority. These “optimistic nutjobs” go round buying stocks when everybody knows the market is collapsing further…. Or worse the world is coming to an end. Nevertheless these, clearly psychotic people continue to buy. Why do they do this?
Well, as one of these people I’m well qualified to tell you. It’s simply this, all this will very shortly be over and I will have invested at or close to the bottom of the market.
Ah, but is it really close to the bottom? What if the market continues to drop? What if oil continues up and things get worse?
Well, only an idiot would predict that these things couldn’t happen, but let’s look at the facts for a minute:
Oil Prices
Oil supply at the moment is fine. There is plenty of oil and the producers are saying so. No one has complained that there was no fuel when they tried to fill up, so what’s the problem? The simple truth is there are no supply – demand issues, yet. That’s the problem – the “speculators” or as they prefer to be called, Futures Traders, are betting this supply – demand situation won’t last and that supply will fall and demand will rise. They do have a point.
The way I see it is – this problem started in the 80’s when oil was cheap as chips and because of that no-one invested money in new exploration or new fields. Then in the “00’s”, along came eastern Europe, China and India with their growing middle class. This of course meant a requirement for more fuel, and we simply didn’t see it coming early enough. While the US still uses 25% of the world’s fuel, their consumption hasn’t caused a great increase in demand, but China and India are now increasing their use dramatically. This is where the problem lies. Couple that with problems in Nigeria, Iran, Venezuela, reducing outputs from Mexico, Indonesia and some middle east oilfields, and we have an expectation that there will be a “supply problem” down the track, as early as next year maybe? This where the futures traders come in and bid up the price.
Is the world running out of oil? No. The world is running out of cheap oil. Oil, will never return to $40 a barrel. Oil will be more expensive to produce because most of it lies offshore, which means drill rigs, lots of them will be needed. But it takes time to start new oil fields in the ocean – about 6-10 years. Companies in the oil industry are working as fast as they can to get this extra supply online, and will be successful, but it will take another year or two before we start to see the increase in supply come on line. So, I suspect we’ll see high oil prices for about two years before seeing them drop in 2010. Alternative fuels will become more viable the longer fuel remains high.
Is it inflationary? Yes, it is, and this has the markets worried. However, there will be a point when the price of fuel will actually cause people to do things differently and this will ease it’s upward movement. Once the price stops going up, the inflation effect will stop and the market will calm down. The new cost of oil will hurt for a while and then will simply be accepted as part of business and will be built into the cost of goods. As long as it doesn’t keep going up forever, we’ll be just fine, and so will the markets.
You see, the world is changing. We now have Brazil, Russia, China and India. We have 300 million more consumers in this commodity cycle than we had in the last one back in the 1970’s. Specifically, we have the industrialisation of China & India, which is why this commodity boom has legs. It will last longer than any other commodity boom in history, I suspect out to at least 2014.
Credit Crunch
The second problem ailing the markets is the “credit crunch”. This has been brought about by the banks in the US and elsewhere having to write down loans provided to less than credit worthy home buyers in the US. During a housing boom, everybody expects prices to just keep going up, even the banks thought “negative equity” just wouldn’t be a problem while everything was going along nicely on the housing front. However, all booms end and this one ended in 2006. The reality of a slump in housing prices in the US, caused “sub-prime” mortgage holders to start to default, leaving banks with huge debts as house holders simply walked away from houses with negative equity (which they can do in the US). This leaves the banks “holding the bag” and having to sell all these houses in a bad market. All the banks carrying these bad loans had to then start writing them off…. Billions lost off their balance sheets, and more to come.
The result will be banks will be in the doldrums until at least 2009. At some stage, the news won’t be able to get any worse on the financials, and they will be a great place to invest money.
As to the issues of the banks being “tight” with lending due to liquidity problems and this having the effect of stifling growth, it’s only a matter of time before the banks start lending again (albeit more prudently). This is the only way they will recoup their losses and start rebuilding their earnings. This is 100% inevitable. Time is the only variable, but as I write this report most banks are already making moves in this direction.
The Markets
Around the world, markets have been hammered and nearly all stocks within those markets have gone down with them. The US market has held up quite well, surprisingly, while the Australian market has been one of the worst affected and should not have been when you consider that much of the market is commodity based, which are still booming.
The average bear market lasts around 13 months, which means that we should be back in bull territory by October. However, I think this may end sooner. My reasoning for this, is based on the reasons we are in this bear market in the first place. Firstly, bear markets that are due to a tightening of credit tend to end sooner than others. So, it comes back to the price of oil being the issue that stands between the bulls and bears. The oil price is precarious to say the least. If it goes much higher demand will definitely start to wane, it’s already down 2% in the US and dropping. The greatest cure for high prices, are high prices. This is what is worrying oil producers at the moment, if oil becomes too expensive, all the alternatives become viable (and possibly permanently changes the way we do things). The price of oil may bring about demand destruction.
The oil market could turn ugly at any given moment, a drop in oil price of say, $10, could set off a 3%-4% rise in equities in one day. You can’t miss these rises! They may be regarded as bear market rallies, but they are usually very dramatic.
Believe it or not, bear markets provide the most dramatic one day rises in the markets. Two important things to note:
The best time to invest is when markets are low and in the doldrums.
The strategy that all great investors will tell you, is to make sure you are invested when the market hits bottom or close to it. The rise out of the doldrums can be spectacular.
Missing these opportunities, and sitting on the sidelines (as US$4 Trillion dollars is doing in money market funds that had formerly been to a large extent in equities), will affect your returns dramatically as the chart above shows.
When will it End?
Everyone wants to know when the bottom has been reached. The end of all the nastiness. When is it safe to get back in?
Well, I simply don’t know. I suspect soon. It could be 3 months, 3 weeks or 3 days….. No one knows.
