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No matter how you voted, all investors now have to deal with the reality that we have a new President. What does this mean for the stock markets? Statistically, on average, in the seven periods when Democrats had complete control of all Houses the S&P 500 rose 14.7% per year compared to the eight times the Republicans were in control the S&P 500 rose 7.4% per year. In these volatile markets that could happen in one day. Obama is the one who wrote the book “The Audacity of Hope”. Hope sounds good, right now. It has been a scary time, with markets throughout the world experiencing a world wide credit crisis. Worldwide markets have fallen some 50% and according to most analysts, the worst for the economy is yet to come in 2009 with corporate earnings faltering and unemployment rising. So why a Lone Bull Letter now? As I said in Lone Bull I, September 11, 1981 (Dow 800 to 11,200) “Don’t expect to see a headline in the paper ‘Buy now and Sell at much higher prices later’ The markets don’t operate that way. A market bottom is formed when all the negatives are fully discounted. That is when everyone that could be frightened into selling has already done so. Discouragement, disappointment, apathy, fear, frustration and the most important ingredient panic are all part of a typical bottoming process”. So the stage is set. We even had on October 17 an Asian Black Monday as Asian markets fell some 14% while US Markets reaction was “to late to sell”. From Lone Bull II October 2002 (Dow 7,200 to 14,200) “most of the news is still bad, but it always is at bottoms” Consumer confidence is near a record low, the housing markets are in shambles etc. Everyone knows the negatives as the media has been full of discouraging news. The question is: Has the downside overly discounted the continued negative news that will surely continue? We think so.
Era of Opportunity
Let’s look at the positive side of an Obama victory and for a change of perception. First keep your eyes open. Stocks like Volkswagen, MGM and Cigna have risen 50% in a day. Opportunity knocks! On the positive side every one cent drop in the price of gasoline means one billion dollars back into consumers’ pockets. The dollar is rising against the Euro as a US recovery looks more likely and stronger than Europe’s. A stronger dollar could see foreign capital inflows in US equities and debt securities. In order for the US to avoid a serious recession Obama is likely to increase spending, whereas McCain said he would put a “freeze” on spending. Government spending on energy alternatives, health care and infrastructure under Obama will continue to flood the economy with cash. Also money supply is growing at record levels (up 50%). Remember Nobel Prize winner Milton Friedman indicated that the most important factor in a growing economy and a rising stock market is the growth of money supply. As 50% of the scientists and engineers now live in Asia an Obama administration will reemphasize the importance of teachers and education. In addition, the Federal Government has shown that it will come to the assistance wherever needed. Of course all this is tempered by run away deficits and by the restructuring of Wall Street and the Banking Industry. Less leverage for debt will wean a previously over exuberant economy. However we feel, in the long run, these adjustments and good leadership will have a long lasting stabilizing effect on the economy.
Sursum Corda (Lift up your hearts)
There has been a lot of talk and negative connotation about the words “liberal”
and “socialism”. So far, what the Treasury and Fed have done will
be short lived. They have moved into the credit banking system and will move
out when appropriate. This is not a nationalization of our Banking and Financial
System. Herbert Hoover in 1929 did nothing, resulting in the Great Depression
of the 1930s. Socialism in European style is not an option here. However, Government
policies under a Democratic administration are likely to become more liberal.
The redistribution of wealth that McCain warned us about has already occurred.
Some figures show that 90% of the wealth is owned by the top 2%. The bottom
50% of those working earn only 16% of total US income and will never be able
to get themselves out of debt or send their children to college. Hopefully the
changes of an Obama administration will help to lift the water level, so that
we can all float higher. We come from two cultures 1) A Linear concept of success
where what is good for the individual should be good for the whole (cowboy approach)
and 2) a concept of inclusion that is Circular, where what is good for the group
should be best for the individual (tribal approach). A proper balance of these
two concepts needs to be implemented through education and social programs.
After all, we are all in the same boat of mutual dependency. Although the next
four years will be difficult “Lift up your Hearts” to Hope, as we
continue to solve our problems through inventiveness, a positive mental attitude
and persistence.
The chart below shows how markets have acted since 1929. As can be seen there were only two periods where a “buy and hold” philosophy was applicable. The majority of the time, investors had to be more flexible to make profits. Over the last ten years (on average) investors have only broken even. This period could continue for a while yet, with a Dow of 14,200 and a S&P 500 1,500 top offering Resistance. As we continued to say over the last ten years “investors must become more flexible during the upcoming uncertain period where proper selection and market timing are the proper Investment Strategies”. In addition Exchange Traded Funds (ETF) are preferable to less flexible Mutual Funds. Keep track of our Current Market Comments and Investment Strategy Letter at our website www.my-broker.com
Long Term Prediction:
Our interpretation and the implications of the below chart
are as follows 1)We are hopefully completing a bottoming formation process,
2)We see approximately 5 years of continued volatile markets between a Dow of
7,200 – 14,200, and 3)A breakout above 14,200 indicates a Dow above 21,000.
Note to Media
FOR MORE INFORMATION or to interview Carl Birkelbach on what’s happening
in the markets and why, please contact: Bill Hammons
Phone: (847) 577-1932, Email: ewhammons@compuserve.com
If you don’t care to receive The Investment Strategy Letter and Current
Market Comment, please notify Hammons as well.
-- Carl M. Birkelbach
November 05, 2008
ADDITIONAL INFORMATION
IS AVAILABLE UPON REQUEST
This report has been prepared from original sources and data we believe reliable
but make no representations as to the accuracy or completeness. Birkelbach Investment
Securities, Inc., its affiliates and subsidiaries and/or their officers and
employees may from time to time acquire, hold or sell a position in the securities
discussed in this report, we may act as principal for our own account or as
agent for both the buyer and the seller.
Past performance is no guarantee of future success. Also, while the above suggested
prices are as listed on our reports and the sell dates and prices are as issued
by our research department, our brokers operate independently and as each individual
client has a unique risk tolerance level, the above list should not be deemed
as a representation of our clients purchases and sales. Some of our suggestions
are volatile and speculative. Therefore, these stocks are only for those investors
willing to assume risk. In addition, there may not be enough information available
in these reports to make an informed decision. Upon request, we will supply
additional information. Purchases should not be made until enough information
is obtained and risks understood.
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