Solitude Blog

http://www.thesniper.us/?p=6348

Below is a condensed version of a longer interview with Thomas Sowell. He is my favorite economist/commentator and is also the author of several books. I have them all in my library.

Financials lead us down and they just might do so again. Below is a chart and my predictions. Feel free to go back in the archives and read what I wrote back in March 2009. The DOW has held up a little better than these financials have the last few months, but that changed the past few days. It could be a sign of things to come. Back in March of 2009, I was talking about the overall market and the economy, but since financials lead us down before, this looks like the canary in the coal mine. Notice the last drop of the past few days right at the tail end of this chart. These financials could be opening act for the DOW correction. If only any of our leaders saw this coming as clearly as I did. Remember, they are geniuses (according to themselves and the media,) and we are just mere ignorant commoners. I hope you made money on it!

For whatever reason, I have good instincts when it comes to the stock market, economy, and investments. I always look at the numbers, but even if the numbers are as good as can be, if my instincts tell me to stay away then that is what I will do.

I often watch TV and see an “expert” on the economy bombard the viewer with data points that back up whatever his or her forecast is. Lets take commercial real estate as an example. The trendy forecast lately seems to be that commercial real estate has bottomed or is in a nascent recovery already. I have seen this forecast made countless times over the last month or two. Had I been on the show when this “expert” gave this forecast I would have replied with this little story.

For the past 12 months I have been driving past a newly constructed strip mall. It looks very nice and has ZERO tenants. For the past 9 months, there has been a huge sign out front saying they will give you 12 months free rent if you sign a lease there. Today, there are ZERO tenants. They are literally giving away free retail space for a year and can’t get one tenant! This is a good neighborhood with good average income and a below average crime rate. Does this square with a commercial real estate recovery?

Inevitably, the “expert” would tell me that while there certainly are still some areas struggling, my ANECDOTE is just that and does not represent the overall commercial real estate market as the “data” clearly shows.

Let me tell ya something…If it ever comes down to my instincts and anecdotes vs. “expert” data or government (BLS) statistics; I’ll take my instincts and anecdotes EVERY SINGLE TIME.

Don’t be afraid to trust your instincts, especially when you have the track record to back it up.

(By the way, be on the lookout for the possibility of a LUDICROUS seasonal adjustment to the unemployment report upcoming. The government can and will make the jobless rate literally ANYTHING IT WANTS.)

Begin the new year with Joe Satriani. The economy is bad, but at least we have good music.

68 years ago today Pearl Harbor was attacked. It was the act that brought the USA into WW2. On a personal level, it brought my Grandfather Danny (who I am named after) into the war as well, where he fought in the pacific in the army infantry.

As the years tick by we lose more and more WW2 veterans. Before you know it, they will be gone. So, if you get a chance, thank one.

Just a quick update since I posted “Look Out Below” on July 22. The S&P 500 was 954.07. Today it closed at 997.08.

As I said, I still think the rally could have more to go, but I am not worried about it either way because I said I have kept my core dividend paying holdings. This way, I take advantage of the rally while protecting myself with cash on the sidelines.

I said then that I was taking off my trading positions, so I did miss out on 5% or so of positive market action but that is really small potatoes after I said I was getting back in on march 13 in the post “What I’m Doing Now.”

I am perfectly fine to wait til the fall with my core holdings taking advantage of any market move up. I have made good money from March 13 with my trading positions so I am ready to buy if there’s another drop in the fall.

I DO NOT CHASE STOCKS. If I miss a big run, then I sit and say “damn,” then I move on to the next thing. Prior to having the ability to do that, I was undisciplined. I made and lost a fortune many times, but now I never lose big because I never make the same mistakes twice.

If you want to latch on to try and get another 10%-15% out of this rally then go for it, but I am not doing it. I am not doing it because I already made my money on the 50% run from the March lows that I told you about here at the Solitude Blog.

If you missed the run, do not feel bad! I have missed countless runs that I still snicker about to this day, so do not worry. Remember, the market can stay irrational a hell of alot longer then you can stay solvent!

Here are some interesting tidbits before the weekend.

The more I look at it, the more I think this rally in the market has been about businesses cutting costs rather than growing revenue, thus keeping earnings respectable. However, they cant keep cutting costs forever. They cant keep laying off people forever. After all, they have cut deep and laid off millions already.

Until revenue grows which then facilitates even higher profits, which then brings new jobs, how can anyone say we have a strong recovery?

