Dear CIGAs,

THE ECONOMY WILL NOT BOTTOM FOR MANY MONTHS, PERHAPS A COUPLE OF YEARS.
HOWEVER, THE STOCK, COMMODITY, AND CURRENCY MARKETS ARE DIFFERENT FROM THE ECONOMY.

The stock market discounts future economic events.  Right now it is discounting economic decline that will not take place for months.  Financial stocks have been declining for over 16months, and the U.S. market as a whole for 13months. Yet, if you believe the Government’s economic statistics, the economy was growing through June.

Many stocks could fall further over the next several months or years in our opinion.  Financial stocks will be among them.  However, some stocks are so cheap that they deserve to be bought, even though we expect further global macro economic problems.  In such an environment, many assets become priced too cheaply, and the wise who have husbanded their liquidity, will have the capital to buy greatly undervalued assets, like the clerk in the following story.

During the great depression of the 1930s, there was a humble clerk on the New York Stock Exchange, who had assiduously saved his money.  This man saw Singer Sewing Machine, one of the great tech stocks of the day, fall to $1 per share.  He put  his savings in the stock.  In the following years, the stock rose many fold, and he became a very rich man. 

This story combines two important attributes of the successful investor.  First, he was a saver and thus had capital when the time was right to buy.  Second, he knew value and bought when others could only think of selling.

Even if we are in for another Great Depression (and we don’t currently think that we are), in our opinion there will be many stock market rallies, and some of them will be big.

Even in the Great Depression, in some years stocks were down substantially and in others they were up..  As we have pointed out before, the Great Depression had no less than 3 huge rallies, rallying 50%, 130%, and 90%.  It also had many 10-15% rallies.

THE CURRENT GLOBAL ECONOMIC SLOWDOWN

The current economic slowdown is the result of unwise speculation in many things, but especially real estate.  The problem was created  by: 15 continuous years of unwise political and legislative decisions, unwise personal behavior of many individuals, unwise salesmanship from the real estate industry and Wall Street in the U.S. and from many banking institutions and investors in other countries, and a lack of discipline and due diligence on the part of many of the participants.

IN THE U.S.

The bad actors in the real estate profession will gradually be purged, and many may see the inside of a jail cell.  The unwise real estate purchasers are experiencing foreclosure.  Unfortunately, the second class intellects in Congress, who created and fostered much of the problem, and some of the Wall Street problem creators are still in charge of the Ship of State.  This is not a pretty picture. Let us hope that President-Elect Obama has the wisdom to avoid elevating any destructive political figures and  Wall Street problem creators to positions of power.

I believe that it was former Vice President Hubert Humphrey who once said, "To err is human. To blame it on someone else is politics."  Clearly, we have seen a masterful display of this skill in the current national economic debate.

Negativity and pessimism abound in the media and in public conversation about the markets.  While all of the negativity has been festering, to us it looks like Chinese, Brazilian, Indian, and other stock markets, along with some currencies, some growth stocks, oil stocks, gold stocks, and food stocks halted their declines and some have actually began to appreciate from their lows.

We expect we will get periods of weakness, and possibly re-test the lows. In our opinion, however, smart investors  may want to place some low priced bids for stocks that get thrown away. This has been the  standard behavior of many successful investors for centuries.