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alstry (34.92)

STOP Looking Backwards

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December 07, 2008 – Comments (14)

My foolian friends, we are in revolutionary times, not cyclical.

Could the buggy whip manufacturers in the early 1900s look back at hundreds of years of buggy whip cycles after the invention of the automoble?  If they didn't start manufacturing luggage, they were out of business. 

Do you look in your rear view mirror while driving to figure out where you are going? 

History provides perspective, not direction.

California is out of money, plain and simple.  The situation will get worse month after month as fewer businesses and individuals will be able to afford to pay taxes as they had in the past.  It will spread to state after state.  It is just that California is the biggest and will have the greatest impact on the nation.

Few really seem to understand the significance of the state wanting to print IOUs.  It is actually considering printing its own state currency.  A dollar bill is nothing more than a Federal IOU.  If you don't believe me, just read the language on the front of the bill.  Could you imagine if other states started doing the same thing?  What about businesses?  How about individuals?

If you live in CA, wouldn't it be silly if you paid your property taxes, or sales taxes in IOUs?  If it is good enough for Ahhhhnaaaaaalllllld, why should it not be good enough for the rest of the citizens of CA?  What about equal protection under the Constitution??????

We are just about to enter the period that I have been warning....very subtlly, but warning  nonetheless.  Nobody knows what a "dollar" will be worth?  Will a loaf of bread be $0.50 or $5000.00.  At this point it is simply a guess.....no matter how smart you think you are.

Is gold the solution?  Who the heck knows....try taking a bag of gold up to the cash register of your local grocer and see how the checkout person reacts.  Wealth and dollars are evaporating much faster than the government is printing them......and those that are being printed are staying with the banks for the most part.

Even Obama's most recent proposals doesn't even come close to making up for the extent of the evaporation of dollars.......how will this play out.....NOBODY KNOWS......but get ready for some  very exciting times.....very exciting times.

14 Comments – Post Your Own

#1) On December 07, 2008 at 12:12 PM, kdakota630 (29.46) wrote:

We are just about to enter the period that I have been warning....very subtlly...

Alstry, you are many things, but subtle is not one of them.  BTW, I loved your opening to the blog.  Very good analogy.

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#2) On December 07, 2008 at 12:16 PM, semper77 (32.33) wrote:

I agree with kdakata630, your introduction here was one of the best analogies/truest statements I've read in the CAPS forums. Well said!

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#3) On December 07, 2008 at 12:56 PM, kceRick (< 20) wrote:

I also like your intro - it's unfortunately followed by a largely emotional response to the latest turn in California's flamboyant economy. The domino theory has been discredited in most other arenas - I think it's time for you to reflect that maybe the rest of the country is resilient enough and possibly fiscally responsible enough [on most local levels] to survive major panic in California.

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#4) On December 07, 2008 at 1:46 PM, biotechmgr (34.01) wrote:

What you are saying at the outset is similar to Robert Prechter's thesis about economic discontinuity. So-called experts cite performance of stocks over the "long term". Ignoring the fact that stocks took 25 years to recover from the bottom of the depression, that is. We are facing the same cliff here and Prechter has been among those who predict the absolute worst in the years immediately in front of us.

 You make a good point that we can't know with certainty whether deflation or inflation. The classical model of depression says it must all deflate.

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#5) On December 07, 2008 at 2:13 PM, abitare (31.77) wrote:

Aligned in thinking.  History provides a perspective not a direction.

I might add for Fools, who do not get the circumstance it is not over it is just beginning  

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#6) On December 07, 2008 at 2:27 PM, alstry (34.92) wrote:

I view my role on CAPs not so much to give answers......quite frankly, I am not sure I have any for what we are dealing with......but more to stimulate thought.  Hopefully our collective minds can generate a reasoned approach, and maybe if we are lucky, a solution to what is ahead.

If we can push the ball forward, I view my blog as successful. 

Currently, my bias is toward a deflationary depression.  But I cannot rule out intervention which may flip the current path 180 degrees.