So, to get some idea before I started putting excess funds into the market, I would consult two reasonably reliable sources. One is Bespoke Investment Group. They have a very reliable indicator that works every single time.
It examines and combines the 50 day moving average, the 10 day Advance Decline line, PE ratios both current and forward, dividend yields and net earnings revisions and they come up with a very good chart telling you where the stocks are at a point time. On the 3rd July 2008, this was the chart.
As I said, this is a very reliable indicator. Earnings guidance and revisions have been for the most part positive, which is very out of step for the middle of a bear market.
The second thing I look at is chart history. It’s amazing how often charts act the same way when reviewing market events, like Bear Markets.
Let’s look back at the last bear market in 2003. A very nasty one, often considered a “once in a lifetime” bear market due to how long it went for.
The following S&P 500 chart shows you the 2003 “bottom”.
The Bottom of The Market in 2003
You see in the chart the initial bottom, and then two more tests to the bottom. For some reason it always tests the bottom three times. It eventually shakes out all the weak investors (mostly individuals), then recovers.
The Bottom occurred in February 2003, then this happened……..
The 2003-2007 Bull Market
From March 2003 to October 2007, it went up from around 850 to 1550. A fabulous bull market. Is this spooky or what?
Below is 2007- 2008. This what we are currently experiencing. Look at the two charts (the Bottom 2003 & Bottom 2008?)…..
The Bottom? of the 2008 Bear Market?
Here is 2003 Bottom again so you can compare them closely….
Both charts are almost identical in their formation. Now, I’m not saying this is absolute proof of an imminent recovery in the market, but you have to admit it looks like it.
We have almost identical charts signaling a bottom, and a very reliable indicator telling us stocks are oversold.
So, we must ask ourselves, are all the weak investors out? And the ones that remain, have they decided to sit tight? Probably. The next move will come in late July and August. As US companies report their earnings we’ll know whether the markets are going to break with history and head lower, or maintain their record, and start upwards, perhaps slowly at first. The earnings will tell all.
The first quarter of 2008 was generally positive and we saw a rally in stocks in April and May as I predicted back in February. So, how will it turn out?
Well, I monitor earnings guidance and earnings revisions like a hawk, getting reports everyday on stocks that have realised some information. I’m please to say that 70% of guidance is in line with expectations, or up. Good news. If the actual earnings reflect this…. The next bull market just may start in August. I suspect it will. There is no evidence at this time to make me think it won’t.
The only problem will be the oil price going to over $160 per barrel. That will temper enthusiasm.
The 2008 Bear Market Strategy
Identify stocks that have been oversold and are in the industries that will continue to do well over the next couple of years or who always recover well from bear markets.
The latest Bear Market Strategy Report sent to Trident Confidential reveals my stock picks that have the greatest potential. For example:
Agriculture – Farm equipment, farm technology, fertilisers, seeds and chemicals.
Heavy Construction Equipment – building infrastructure – cities, roads, bridges, and hospitals need to be built.
Oil Service – Rigs, drill ships, welders, ship builders – there are huge backlogs in this business.
Industrial Metals – Iron ore, Aluminum, Copper and Zinc.
Energy – All alternative energy, wind, solar, nuclear and geothermal.
Biotech/Nanotech/Healthcare – Baby Boomers are getting older.
Technology – One of the first “recovery” sectors.
In the latest Trident Confidential we show you exactly where the growth continues as is proven by our 29% return this year while markets have collapsed. In the members only version of this report I tell subscribers of my 25 Core Holdings that are “must have” stocks for the next market “lift off”.
Accumulate these stocks using a third at a time buying strategy.
This way if the price moves slightly lower you take advantage of it.
Use a buying strategy that ensures you pay close to the daily low for that stock.
I use limit orders to ensure I pay a great price and maximise my profits. I explain how to do this The Trident Confidential Users Guide.
Use a stop loss strategy that ensure your profits and capital are protected.
How to set use these strategies are explained in The Trident Confidential Users Guide. These strategies have protected my profits and capital in all market conditions.
Take advantage of vicious short-covering rallies.
Remember that in the 2000-2002 bear market we had three big short-covering rallies of 20% or more. You need to use rallies like that to take profits if the stock runs up too far.
Conclusion
Bear markets will pass. But it’s in the darkest days of a bear market that the seeds are sown for the triple-digit percentage returns that come later in the business cycle.
I have been involved in the investment markets for 30 years now. I have pretty much seen it all and some days, it even gets to me – someone who knows that emotions are your worst enemy when it comes to making the right decisions. So, when I feel it’s all becoming really annoying I just leave it alone for an hour or two and come back with a freshened attitude. I always ask myself, what would Warren Buffett, Peter Lynch, Philip Fisher be doing in these circumstances? They would be doing what all the great investors do at a time like this. They would be buying top quality companies at bargain prices knowing full well, that this will soon pass and euphoria will return and bring inevitable profits with it.
At the start of this report I mentioned that when someone was panic selling, there was another “nutcase” buying…. Well, that may have been one of the world’s great investors building yet another fortune. The foundations of that fortune are being laid right now. It will be completed in the next two years.
I have realised finding and investing in great companies is only part of building wealth from stocks. The second and almost more important part, is knowing how to buy stocks and how to protect your profits and capital. Put these two parts together and you have everything you need to build lasting wealth from the stock market. I can show you exactly how this is done if you subscribe to The Ultimate Wealth Program which includes Trident Confidential, which has returned 29% for the 6 months to 30 June 2008, yes, even amid the chaos.
It doesn’t matter what happens in your life, once you have the skills, you’ll always be able to make money. It’s a re-assuring thought.
Kind Regards
Lance Spicer
July 2008
