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Tharp's Thoughts Weekly Newsletter

November 12, 2008 — Issue #398  
  
Workshops

Two Exciting Locations Kick Off the 2009 Workshop Year

Article

What It Would Take for Me to Be a Major Buyer of Stocks by Chris Weber

Trading Education

Van Tharp’s Ten Favorite Trading Books

Trading Tip

Crude Oil Climbs up the Stairs and Jumps out the Window by D.R. Barton, Jr.

 

Workshops

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Phoenix, Arizona, USA

Phoenix, Arizona 

January 30-Feb 1

How to Develop a Winning Trading System That Fits You

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Sydney, Australia 

Sydney, Australia

February 6-8

Highly Effective ETF and Mutual Fund Techniques 101

Sydney, Australia

February 10-12

Peak Performance 101

Sydney, Australia

February 15-18

Advanced Peak Performance 202

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Feature

What It Would Take for Me to Be a Major Buyer of Stocks

by
Chris Weber

As much as I want to believe otherwise, I don't think the worst is over for global stock markets.

Yes, the week that just passed (October 27 to 31) was the best week for the Dow in 34 years. It rose by 10.5%. But what does this mean?

It means that not since the week ending October 11, 1974, has the Dow risen so much in percentage terms. But let me remind you that October 1974 was not the low of the terrible 1973-74 bear market. Yes, it rose by a massive 14.1% that week in 1974, and ended the week at 658.17. But in the weeks to come, this would prove to be just another bear market rally. It would fall, ultimately, to a closing low of 577.60 on December 6.

In fact, if we look at the best weeks ever on record for the Dow, we see that they were all bear market rallies. The week ending June 26, 1931, saw the Dow soar by 16.1%, its best ever. But the absolute low was still over a year away. In fact, except for that week in 1974 and last week, all of the best 15 weeks of the Dow took place in the 1930s, and most were bear market rallies.

To convince me the lows are really in, I'd like to see a couple things.

First, P/E ratios on the major index would have to be much lower. At great market bottoms of the past, they have been well under 10. And the dividend yield on the indices has been as high as 6% at great bottoms. Given current dividends on the Dow, it would have to go to around 5,300 in order to yield 6%.

I'm not predicting this will happen, because the Fed and other central banks are doing everything they can to inflate. But I realize they may not be successful... 

So far, they have not been. Banks are still not lending and people are afraid to borrow. I fear to say this, but so far things are looking much like the beginning of the long Japanese deflation that began in the early 1990s and has still not ended. Just last week, the Japanese central bank once again cut interest rates to near zero and announced yet more spending programs. All of these programs and all of the printing of money since 1990 have not resulted in economic recovery. This is a sobering thought for the rest of the world.

For many of the countries now flirting with deflation, like the U.S., relatively few people have much in the way of savings. The idea that the average American family should have as little as eight months of expenses saved is greeted with laughter from most Americans.

"Who has that much?" many ask.

Yet I predict that – though it will be wrenching – Americans will be forced to save like they have not saved since the 1930s. This process will take years, and it may be the case that what has happened this year with both real estate and all other asset prices falling, we will see a new generation of savers in the U.S. and much of the world.

I think this will be so even though we will see bargains in asset prices during the next few years. At some point, for instance, the world's stock markets will be great bargains. Yet most people will be too scared to buy into them, having been fooled too many times before.

So... while the market could rally strongly from here, I'm not risking much of my capital on it. My strategy is still to build cash, but to look for bargains. When the valuations I just cited appear, I'll be a big buyer of stocks.

Good investing,

Chris Weber

About the Author:  Starting at 16, Chris Weber turned just $650 (earned from his paper route) into $1.8 million in cash through a series of remarkably insightful investments. He records his thoughts on investing in his personal newsletter, The Weber Global Opportunities Report. You can learn more about Chris by clicking here.

This article is reprinted from DailyWealth, November 6, 2008, a free daily e-letter focusing on the world's best contrarian investment opportunities. For a free subscription, click here.

IITM Third Party Clause

Trading Education

Van Tharp’s Ten Favorite Trading Books

Van is often asked "What are your favorite trading books?" 

Click here if you'd like to see the list.

 

Trading Tip

Crude Oil Climbs up the Stairs and Jumps out the Window

by
D. R. Barton, Jr. 

 

During the insane summer run-up in crude oil prices, I did a series of articles on the inevitability of a crude oil price pullback. 

Who knew that it would be this hard and this fast?

I’m sure that if we asked 100 oil business execs and oil analysts in June if crude could be trading in the 50s in less than five months that 100% of them would have said, “No way.”  And then they would have looked at us like we had just suggested a plan for immediate peace in the Middle East. Or a way for the Cubs to win the World Series.

Yet here we are, $57 and change with price in a downward spiral.

Why the monstrous drop?  Is it the demand drop that everyone has been talking about this morning?  Demand has fallen at least 1.3 million barrels per day globally (that estimate seems very conservative to me; crude supply and demand numbers are notoriously fudged because most of the world’s output is controlled by central governments).  But with the OPEC countries producing around 30 million barrels per day, that certainly can’t be the main reason for the 60% drop in crude prices.

How about the fact that the U.S. dollar has strengthened considerably in the last few months as currency has undergone a “flight to quality”?  Here’s a weekly chart of the US Dollar index.

It’s plain to see that the dollar is at its highest point since the spring of 2006.  But in this index measuring the dollar against a basket of U.S. trading partners’ currencies, the dollar is only up 17% in the last few months.  So while this certainly plays a part in the dropping price of crude oil, it is not the major reason for fall.  To drive home that point further, let’s look at the price of crude denominated in another hard asset— gold. 

Back in June, I highlighted the fact that an ounce of gold would only buy 6.5 barrels of oil – a multi-decade (if not all time) low.  How is that ratio playing out now?  I’m glad you asked, since I just happen to have a chart handy…

This month, gold has been able to buy almost 13 barrels of oil at the ratio’s highest point.  That’s a huge jump of 50% in a short time.  But since both commodities are denominated in dollars (and both have had steep price pullbacks in the last five+ months), this chart shows that oil’s price has dropped twice as fast as gold’s. 

So if neither the drop in demand nor the strengthening dollar tells the whole story, what else adds to the case for dropping crude oil prices?

Tune in next week as we build the rest of the case for crude oil’s big drop.  (Here’s a hint: don’t expect the prices to stay on this severe downward course for long.  We’re already due for a reaction to the upside.)

Until next week…

Great Trading,

D. R.

About D.R. Barton:  A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena.  He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  “drbarton” at “iitm.com”. 

D.R. is presenting the upcoming How to Develop a Winning Trading System That Fits You Workshop, January '09.

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