My two favorite business book reads are The Black Swan by Nassim Taleb and Atlas Shrugged by Ayn Rand.  I consider myself a Graham and Dodd deciple and view the1934 edition as the most important business textbook and tool ever.  Graham's lay adaptation in The Intelligent Investor is simply the Cliff Note version and more than adaquately distills his earlier work.

We use history to provide perspective.  Those that use it to predict the future are doomed to failure when paradigms shift.  Right now I view us in such a period. 

It is a very unsettling time for those that truly understand the problem.  The nation, and most of the world for that matter, is bankrupt in a legal and accounting sense.

Now the question, which is the unknown, is how are governments going to react to such a widespread and systemmatic bankruptcy.  I know many of us think we know, but in the end, all we truly know is we really don't know.

As one who champions the US Constitution as one of the greatest documents and ideals ever written by man....I simply hope that we don't abandon our principals for fear.

Time to go play with my daughter.

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#7) On December 07, 2008 at 2:39 PM, Jhana9 (20.30) wrote:

I think right now the investment world is divided in a couple groups. There are those who see this as a cyclical recession. It might be long, it might be deep, but we'll come out the other side and do business as usual. Many of the people think we are at or near the bottom, and so they are buying "cheap" stocks. They are probably one reason the stock market went up on Friday, and why the market may go up again on Monday due to certain news (auto bailout, Obama stimulus, etc.)

There is another camp that believes we are headed into a whole new economic world, and it's not a good place for the U.S. They are not buying much if anything. Or their buying is very focused (gold, or commodities, for example). Bad news confirms their scenario, good news is shrugged off because it doesn't change the game. 

Reason tells me that the second group has it right, or closer to right. This isn't always an easy place to be when you see Bill Fleckstien closing his hedge fund, and Ken Heebner buying financials. Still, even Fleckstien said he thought the market still had some work on the downside. Nevertheless, there will be times when the crowd runs the market up so as not to be left behind, and it's going to be hard sometimes to not run with them. I do expect this to happen next week, but maybe Friday was the extent of the euphoria for a while. We'll see.

I like Alstry's consistent reminders of the reality of where we are at, and how significant some of the bad news really is. 

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#8) On December 07, 2008 at 2:54 PM, kdakota630 (29.46) wrote:

Alstry, you temporarily lost me with your comment about Graham and Dodd and the "1934 edition" until I did a little digging and realized you were talking about the book "Security Analysis". 

My question is:  Why the 1934 Edition?  Why not the new 6th Edition with a foreward from Warren Buffett?  Why not the 1940 edition that Buffett says (in the foreward from the aforementioned 6th edition) that he has read four times?

You've piqued my interest enough to buy a copy, but I was hoping you could explain the differences between the three copies I mentioned so I can make a more educated choice.

Thanks in advance.

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#9) On December 07, 2008 at 4:25 PM, vtBrunson (42.75) wrote:

Preach on...I agree with the analogy, and think that unless we find some other bubble to inflate (we tried .com, and real estate) we could be in depression-style economy within the next year...(Alternatively if we do find a bubble to inflate it will only give us a few years of fake comfort until the checks are due....)

In my lifetime, I've experienced one of the greatest bull markets for any economy in the history of the world, so it's hard for me (or most other people alive today) to have a correct frame of reference for what we should expect for returns on investments in equities.  We generally speak in term of % drops from previous highs, etc., but we need to throw those old valuations out the window because they were based on fantasy. (again people were making assumptions that this bull market would continue "to infinity and beyond")

BTW alstry, I too love NNT's Black Swan, and Graham's Intelligent Investor (the Jason Zweig version not so much)... I just think it's interesting that before Graham died he said he no longer supported the idea of doing securities analysis... (he did believe in index funds were a decent idea) 

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#10) On December 07, 2008 at 4:49 PM, kdakota630 (29.46) wrote:

Oh great.  The Jason Zweig version of The Intelligent Investor is the one that I have.  It seems I have a knack for purchasing inferior book versions.