It also appears to me that there has been a massive reduction in short interest, meaning shorts have covered thus pushing the market higher. This could suggest the rally is not being fueled by an influx of new money and new investors.

Also, President Obama’s two big issues sans the failed stimulus (waste) package are cap and trade (tax) and health care reform (destruction.)

As cap and trade could be in trouble in the senate, and health care facing trouble just getting out of the house, maybe the market likes the idea of two bills that would do terrible economic damage dying a slow miserable death. I know I do.

As I wrote late last night I believe the downside risk now is far greater then the upside potential which in the short term I see as around 15%. It was late, so this is a little more of my thinking.

I am not selling any of my core holdings. However, today I sold off some of my trading positions into the strength of today’s rally. I am not buying anything new right now. I am in cash and my safe core holdings, so I am ready if we see a correction or a major move to the downside due to the continued weak economy.

All it would take for this drop to occur would be a change in investor sentiment. If investors wake up one morning and say they would rather pay 10x forward earnings instead of 15x due to the lack of growth in the economy, you could see a retest of the march 9 lows. I am not predicting this, since I only predict things when I am 99% or more sure as I was when I said 10 year treasuries would hit 4% and then sell off, which they did.

I cannot say whether we will retest the march lows. Perhaps in the future I will able to say, but not now. Therefore, I am well positioned and prepared for anything.

Today the S&P 500 closed at 954.07. A 15% move up would take us to about 1100, and though I think that is really pushing the envelope, it would not surprise me. Today, the downside risk looks far worse to me and it is not impossible that we revisit the march lows which would mean a 30% correction from here. There are some very dire predictions out there about breaking down below these levels and I think it is very possible. No matter what the market does though, the real economy will be very weak for a long time even when it stops contracting as the recovery won’t be robust. The term jobless recovery will be an understatement. This is my warning to you. Be careful.

The strength in the stock market since March 9 when I posted I was jumping back in despite a weak economy has been incredible, but there is no corresponding strength in the real economy today and the government is making it worse. Industrial output as plummeted. We have to understand that we just lost about 467k jobs last month. The peak of losses so far per month was around 651k, so the pace of job losses has fallen but there is a problem. This means that literally millions more will lose their jobs before this is over. 467k multiplied by the remaining 6 months of the year alone equals about 2.8 million more jobs lost. Sure, the rate of decline should slowly improve so we won’t lose 467k every month, but job losses could easily last longer then 6 months anyway. I will say it is a guarantee that at least 2 million more people will lose their jobs and that is my optimistic scenario.

Now, you should know that I will not sell all my stocks. I am not the type to say sell everything and get back in later except in the rarest of circumstances like last year. I have a core group of holdings that pay safe dividends. I also have holdings that I trade. I take advantage when the market begins to sell off because I always have a huge amount of cash sitting on the sidelines ready to jump in at depressed prices. This has grown my safe core holdings and given me huge profits on my trading opportunities. It is a discipline I have learned, and I apply it ruthlessly.

Here is an example. Goldman Sachs fell to below 50 after falling from 150. Today, it is right back to around 150. MGM Mirage fell to below 3 and then bounced to 13.  Now, if you had put all your money into the market, you would never have been able to take advantage of these huge drops even if you knew they were great buys which they were. This is very frustrating when you know you are correct in your call but don’t have the money to act on it. So, always have cash on the sidelines!

If you hope to make money long term as an investor it is vital you understand how the United States economy can be most effective. A book that I feel is a must read is “The End of Prosperity” by Arthur Laffer, Stephen Moore, and Peter Tanous.

This book provides a spirited straight forward explanation as to why low taxes and less government is the path to prosperity and why high taxes and big government are the noxious fumes that suffocate our economic growth.

It is extremely relevant given the “Tea Parties” that occurred a couple days ago that among other things protested out of control government spending. If you want to know what will happen to your state, your hometown, and your country if our Reagan capitalist boom model is jettisoned then take a good hard look at how messed up California is right now. This is discussed in the book, and clearly outlines how millionaires have left California at an alarming rate for several years to escape oppressive taxes. Once they left, the state lost major tax revenue so the government raised taxes even more thus facilitating an exodus that would make Moses proud. Now they have deficits that rival some countries total GDP!

Anyway, if you want to be educated on some basic economics or want to read why low taxes are the solution, pick this book up.

