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Now you must fight the bear

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July 07, 2008 – Comments (9) | RELATED TICKERS: PBR , SLB

 

Happy Monday everyone.  We all know that the stock markets have been a train wreck lately.  In an effort to keep my sanity, I have decided to try to fight the bear, aka post something bullish on a sector or the market as a whole every day (don't worry I still will have plenty of negative things to write ;) ).

There's still a number of analysts and investors who are positive about the U.S. economy.  I usually chalk that up to people just whistling past the graveyard, but I've found someone whose opinion I really respect who is fairly positive on things...Ken Heebner.  A couple of months ago I wrote about his outstanding record and stated that I would be paying close attention to where he invests his fund's money (see article: Ken Heebner, my new hero).  I just came across a great recent interview with him in The Boston Globe (Portfolio manager casts an optimistic eye on economy).

In the interview, Heebner states that while the economy will not be great next year we have already seen the weakest period of economic activity and things will slowly get better from here.   Interestingly, he believes that the economy will do well even though inflation will remain high.  He says that demand from emerging markets will cause inflation to rise, possibly to as high as 10%.  Here's a great quote from him on the subject:

"How can you be such a bull on the economy and say inflation could be such a potentially big problem?
I didn't say it's a big problem. In the 1970s and 1980s, when inflation was high - we made good money investing in stocks in that period. I'm running a portfolio. I'm not running the country. The challenge inflation presents is that price-to-earnings ratios tend to decline. So when you invest money, you want to have enough growth to offset that compression." 

The only stocks that Heebner specifically mentions, Petrobas (PBR) and Schlumberger (SLB) are ones that he has had positions in for a while (note I am long both of these companies as well).  I'll be keeping an eye out for a report on what companies he added to his portfolio last quarter.  He seems to be bearish on bank and insurance stocks.

Is Heebner perfect, no.  He has made mistakes in the past and I'm sure that he will make some again in the future, but he is he right more often than most so even though I am a little more pessimistic about the current state of the U.S. economy than he is when he speaks, I listen.

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OK, back to the bearishness.  I can always count on Barron's Alan Abelson to cut through the Bureau of Labor Statistics' BS that it calls the monthly employment report.  The BLS was up to its old tricks again this month, using the absurd birth/death adjustment to create 177,000 phantom jobs in June.  If the BLS had just reported the actual jobs numbers rather than arbitrarily adding these made up jobs to it, June's job losses would have come in at -268,000 rather than the reported -62,000.  Yuck.

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Since we are officially in one now, here are some interesting facts about bear markets since 1940 (again from Barron's):

-  The average bear market drop in the S&P 500 has been -30.4%.

-  The average bear market has taken 386 days to go from peak to trough.

-  By the time it had reached the -20% to quality, on average bear markets were 74% complete.

-  The worse bear market happened in 1973-1974, 630 days & -48.2% for the S&P 500.

Of all the stats mentioned in the bear market article, the last one that I mentioned scares me the most.  I see a lot of similarities between the current economy and the one in '73-'74.  If you don't think that things are as bad today as they were back then, you should feel pretty good about these statistics because it would appear that we are more than half way through this mess.

Deej

9 Comments – Post Your Own

#1) On July 07, 2008 at 9:20 AM, Zanibel17 (97.67) wrote:

I agree that BLS employment numbers are damned lies.

It's admirable that you are trying to find something positive in this market.  What data are you using to justify staying long Petrobras and Schlumberger?  (Not criticizing, just asking.)

-Z

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#2) On July 07, 2008 at 9:30 AM, TMFDeej (99.27) wrote:

Thanks Zanibel17.  I have a number of reasons why I like PBR and SLB, but in short, the numbers that I am using to justify staying long these companies are $100+ oil and $10+ natural gas.  As long as we stay at that level...and I have a feeling that we will long-term they are going to print money.

Deej

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#3) On July 07, 2008 at 10:52 AM, LordZ wrote:

Ignorance is bliss..

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#4) On July 07, 2008 at 5:30 PM, RussWild (< 20) wrote:

For your facts regarding bear market, I'm out of bond in my 401k and back into funds. I think the drop is to much to fast, but will go to that 30% average if not the '73-'74 48%. Looking at  1375 on S&P500 then run for the hills.

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#5) On July 07, 2008 at 6:28 PM, TheGarcipian (36.50) wrote:

Deej,

What we are seeing today closely mirrors the '73-'74 slide. See my most recent blog ("Sweet Medusa, Do Not Look At This Picture!") for a couple of charts that will help confirm your suspicions. There is a lot of pain to come, and (unfortunately) I do not share your optimism nor RussWild's. Still, there are always corners of the market in which one can make money. They're just harder to find now.

I'm with you on PBR and SLB. I think oil & the energy sector will continue to deliver good results, followed by emerging markets (BRIC, in particular). 

Cheers,
--Gar

P.S. I've seen the video before, but it still cracks me up, especially the karate kick. Thanks for posting that jewel. 

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#6) On July 07, 2008 at 11:12 PM, GS751 (27.54) wrote:

Dude I love that video...... U get a rec just for the video.  I own some SLB in real life.

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#7) On July 07, 2008 at 11:12 PM, GS751 (27.54) wrote:

Dude I love that video...... U get a rec just for the video.  I own some SLB in real life.

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#8) On July 08, 2008 at 5:55 AM, TMFDeej (99.27) wrote:

Thanks Gar.  The similarities between today and the 70's are unfortunately pretty scary.  Let's all hope that we aren't in that sort of mess again.  The energy sector outperformed back then and I personally believe that it will do so again today.

Deej

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#9) On July 08, 2008 at 5:56 AM, TMFDeej (99.27) wrote:

Thanks GS751.  I've seen it before, but it still makes me laugh every time I see it.  It's sttrangely appropriate for today's market.

Deej

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