Monday Weekly Overview Sample Letter  

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

Seventeenth Consecutive Year of Publication; Letter #1; September 18^th, 1990

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address:  Richardstk@aol.com

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Monday, July 28^th, 2008:  Your New Paltz, NY SUNFLOWER update:  A few sunflowers have popped but I noticed the farmer’s market has alternated its plantings so any time you visit you should see some.  Just spectacular!

THE BIG PICTURE

Looks like one potential US and global leader gets it.  Presumptive Democratic nominee Barack Obama, to shore up his lack of experience on the global stage, embarked on a global tour last week.  And was again able to put his finger on the pulse of the world and his audience, exhibiting his knowledge of history and this particular critical point in time speaking at the historic Brandenburg Gate in Berlin.  While he didn’t rock star the crowd, fine with me, it was good to see he continues his role as alienate no one, moderator showing again he understands all sides of issues and is committed to leading by example.  While not denigrating any political party, say our Republicans, or country, say Old Europe.  Thus there is hope that America will soon embark on a new direction, one of getting things done by bringing all parties together and then making logical and effective, not ideological, decisions, forgoing our previous path of fostering divisiveness in the world, between our two political parties and among the American people ourselves.

Schwartz View:  Enough said.  I always get negative feedback when treading in political waters.  I do like presumptive Republican presidential nominee and American hero John McCain quite a lot but just feel we have to drastically change policies going forward, not follow a similar path.  America needs to get it’s act together quickly as all long range forecasters have reached consensus, saying we’re on a downward slide, financially, politically, economically, socially.  We just need to start cohesively tackling our problems.

THE ECONOMY

Numerous economists last week admitted that the US economy is weakening.  Among them Brian Bethune of Global Insight, James O’Sullivan at UBS and Moody’s John Lonski.  So, in spite of the US not posting two straight quarters of negative GDP growth, the old and easy definition of a recession, and one not used any longer by the National Bureau of Economic Research which calls and dates recessions but problematically many months late -- remember in today’s new globalized world we need to learn new economic relationships! -- it looks like a recession is here.  And in my view is going to stay with us for quite some time.  That’s because America has been moneying-over all near term problems for many, many years, thus postponing the always needed recessionary cleansing and efficientizing of the US economy, while we’ve also avoiding developing and implementing solutions to our long term ills, like our increasing oil dependency, our underfunded government pension plans, Social Security and former Fed head Alan Greenspan’s #1 concern, Medicare.  America does have a bad habit of avoiding problems until they reach crisis state.  Maybe that’s because our representative democracy has become so dysfunctional here in the US.  I would suggest we start fixing things right there in Washington by first getting rid of lobbying which skews everything toward those with the money to get their voices heard.  Even corporate America, who now realizes it’s entrapped by this self-perpetuating system, would like nothing better than to see lobbying go away as big business now has to carry and fund a large and increasingly onerous lobbying budget.

Schwartz View:  All I’ve read recently has been about how there are so many inefficiencies corrupting our inherently great economic and social framework that it’s a wonder anything can get done.  Such as the US having 600,000 lawyers while Japan has 15,000 (those figures were about 10 years back but obviously haven’t changed for the better).  And all the broken marriages and unwed mothers costing America a fortune as well.  It’s almost funny, after encouraging the rest of the world to move to free markets for decades, when the Soviet Union collapsed and showed the economic rot hidden there, the world finally started followed our recommendations.  And economic success followed suit but that led to tremendous and widespread global competition, so it’s vital we get our own act together as soon as possible, to just keep up.  Thus the silver lining to this current economic slowdown, a slowdown that isn’t responding to our normal response of throwing money at it, is that crisis is when change really does occur in America

THE STOCK MARKET

Stocks have again gotten ahead of themselves on the downside although not as much out of whack as at the first bottom back in mid-March.  Figuring the Dow Industrials and S&P 500’s previous bull market tops were set back last October, after nine months of a bear market or at the recent July 15^th lows, we are down on average about 2.5% per month versus the historic average bear market monthly decline of 2%.  So we could easily see a backing and filling trading range here and now or even a modest rally, the two normal ways bear markets correct themselves.  Much government intervention has come together to force down the price of oil and thus commodities in general, prop up housing and consumer spending, keep the financial system from breaking down completely and holding interest rates way below the rate of inflation.  So all this government stimulus has to go somewhere just as previous stimulus found places to bubble up.  Plus new government props and controls historically have been able to put a temporary fix in place.

