It's a Lot Easier to Play the Short Side

I keep getting asked if the market's turning around right now. Yes we've bounced a bit over the recent week, but don't think we're out of the woods yet.

Remember, there are such things as bear market rallies and I believe we're staring straight in the face of one right now. It's a whole lot easier to play the short side right now. Every time the market's going up the volume decreases, which makes betting on the market going down is a lot easier.
So how do you make money on the short side without taking on unnecessary risk? It's a lot easier now with the ETFs they have out there to eliminate the unlimited risk.

I guess if I HAD to make an argument for equities right now it would be that you can sell happiness and buy fear right now. But you have to be nimble, VERY nimble. Investors are getting happy very quickly right now, even though we're only getting relief rallies. I know this because all that's driving the market right now is stories of global growth, which isn't what you'd be seeing if serious investors were getting in the market. So all we're seeing is people covering profitable short positions, which definitely does not mean we're in a new bull market.

Private Mentoring

I’ve got another really interesting thought for you about how we believe in investing and the truth if you just look at results. I warn you, this isn’t going to sound right to you. That’s because it is right.
Let’s take the global stock market for now. Not your country, but the whole world.
The world economy is going to be vital and it's going to grow. You don’t want to just think in terms of one country, even ours, just because economic, business, and tax policy affects how successful you’re going to be in that one country. Believe me, the vitality, the ambition, the courage, and the ingenuity of people around the world who want a good, educated, safe comfortable electronic life for their families will not be denied.
The growth will be there, and they will need our capital. So from now on you can afford to be very, very choosy. You don’t have to invest in uncertain situations. Money will be scarce, and you can pick and choose.
I know this isn’t the way most of us think. But this is the new world. You can afford to think like this. You can demand that everything be right before you commit, and you better take the responsibility to evaluate each deal carefully.
You can know the real story about every company you invest in, and everybody you loan money to. You can demand only good deals. It is a buyers market for investments now, and it’s going to be forever.

What You Need to Do, What They Need to Do, and How to Do It

Right now people are looking at the stock market and asking, how can huge companies worth billions, if not trillions, of dollars have stock prices at $8? How can fertilizer companies, making 60% profit, be selling for 2 years worth of profit and the price is dropping?

Do you get it? It means it’s not low enough.

So what does that mean?

I know everyone’s saying this is about confidence (and it is), so here’s what it means.

We all lived through the late 70’s during Carter’s presidency. Now Carter was a good guy and meant well, but he wasn’t up for the presidency. He didn’t have the personal strength to handle it and was totally overwhelmed. When Iran and Soviet Union backed him into a corner, he just couldn’t handle it.

The truth is, right now nobody knows ANYTHING right now. All the TV pundits and politicians are talking like they know EXACTLY what’s going on, but the truth is that nobody knows anything right now.

As human beings, however, we have a need to feel that SOMEONE knows what’s going on, that’s someone’s in charge. It’s simply human nature. Right now Paulson, the government, the President, they’re all throwing their hands up, no idea what to do.

Dr. Laffer was screaming a year ago for Bernanke to do one thing to help stave off this situation. It was simply to let the monetary base to grow. They all knew that money was too tight, that money needed to flood in, not trickle. Lowering it a little at a time makes people wait to borrow money. Think about it. Would you borrow at 2% today if you knew you could borrow at 1.5% two days from now? Neither would anyone else!

So we wait and people starve.

Now the government, Paulson, the President, every day they’re changing their mind about what is needed to fix this situation.

Bush is AWOL right now and nobody knows what Obama’s going to do when he takes office. With all the indecision, nobody knows what to do and we’re at a stand still.

If they would just buy the bonds like they said they would, buy with conviction. Who cares if it’s right or wrong? We won’t know for a long time. So what if it’s wrong? How wrong could it possibly be? You buy the bonds and sell it later.

This situation isn’t, at the core, about bonds. It’s about a lack of mastery, a lack of competence. THAT’S why we’re circling the drain.

Obama’s staying out of it out of respect for President Bush. So right now President Bush needs to suck it up, act like the President (even if he’s a lame duck), invite Obama into the White House and work it out. That’s all you have to do.

The minute you have someone who looks like they’re in control the stock market will rebound. Remember, this isn’t about fundamentals. Stock prices are WAY too low because people have discounted that nobody’s going to take charge, and nothing is ever going to get done. Now we know this isn’t true, but it’s the impression we get right now.
We have a president who won’t do anything and a Treasury Secretary who can’t make up his mind. So I repeat my request to them, “JUST DO SOMETHING!”

