Wednesday, January 7, 2009

Secular, not cyclical thinking

Secular is a vague term in investing cycles that denotes a longer term trend typically measured in decades. We are currently in the middle of a secular bear market that started in 2000 and should last until at least 2015. There is a corresponding secular gold and gold miner bull market that is in the same time frame. Can you handle it? Do you believe it? If not, what say you about this 100 year chart of the Dow Jones Industrial Average (stole it and can't give credit as I forgot its source)?

Why is this time different? Do you honestly believe that Georgie W. Bush, Barackster Obama, Benny Bernanke and Hanky panky Paulson have implemented policies that are going to change the usual market cycles? I suppose it can be argued that they are the smartest bureaucrats we have ever seen in this country - this argument could absolutely be made, assuming one was a CRACKHEAD.

Anyway, it's important to remember that bureaucrats don't cause economic recoveries, people betting with their own money and with real jobs do. Waiting for Bernanke to fix the economy is like waiting for a prostitute to cure herpes. Painful and not very effective.

These secular bear market cycles of roughly 15 years or so on average are a necessary part of the economic re-structuring that is needed after a boom that causes capital misallocation. Think of how much money was wasted over the past 5-10 years building mega-McMansions and strip malls that all sell the same stuff! That money is gone - poof! The hangover left behind is a doozy, though. Real estate will not bottom until at least the 2011-2012 timeframe, and that's the optimistic scenario.

Don't expect an economic recovery or new stock bull market until after housing prices stabilize. Anyone who tells you housing prices will bottom before 2011 is ignorant, wasting time wishing due to owning lots of real estate, a government official, or a paid shill for the industry. Ain't gonna happen and I would bet your first born child on it. The National Association of Realtors has been calling for the bottom every month since the first month housing prices dropped. They should never be listened to again by anyone with cerebral hemispheres (i.e. brains, yo).

By the way, banks in this country are almost all bankrupt or about to go bankrupt and the largest ones are the most insolvent. Commercial real estate has fallen off the proverbial cliff and unemployment is accelerating at an alarming rate. In other words, this secular bear market is progressing in the usual manner and this time will be no different than the others in the chart above.

Buy and hold is buy and lose when it comes to general stocks. During these secular bears, simply holding physical gold and waiting to buy stocks until the Dow to Gold ratio gets to the 1-2 range is the easy, no-brainer way to play things. Whatever you do, don't suck it up and hold for the long term because Suze Orman and Ben Stein told you it was OK and everyone's doing it. Stuffing cash under the mattress is a better plan than listening to those two.

The good news is that we're halfway through this secular bear and a new secular bull can be born once it's over in 2015 or so. Also, secular bear markets have cyclical (i.e. 1-5 year duration) bull and bear markets within them. For example, the cyclical bear market from 2000-2003 within this secular bear was followed by the cyclical bull from 2003-2007 and we are now in a cyclical bear that should last at least until the fall of this year.

The other good news is that if you're willing to take the risk, fast and furious profits can be made in bear markets. Think about it. This fall, the S&P lost 43% in 3 months. In the 6 weeks since, it has made 27%. Gold stocks made a 100% gain in the last 2 months. If you're willing to trade and switch sides based on where the opportunities are, bear markets are actually much more profitable than bull market. The problem is that bear markets require more skill and attention.

Once the current correction that I believe started today (but could squirm around a few more days to torture those without conviction) ends in the next 2-4 weeks, another big move up will begin. This up leg may be worth another 27% or more from the next bottom in the S&P (and a 50-100% gain in gold stocks) and it too will only take 1-3 months. Got your trading shoes on?

But back to the theme of this piece, which is that we are in a secular bear and it ain't even close to being over. Those that come to accept this are better off than those who watch Cramer and CNBC and quote the latest bozo who says the next bull will start in 5 seconds. When's the last time these assholes told you to short the market? When's the last time they told you to get out of stocks for a decade? When's the last time they told you to buy physical gold bars and coins? Don't you wish someone would have told you to cash in stocks and buy gold back in 2000 before the internet bubble crashed?

But if these shows tell you the truth, who are their Wall Street advertisers going to sell their stocks to at the top? And I do take it back - Cramer and cronies will tell you to sell stocks at some point in the future. When they do, remember: the bottom is in and it is time to buy stocks with both hands!

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