Still, over a period of time the stock market reflects the economy and things aren’t really getting any better there, despite Q2 GDP growth out this Thursday going to again be positive.  In point of fact, the economy is continuing to get worse if one looks under the surface at signals like credit spreads, a rough definition being the difference in yield between US government bonds and non-US government guaranteed bonds, which remain wide.  Or if we factor in historic trends which show that economic downturns tend to surface hidden problems which end up feeding on themselves.  Today’s continuing wide credit spreads mean at some point MBIA & Ambac and Fannie & Freddie, the other 17 big financials which have also been taken off the allowed short selling list & all the other financials who’ve lost billions of dollars aren’t going to be able to hide things any longer and are going to have to really own up.  So stocks remain iffy for now.  And with the rug pulled out from under the remaining stock leadership in the stock market over the last two weeks, out from under energy, the energy complex and other commodities, any market rallies are going to be just technically based, say from an oversold position or short sellers being forced to cover.  Sure, a rally may then feed on itself and last longer than bears think, but should ultimately roll over as data worsens.

Schwartz View:  Technically then, we could be embarking on a summer rally and if so sharp traders with the courage to risk their monies in the propped up financials may be able to scalp the stock market.  And other pockets of strength should or may show up (hopefully in the health sector as that is now my focus with my few longs) normally searched out and propelled along by momentum players.

PORTFOLIO STRATEGY

LONG TERM PORTFOLIO STRATEGY continues to be hunkering down until this big storm passes.  I expect that to be longer than most government and Wall Street economists and market strategists believe or at least publicly state.  Publicly state because we all know that bearish Wal Street analysts and economists ultimately get fired and that in the aftermath of the dot.com bubble bursting, we got some theretofore hidden insight into what analysts really think.  I see widely-followed, economist Nouriel Roubini, formerly holding various high level economic advisory positions in government, believes the US and European economies are now sinking as last Friday he said Wall Street was in spin mode and that financial institutions are “… manipulating at will their earnings, and analysts [are] falling for this supreme baloney.” 

NEAR TERM PORTFOLIO STRATEGY depends more on whether this two-week, fledgling rally proves it has legs or not.  I’m using as a key gauge whether the Dow and S&P are able to close above their last Wednesday’s closing highs, Dow 11,632.40 and S&P 1282.19.  If these key indices close higher, then we will have the definition of a new up trend in place, a series of higher lows and higher highs.  Strategy then will be to favor the long side but with say with no more than 50% at most market exposure.  Planning on a modest summer rally for a month or two, with strategy being trying to scalp some short term profits.

AS FOR INCOME INVESTORS, we’ve all gotten used to our income fixes after 25 years of income investing being easy during a bull market in bonds, meaning just riding the trend toward lower and lower long term rates, I know it’s a struggle for you all today.  My best suggestion is to watch for weakness in income sectors, say in utilities, royalty trusts and even REITs, then strike.  Only move in and in a small manner AFTER a sector has just been blasted.  This gives you some profit buffer as primary extended downtrends many times have sharp sell offs after disillusioned investors finally give up hope and sell, right before they rally.  This can get you in at unusually good prices, at least for the near and intermediate term.

INCOME IDEAS.  Thus I would currently search through the utility sector as the Dow Utility Index has just fallen a sharp -8% over the last two weeks.  Or take another look at my previous July 11^th, 2008 two energy income recommendation Cross Timber Royalty Trust (CRT) and San Juan Basin Royalty Trust (SJT), both haven tumbled hard with crude.  Both go ex-dividend tomorrow, meaning today’s the last day to get in to collect the substantial August dividend (both pay monthly).  Or finally, revisit my other income recommendation, back on July 10^th, 2008, of two large European pharmas, GlaxoSmithKline PLC (GSK) AstraZeneca PLC (AZN) paying moderate dividend yields of 4.4% and 5.8% respectively.  You need to buy GSK today to be entitled to this quarter’s dividend and buy AZN soon before it goes ex-dividend (not declared yet but last year it went ex on August 8^th).  Good income investing!

Have a great week!