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The Next Rally

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October 08, 2008 – Comments (14)

I do not believe the pain of the financial industry is yet over.  There is too much over extended debt that is still out there that has been marginal and as things get tighter, will default.  The Alt-A mortgages and the commercial real estate and two big problems that have yet to hit the financial markets and these will take another 2 years to work their way through the markets. 

There is also the problem of how many people were working for the "speculation industry," you know, all those houses that got built with no one to live in them and that kind of thing.  Supplying and working for the "speculation industry" gave quite a bit of employment. Those displaced people are going to be the next round of debt defaults.

So, I right or wrong, I think the markets will not be for the risk adverse (me) for a couple years.  However, that doesn't mean that there won't be money to be made.  We have already seen significant rallies in this bear.  Financial Armageddon has a graph that show numerous rallies in the 1929 to 32 period.  I counted 9.

I don't think a bear market is a buy and hold market, but for the nerves of steel types, I suspect there will be some great rallies.  Buy on the panic, and sell on the recovery, or keep the losses to a minimum and sell on a 10% loss if the expected rally doesn't happen.

14 Comments – Post Your Own

#1) On October 08, 2008 at 10:07 PM, Allstar13913 (99.80) wrote:

Momentum investing is bad news.   I wouldn't follow that advice...

Mike

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#2) On October 08, 2008 at 11:26 PM, Harold71 (22.70) wrote:

Aye, trading is difficult.  It is more like gambling than investing. 

I've been shorting the market since last December and just recently recovered.  I hopped on the commodities bubble (fear of dollar really), and took losses there.  If not for that I'd be up nicely.  Commodities was a gamble, shouldn't have done it, shorting the market though was based on solid research and sources.  Which I still think breaks through the last bear market...not there yet.

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#3) On October 08, 2008 at 11:31 PM, awallejr (82.99) wrote:

I think a bear market is the perfect market for "buy and hold" strategy IF those things you bought and are holding are high dividend stocks (4%+) in good companies with "staying" power.  You are being paid to wait and you are already in the stock longterm when it turns (don't ignore long-term capital gains treatment).

But yeah, you are right, it does take nerves of steel, and mine are numb now ;p But if I get the exit prices on my holdings that I honestly think I will over the years, I will actually do pretty damn good.  And if it takes 5+ years, so what as long as those dividends keep coming in and are ahead of what I'd get in a CD.

As an aside, that really is how Warren Buffett made his billions.  He bought companies.  Not just stock.  Companies that he felt strong about and that paid him dividends.  He accumulated those dividends and reinvested them in new companies. Something he said on an interview that stayed with me.  All he does now is write checks because of all the money that flows in.  The power of dividends. Screw stock repurchases.  Give me the "gold" ;p

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#4) On October 09, 2008 at 12:35 AM, DemonDoug (91.51) wrote:

on the altria board, i read about people who believed in MO in 1999-2000 and kept finding money to buy on the way down into the teens, and made mega-buck profits and have an insane effective yield at this point in time.  I firmly believe that buying solid dividend paying blue chips like MMM, MO, PM, JNJ, PEP, KO, will make you big winners in the coming years.

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#5) On October 09, 2008 at 12:38 AM, MaskedMan2007 (99.25) wrote:

I disagree with Harold71 : trading is difficult, but with a sound strategy it's not gambling. A good trader could be right almost 80% of the time. Although, this is not for anybody. You have to know what you are doing, if not you will pay very hard for a practical lesson. Trading in these market takes steels nerves, as dwot said.

Their will be rallies in this bear market and we are overdue for one. The Dow could yeasily rally to 11 000 (almost 20% from here) before the end of 2008. November and December are especially good months for the market, so we could see the end of the year rally, before seeing more pain.

I have the feeling that it is still not the time to buy for the long term. Personnaly I am 100% cash an I am playing the market on a very short term basis only, before I see technical signs of a strong recovery.

If we are to see a bull market, this bottom will be tested at least one more time, maybe twice. So be patient, and very CAREFUL. 

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#6) On October 09, 2008 at 12:51 AM, fixnit4u (< 20) wrote:

I agree, the fall of the financial industry is not over by a long shot.  This last rate cut looks like it will spur a rally similar to the rallies your described during the Great Depression. 

I cannot imagine this market stabilizing again for at least 6 months, and even that is doubtful.  Banks can borrow a lot of money real cheap right now, but it looks like they'd rather keep cash than lend at the moment - and the gov't can't make them lend.  To make matters worse, most consumers don't want to spend because of confidence in the economy.  Many who apply and would otherwise qualify for credit are turned down now that the banks have become overly cautious.  Americans are not buying cars, houses, or luxury items right now and I expect the Christmas season to be brutal for the department stores. 

