10/5 Kelly Letter Topics
Weekly market review
D-O-W-N
Monday House failure
Growing joblessness
Wellsovia
3-minute bailout bounce
Buying selected weakness
Russia's still sinking
McCain's failed gambit
High cash/stock ratio
Bailout helps, no cure
Itching to fall farther
We'll do well
Opportunity costs
Consider selling losing positions for tax write-offs next year, and then putting the proceeds into index ETFs or leveraged index ETFs. The move provides two benefits:
You lower your taxable income next year
You still ride a recovery in the market
I'll be providing details of this approach to Kelly Letter subscribers early next week, including which ETFs look like the best bet for the oft predicted yet still unseen recovery.
Enjoy the weekend. There's more to life than stocks.
We're coming up on an unprecedented, fabulous, multi-asset buying opportunity. Here's why:
The stock market is undervalued, all sentiment and most technical measures are saying to buy, and some fine companies are on sale. The problem is that it's been this way for the last couple of weeks and has kept plunging, frustrating all the bottom callers.
Nonetheless, you need to start working your mindset away from how awful it's been to the idea that capitulation and despondence are the current stages of the game, and that the next smart move will be to buy. I would focus on analyzing the leveraged index ETFs such as QLD, MVV, and UWM.
Interest rates are coming down, which makes real estate more enticing. This morning, the Federal Reserve worked in coordination with the European Central Bank and central banks of the U.K., Canada, Sweden, and Switzerland in an emergency rate cut. In the U.S. the amount was another half-point to 1.5%. Eventually, we should see lower rates reflected in mortgages, providing a 30-year at perhaps 5%. You don't want to miss that either through refinancing your current properties or buying new properties, or both.
Property prices in parts of the U.S. are getting lower and lower. My personal area of focus, Southern California, is awash in homes that are now worth less than the mortgages on them. I even met a relative who's in that position with negative amortization, meaning that he owes more at the end of each month even after making his payment. He's considering a short sale to the bank.
Searches at RealtyTrac show a growing number of properties in foreclosure or already listed at banks as real estate owned (REOs) and available at less than half their last market sale price.
The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.
The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.
And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.
You've heard that it's smart to be fearful when others are greedy and greedy when others are fearful. Get your greedy hat out and get ready.
To recap, there are three things you should be thinking about. They are:
How to benefit from an eventual stock market recovery.
Everywhere you look, people are debating whether last Monday's S&P 500 plunge of 8.8% combined with yesterday's 8.3% loss at the lows and 3.8% loss at the close is the capitulation we need to call a bottom. Was the last-hour recovery yesterday a sign that the tide has turned?
Here's a round-up:
Mark Hulbert: "It's worth remembering a truism about market psychology that has been too often overlooked in recent weeks: When genuine capitulation finally takes place, few will recognize it as such at the time. In contrast, an eagerness to declare that capitulation has occurred probably means that it hasn't."
Bill Cara: "Equity markets complete their Bull and Bear cycles with increased volatility, which is the case today. Bull cycles end when the actors run out of cash needed to push prices higher. Bear cycles end because cash holdings build up to very high levels amid the growing opportunities to buy value.
"Presently the latter situation envelops the market. There are at least $4 trillion in cash now on the sidelines plus a couple trillion more in newly printed fiat money from the treasuries of governments around the world. There is sufficient cash to feed the Bull."
Michael Kahn: "There can be no denying that the current market conditions are indeed extremely volatile. And volatility is something we usually associate with turning points in the market and not the continuation of the current trends. That could be good news for investors, even if some sentiment readings are not quite ripe.
"However, being even one day off in timing during such times can spell disaster to a portfolio whether you are a professional trader or casual investor. For that reason, sitting on the sidelines is the best advice I can give. After the market finally finds its bottom, missing the first few weeks of the new rally won't really matter in the long run."
Jim Cramer: "Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now."
Barry Ritholtz: [On Cramer's warning yesterday] "As I have said in the past, I don't like to harp on any one person. I also don't want to be a Cramer stalker. But DAMN if that headline doesn't smell like a giant buy signal.
"The market down 30%, the VIX spiking to 56, and Cramer giving a panicky SELL on TV this morning. We have a 9,500 downside target, and the likelihood of an emergency action makes us want to get long -- at least for a trade . . .
"We are putting a toe in the water here."
Bespoke Investment Group: "Market commentators this afternoon seemed downright masochistic, as many of them complained that we needed to be down even more after falling close to 800 points today. Then, as the market rallied back in the last hour of the day, those interviewed on CNBC were complaining that it didn't mean capitulation was taking place. But who ever said that capitulation couldn't happen in the middle of the day? And since when was an 800 point drop and a VIX spike close to 60 not considered panic selling?"