The Cyclical Life

If you want to understand what’s happening to you right now, it’s really pretty easy.
I have a really good way to make sense out of the economy, the markets, the relationship between sellers and buyers, and everything that happens between people who can buy and sell when they want to. It's what makes America what it is today, and thanks to us it's also what most of the rest of the world uses — more or less free markets.
The reason it’s always so tough to understand (and especially to forecast) is because we draw these charts that are really just wavy lines going from left to right.
But the problem with wavy lines is they really don’t tell you where you’re going next.
People have theories about what they think based on the past, but look at that line. It could really go anywhere.
Folks, life isn’t wavy lines. Life on earth is cyclical.
The great thing about a circle is you always know where you go next. The only uncertainty is how fast you’re going to get there. I’ll say it again, life on earth is cyclical.
Take my house – please (sorry, I couldn’t resist that old Bob Hope joke). Anyway, you have house prices, and eventually, as the prices keep rising, you get to a point where it’s a wonderful deal for the seller, and the buyers hate it. It’s so high that it discounts all the profit you could ever make on the house. No doubt it’s a great house, but you have very little chance of making money on it in any reasonable time.
So buyers don’t like it and they stay back. Sellers love it and they are eager. So eventually the sellers start to bid lower, and eventually the buyers start to get attracted. But the sellers keep giving lower bids, and you move from 1 pm to 6 pm (if you’re still imagining the cycles as a clock).
At the other end, you get to 6 and now the sellers can’t make any money at that level, but the buyers are ecstatic. The sellers won’t sell because they can’t afford to.
Think about copper and steel right now. Commodities simply can’t go lower in price than the cost of producing them, at least not for long. Stocks, on the other hand, CAN, but commodities can’t.
So it’s a great deal for the buyer, but the sellers just don’t want to participate. After the ones who have to sell are done, the rest just won’t sell at that price.
The economy is going to keep getting worse, but soon the sellers that are forced will be done. Stock prices are already going below the price of the cash, inventory and building worth that lots of companies have. Eventually, there will be so little risk, that you will be able to buy companies and break them up and sell the assets off. There was even a movie staring Danny Devito about that back in the mid eighties. They also made the movie Wall Street about the same thing. It was real. The stocks were so cheap that you could buy the company, sell off a few buildings and you had the company for free.
Folks, THAT is where we’re going.
The thing is, you can really never tell whether you’re at 5 o’clock, 6 or 7. Not at the time. But it really doesn’t matter, does it?
Just play small, because you could be at 4 o’clock. It could take years to get to 7 pm. And don’t forget, you will have to get back to 8 or 9 to just get even. Who knows how long that part will take.
If you want to see a twenty year period that had zero appreciation, where you made no money unless you knew how to buy fear and sell happiness, just click here.
Now, remember 18 months ago? We were like a broken record, talking about the narrowing of demand. I remember explaining all about the advancers vs. decliners and all that. I remember showing how demand was narrowing. Why don’t you click on the link above and take a look at the graphs I’ve posted in the past to get a real sense of what I’ve been talking about.

Death By a Thousand Duck Bites

Death by a thousand duck bites.
That’s what’s happening to you if you’re still living in the nineties.
I received an email from Bob. He says, “How can you keep pointing out industries and stock picks, then take congratulations for calling the crash and keeping us out? Isn’t that somewhat disingenuous?”

Here’s my response.

First of all, the people saying we saved them money, they’re in the thousands. I, personally, haven’t said a word about it. It’s the people who call here, email me, and come to my personal appearances that say those things.

On the air Monday, no less than Dr. Arthur Laffer, one of the most important financial minds of our times, an advisor of his own to way over a billion dollars, told us the same thing. I was shocked and thrilled to hear him say it on the air, I don’t mind admitting. It’s a thrill when somebody like that says things like that. He gave this show credit for keeping him out of stocks and saving him millions of dollars.

I didn’t do it, but I’ll take the credit.

So now how can I like companies and still take credit for not liking the stock market? Easy.

At the time of the crash I had maybe 15 or so percent of all investment money in stocks.

Now, after coming off the bottom, maybe I have around 24%.

Right now there’s much more money in bonds that are making great profits right now. Much, much more. There’s also much more money in private equity deals, which can give terrific returns. These deals are centered around projects like building cities, the Children’s Educational Network, lots of things.

The great thing about private equity is, it isn’t about crazy investors guessing their psychological state a year from now. It’s real simple. If the business makes money, you’re richer. If the business doesn’t make money, you aren’t. If it loses money, you’re poorer.

It’s times like this that I like substance over herd psychology.

And yes, I take the credit for knowing it.

If you think about it, you can’t just see these things when they are happening in order to make money. You have to see them months, sometimes years, in advance. That’s where you make the big money. And if you’ve noticed, you could just take some of the big calls from this show in the last ten years. If you just caught those few days, you’d be much, much richer.

Unfortunately, I never know when the big day is going to be. If I did, I swear, I’d announce it so you could save a lot of time and watch Desperate Housewives the rest of the time.

But I don’t, so everyday I try to make the big important call.

In 2001 we said, “We can’t see taking all that risk with companies that are competing with each other so stiffly. I’d rather be a lender.”

We bought tons of mortgage bonds, which made close to double digit returns through that whole bear market, all the way until now!

In 2003, I said, “This is the time. Believe this rally. THIS is going to be the new bull market.”

Back to stocks.

Since 2006 we've said, “The economy is softening, worse than anybody expects. The stock market is losing ground and our market x-ray is showing progressive disenchantment with taking risk in the stock market. Start lightening up.”

Another pretty good call.

So any stocks in these last few months have been bad. But look, if you have most of your money somewhere else, and a lot of it is profitable, you’re doing pretty well. Especially when you consider that the rest of the world is losing 40% of their money.

On a relative basis, you are now 30 or 40% richer in terms of what you’re going to be able to buy. In other words, if you have a deflation of everyone else’s assets, and not yours, you are richer. Do you get that?

The hard game now is calling the bottom of the stock market. The easy game is buying corporate and municipal bonds and selling treasuries short.

That’s easy money compared to the stock market, and many of you are participating in that because you learned about it here on my radio show, and in my blog.

So am I proud? Sure I am. And sure, there is always going to be something I own doing poorly. But on a relative and absolute basis, I’m getting richer, the people around me are getting richer, and if you aren’t, maybe you should be taking more interest in the learning. The old, easy, appreciating world is gone, folks.

Crazy Investors Make You Money...AGAIN!

My Crazy Investor Index isn’t always a buy signal. People who get fearful in a bear market are right to do so. But the Crazy Investor Index can be a great sell signal if there’s exuberance in a bear market, or it can be a great buy signal if there’s outright panic in a bull market.

Right now the Crazy Investor Index is flashing volatility and fear, but I don’t think we’re seeing a buy signal. Soon enough though, we will see people getting more and more happy and confident and THAT will be the time to strike and sell, sell, sell.