Is there an edition of The Black Swan I should be aware of before I buy the wrong one?

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#11) On December 07, 2008 at 4:54 PM, alstry (34.92) wrote:

Kdakota,

Nothing substantively has changed from the 1934 edition.  For 99.9% of the players on CAPs, undertanding The Intelligent Investor is more than enough.

I love originals, and if you read the examples in the 1934 edition, you will laugh your head off.  But then again, it doesn't take much to make me laugh.

vt,

I guess I must disagree with Graham on his own work.  It has served me well even after his death.  I am greatly indebted to his accomplishment in conveying important information in a readable format.

I would have to say, in the mainstream, for the last 20 or so years, fundemental analysis has played little role in the stock market.  Especially in the S&P 500 world.  Just look at Buffet's public picks for the last 10 years......even Buffet isn't bragging.  His private plays, and those not available to the public, well that is another story.

Most of my profits in the market in the last ten years have been from public companies that few have ever heard of...and in the last five...they have been almost impossible to find....at least for me anyway.  I guess I don't swim in the main stream.

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#12) On December 07, 2008 at 5:50 PM, alstry (34.92) wrote:

My guess is that Greenspan got caught up in being Greenspan.  As far as politicians go......we don't even need to start.

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#13) On December 07, 2008 at 6:30 PM, vtBrunson (42.75) wrote:

hey alstry,

I wasn't trying to disagree that Intelligent Investor is a great read... I just thought it was interesting that "the real maestro" Ben Graham had concerns later in life about doing securities analysis. Maybe he thought the world and investing were changing so rapidly that he began to question his methods ... who knows?, it's still a great book, and I would def. recommend it.

kdakota,

I think there are 2 versions of Black Swan, the newer version doesn't really differ from the old version too much (and the newer version does come in softcover) either is good.... I really liked NNT's Fooled By Randomness as well (maybe even a bit better)... FYI neither of NNTs are "books about investment" they are more phillisophical in nature...basically one of the major premises is "how we humans are fooled by what we believe to be knowledge"...and "how we are swayed by our emotions, and not facts"...and we are susceptable to "Black Swans" because we like believe that the world moves in a predicatble way. (which we can rationalize ex-post-facto) 

The Zweig version of Intelligent Investor is, well...confusing, it's hard to tell when you are reading Grahman's words or Zweig's commentary on Graham, and it's so heavy on Footnotes ... kinda annoying... maybe its just me, and maybe you'll have a better experience with it (I think Jack Bogle of vanguard fame released an edition which is a little easier to take in)

Thanks, alstry, keep up the great blogs.

Cheers

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#14) On December 07, 2008 at 9:59 PM, dexion10 (27.48) wrote:

ANOTHER RECOMMENDATION FOR ALSTRY.

I agree.. all the bottom callers (Bill Miller, Jim Cramer, etc) are out of their minds... or they've simply lost them long ago int he case of Cramer and Miller. 

Why is this market cheap here at 15x next year's earnings... yeah we're 15x Goldman Sachs expected earnings for the S&P 500 ($56).  

15 x $56 = 840 for the S&P 500 ... we're about 30 poitns above that)

Normalized  earnings for the S&P 500 are probably $65 - $75 without a bunch of leverage. 

15 x  $65 = 975 - we're only about 100 points below that.

 

SO ASK YOURSELF... ARE YOU FEELING LUCKY... WELL ARE YA!

 

 

I know fundamentals aren't driving this market ... here are a few  things that would make me very scared to be a bull besides the technicals
 
1. we're almost 15x next years earnings
2. we're only 100 pts from 15x low end normalized S&P 500 earnings
 
3. solutions to the problems aren't even on the drawing board so you have to discount the possiblity of the tail risks... so a 15x multiple isn't appropriate
 
4. The deflationary expectations are becoming self fulfillng ... for example:
   
    - we have no policies that are looking to raise salaries... we have solutions that are predicated on less demand and less supply

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