Charles Kirk: "For what it is worth, I think the afternoon reversal was generated by short-covering (i.e. profit-taking by the bears) than any real buying interest.
"As you might imagine, the sentiment and technical indicators are literally off the charts suggesting we're going to see a big-time counter-trend reversal sooner rather than later. As in life and the market, there are no guarantees but when you see readings of this nature, that is pretty much as close as you are going to get unless the world and the market are about to come to their bitter end.
"Beyond the obvious, the best thing to say about the market is that at least no one expects anything good to come from earnings season this time around. And, as far as hope for the Fed and Plunge Protection Team, well, you can forget about that as well. The action over the past few days shows us many fear the world is headed for a complete collapse and anything short of that will be a positive surprise. All in all, at a minimum, it's time to start thinking about what can go right for a change because no one else is.
"There are no equity indicators at extremes that are offering bearish readings right now. Not a single one."
Mark Hulbert wrote last week that the best market timers in his database are bullish, while the worst ones are not.
Steve Sjuggerud wrote:
U.S. real estate is no longer a bubble. It's affordable once again. The median family can afford the median home in most of America. Sure, we have an oversupply of homes for sale. It happens in recessions. That'll work itself out. No big thing. (Really!) And sure, it will likely take many years for the market to stabilize, much less recover. But the bubble is gone.
The forward price-to-earnings ratio for the Dow Jones Industrial Average is about 12. By that standard measure of value, stocks are the cheapest they've been in a quarter century... That's hardly a stock market bubble!
Meanwhile, people are downright fearful. Instead of being scared, you should think about buying. Stocks are 1) cheap and 2) hated. We're just missing 3) our uptrend... Then, it's time to buy!
That part about a missing uptrend is worth noting, especially this morning.
You may recall the market's performance last Monday: The Dow lost 7%, the S&P 500 8.8%, and the Nasdaq 9.1%. It was the S&P 500's worst day since the 1987 crash.
The bailout bill passed on Friday, though, so all was supposed to be well. It wasn't. The relief rally from that lasted all of three minutes before rolling over and ending the day down again.
Last night, here's how the rest of the world fared:
-4.3% Japan -2.6% London (9:00 a.m. Eastern) -4.7% Germany (9:00 a.m. Eastern)
The U.S. is set to open lower following those acknowledgments that a $700 billion bailout plan that replaces the worst assets in banks with lendable cash still can't make banks lend. More is yet needed, and a fine step according to traders would be another interest rate cut.
I always like to point out opportunities where they exist, and it's awfully easy to see the one staring us in the face right now. Real estate prices are down at the same time that interest rates are down. You can fairly often get one or the other, but rarely do you get both.
Consider spending time away from the stock market to get some money together for a down payment (remember those?) on something that's become a great value. Experts disagree on whether real estate has bottomed and it varies by region anyway, but now is a good time to become that fabled "prepared man" who's favored by chance.
I spent some time yesterday walking around Caruso Affiliated's new Americana at Brand center in Glendale, Calif. and then meeting some investor friends, of both the real estate and stock market variety.
I even toured the Excelsior luxury condominiums at The Americana, as I'm looking to buy more California property in the current downturn. The sales agent was excellent and the tour compelling. The marquee unit with a corner view of the center's main square, downtown Los Angeles, and surrounding mountains, is listed at $2.4 million. "Because of the current environment, however," the agent told me, "we'd be willing to make a deal." Here I am inspecting the joint:
I asked my investor friends later, "Is this what the next Great Depression looks like in America? I mean, every day the headlines are worse than the day before, all of you tell me you've never seen deeper gloom in the market, and yet life is completely normal on the street."
And it is. ATMs are fine, traffic is flowing, restaurants are cooking, even real estate offices are humming. I met with a friend's agent yesterday and the only thing he kept saying is "the last time we saw this..." and making comparisons to the right time to buy. His wife even drew a line on a piece of paper rising 2/3, settling back 1/3, rising another 2/3, then settling back 1/3. "As you know, Jason," she told me, "this is what the real estate market does on an approximately seven-year cycle."
Economist Nouriel Roubini, who predicted the current crisis better than almost anybody, wrote on Monday that if an international bank run on the interbank liabilities of the U.S. were to accelerate, "a total meltdown of the U.S. financial system could occur."
Yet, in front of that, the only impact Excelsior is feeling is the need to mention their willingness to "make a deal" with me on a $2.4 million condo. The only impact the real estate office is feeling is the need to mention that this happens every seven years or so. As for the typical person on the street, they're barely aware that anything's happening, beyond a vague "all this trouble on Wall Street" comment before praising their neighbor's new SUV.
It makes you wonder, doesn't it? How bad do things have to get before it really matters? At what point will people on the street feel an impact? When, if ever, will any of this genuinely affect your life?