SHORT the market for now, here's why. . . unemployment #'s coming out in October, inflation creep, consumer spending and confidence in the economy is down, current global credit crisis fears, new car sales have plummeted, individuals are upside-down on their trucks/suv's, houses are still sitting on the market too long, we haven't seen the last of the foreclosures, DOW is losing +200pts per day, war in Iraq keeps pressing on, fiscal spending isn't being curtailed, government debt continues to climb, trade deficit with China and Asia isn't improving, babyboomers are coming to age for social security, record average household debt, we have a potential conflict in Iran, stock market instability has eaten +30% of baby boomer wealth, 8 rate cuts since June last year haven't done much, stimulus program didn't do much, and the expensive $700 billion bailout aren't very encouraging.  Doesn't quite look like we have seen the bottom yet IMO, get ready for an ol' fashioned bank run.  Doomsday is coming folks.

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#7) On October 09, 2008 at 2:24 AM, MichalTod (46.75) wrote:

This isn't the next depression.  We have issues, and it always looks really bad on the way down and at the market lows.  However, regardless of whether we're at the lows yet, I'm seeing great companies now that are incredibly cheap.  Unfortunately, that doesn't mean they won't be cheaper a few days or months from now, but those who try to time the market ultimately lose out on the big long term gains.

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#8) On October 09, 2008 at 2:42 AM, dwot (97.29) wrote:

Mike, some will make money doing that, as I stated, it isn't for me.

Harold, I was warning about commodities during that period, at least base metals.

awalljer, I'd prefer to wait as I think the market is going lower.

Demondoug, I would prefer companies that sell a product that causes chemical slavery and kills people when used as intended not be promoted on my blog.

MaskedMan, you must have those nerves of steel.

fixnit4u, I'd agree then bottom isn't in yet and things have a ways to getting worse before they get better.

 

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#9) On October 09, 2008 at 12:19 PM, Harold71 (22.70) wrote:

Actually I lost money on silver.  SLV...what's really funny is the physical market is extremely tight.  Physical silver is hard to get without a massive premium.  So I don't trade paper etf's anymore, they just don't reflect real supply/demand IMHO.

Sold out of base metals stocks back in early Jan. 08.  PM's have different fundamentals.

I'd be beyond impressed if this market went to 11K again.  I see it going much lower on this wave, and then having another rip your head off rally, and then lower again. 

How is any stock cheap if the currency itself is a total sham? 

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#10) On October 09, 2008 at 3:45 PM, DemonDoug (91.51) wrote:

deb - noted, and I will comply, although I'll leave by saying that the only social responsibility any individual investor should ever feel should be the social responsibility of increasing their bottom line and being as wealthy as they possibly can.

How is any stock cheap if the currency itself is a total sham? 

If the company survives but the currency does not, the shares in your company still exist, and can be traded for whatever currency comes after the failed one.  This is sort of my philosophy about investing right now and why I'm not 100% in cash.

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#11) On October 09, 2008 at 4:57 PM, jester112358 (28.97) wrote:

Yes, being 100% in cash is a much larger risk than is commonly assumed.  I'd rather be a part owner in a business that supplies critical commodities like food and energy and pays a dividend as well.  As which cash should one be in?  Not the $ that's for sure.  Perhaps the Japanese yen or Swiss franc or physical gold or silver.

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#12) On October 09, 2008 at 5:32 PM, columbia1 wrote:

 

"There is also the problem of how many people were working for the "speculation industry," you know, all those houses that got built with no one to live in them and that kind of thing.  Supplying and working for the "speculation industry" gave quite a bit of employment. Those displaced people are going to be the next round of debt defaults."

A Lot of those workers involved in building those homes are fleeing to the border, heading back to their nation of origin. This slowing economy is forcing the illegals aliens to return home, there is just no work available here in the states. It makes me curious to know how many abandoned their homes and mortgages(yes, illegals do own a substantial amount of homes in the states). I never thought it was possible to solve the immigration problem, but this crisis has done more than all the politicians put together could ever get done!

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#13) On October 09, 2008 at 9:09 PM, abitare (40.75) wrote:

I said in Dec 07 blog, I expected the DOW to fall 25% and China to fall 40%.

dwot replied that she expected the DOW to fall more.... 

Now that we have passed that fall. I have to say I was, sort of surprised at the extreme levels of sell of and the speed of the sell off.

But with the insanity of the short ban + the $700 billion+++ robbery, the GS CEO acting as Treasurer has destroyed confidence, beyond repair in the near term.

Plus Buffetts raping of GS and GE with a 10% dividend on a prefered ++++ two of Americas "leading" companies added up.

I think there might be a capitial flight out of the country and the dollar. Investors must think a Gold ban is coming. Confidence has been destroyed. COngressionial passing of the "bail out" despite public opposition, was an aggregious offense.

FYI - Asia is selling off. I am still 50% short. I bought silver coins today. I am buying more silver coins tomorrow. 

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#14) On October 10, 2008 at 1:22 AM, dwot (97.29) wrote:

AresFinancial, I've been thinking 7000 dow...

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