Treasury bond yields will have to go up alot given the reckless spending our government is engaged in. The Obama budget is insane and will lead to higher yields as we finance our deficits with more treasuries then ever before. This will continue for several years to come. Be alert for this and do not get burned as treasuries fall and yields skyrocket. I would short the long treasuries by buying (TBT) which is a short ETF that goes up when treasuries fall and yields go up as I am predicting will happen. You can hold this long if you would like, but I would get out when the yield on the 10 year gets around 4%. This is because the economy will still be very weak and people will demand bonds. Then as it comes off the 4% level you can get back in, after you made some easy money.

Northrop Grumman (NOC) closed Friday, March 13th 2009 at $36.57, almost 60% below its intraday high of 85.21 on November 7th 2007. Is this the result of something ominous on the horizon for the defense giant, or is it just one of many victims of the broad market sell off that has occurred over the last 12 months? I lean heavily toward the latter. I can find no massive loss of revenue or scandal that warrants such a price correction. It is true that Northrop has been involved in the circus that is United States politics in regards to the Air Force tanker refueling contract. In fact, Northrop and EADS winning the original contract was seen a huge surprise and was a bonus. Had Boeing won the contract as was widely predicted, Northrop would not have seen a major long term sell off. Now that is still in limbo, but I do not see significant downside no matter how it turns out.

While boasting a 3.40% dividend yield and trading 60% below its high, Northrop seems quite attractive to me. There is some risk of a new administration scaling back weapons purchases, but no president is getting rid of nuclear powered aircraft carriers anytime soon and when it comes to that, Northrop Grumman is the only game in town. To be clear, I fully expect the Obama administration to make big defense cuts but I believe they have already been factored into the price. They will also replace some cuts with purchases in other areas. Simply put, the world is a dangerous place and investors need to protect themselves. Looking back at some historical prices from years ago, I discovered that one of the greatest days this stock ever had came on one of the worst days for the market and our great country.

On September 10th 2001 the DOW closed at 9,605.51. After the horrific events of September 11th the market reopened on September 17th and closed at 8,920.70. This drop of 684.81 was enough to scare the most seasoned investors. About a year later the market fell to well below 8,000. As we always do though, America and the stock market roared back from 2003 to 2007. The question remains though, how do we protect our portfolios from such a jarring terrorist attack in the future?

While the DOW was diving almost 700 points on the day the market reopened after the attack, one stock soared over 15% and went even higher in the coming weeks. That stock was Northrop Grumman. They build aircraft carriers and other things that go boom and have been a good long term performer. With hindsight it is easy to see why this huge pop happened on a day when almost everything else tanked. Looking for a safe haven, investors concluded that the USA was going to make someone pay for killing our citizens no matter what the cost and Northrop Grumman was as likely a candidate as any to benefit. While it will almost always be a decent long term performer, any type of national terrorist attack or global instability in the future will benefit companies like Northrop Grumman in a big way.

This might seem a bit unethical to some people by essentially profiting off tragedy. I do not follow that logic as I must point out that this is the harsh reality with which investors are faced, and there is nothing wrong with protecting yourself. If I had to trade a 15% increase in a day for the World Trade Center and 3000 American lives, I would forfeit my capital gains in a heartbeat, but since none of us can predict the future or control events we should be prepared for any and all eventualities. If you want to sleep well at night knowing your portfolio is safe, do what I do. Get some defense stocks like Northrop Grumman, and pray that nothing bad happens.

I am heavily invested in the defense sector and it will remain a stalwart in my portfolio.
I own shares in…

Northrop Grumman (NOC)
General Dynamics (GD)
Boeing (BA)
Lockheed Martin (LMT)
Raytheon (RTN)

Though I am pessimistic about our current economic prospects due to inept government policy, I remain a long term investor because I still have hope that we (America) will come to our senses eventually and that the market will heal itself in time. How much pain we face in the meantime is up to us though.

It would not surprise me at all if the market fell another 20%, so I am keeping some cash in reserve to take advantage if prices fall. However, I believe picking a bottom is almost always a fruitless endeavor so I have begun initiating positions in commodities and equities. I have been entirely in Cash and Short Term Government Bonds for the past 6 months which was highly unusual for me. I recently liquidated my Bond positions.

I am now keeping an eye on Gold (GLD) and Agriculture for possible entry points.
I have bought positions in…
MO,BP,NOC,LVS,MGM,T,NTGR,CHK,RIG,DE,UA,INTC,COP,DHIL,GD,BA,LMT,RTN,GROW