A DEPRESSION OR NOT A DEPRESSION

It seems that the D-word is now becoming prevalent. You won’t hear it from the any of the
financial authorities, or the politicians, or anybody in an official capacity. Well okay we
overheard Stephan Harper, Prime Minister of Canada say “The world is entering an economic
period unlike, and potentially as dangerous as, anything we have faced since 1929”. Okay so
maybe there is some recognition that we are in unchartered territory. But the thought of an
economic depression is not something anyone really wants to discuss. We have stated that we
don’t believe we will see anything on the scale of the Great Depression. Trouble is, even
economists can’t agree on the definition of a recession or the rarer depression.

The rule of thumb is that a recession is two consecutive quarters where GDP declines. A
depression is a severe recession, with GDP declining by more than 10 per cent. Thus far at least we have seen no one predict that will happen but it hasn’t stopped a host of pundits declaring that we could be in a depression and that the stock market is probably only about half way through its decline. Certainly if the latter were the case then that would be equivalent to the long liquidation that took place 1929-32. In all of stock market history of North America there simply is no record of decline of that nature either before or after. Typical panics and sharp recessions or even prior to the 1929 crash and depression collapses usually shed no more than 50 per cent. By that definition for the stock market we are there.

S&P 500 STRATEGY: STAND ASIDE (for definitions of terms see end of report)

• S&P 500 crashed 8.4 per cent this past week plunging to new lows at 741 officially
  taking out the lows of 2002.
• We are down 49 per cent from the highs of October 2008. On a high to low basis we lost 53 per cent.
• Gloom continues to be pervasive as the economic numbers remain relentlessly bad.
• Despite what appeared as a potential key reversal day the previous week it merely proved to be another huge rally in a relentlessly down market. Friday saw another reversal day
  following the confirmation of the appointment of New York Fed President Tim Geithner
  as the next Secretary of the Treasury.
• We apparently bounced off a very long up trend line from the 1932 lows. This could then prove very important as a potential low.
• The market was led down by the collapse of Citigroup(C-NYSE) and General Motors
  (GM-NYSE).
• Many indicators have turned up on the dailies and a few on the weeklies .The collapse this week did not drag them back down again. That is a potential interesting positive
  divergence..
• We hit the bottom of some other channels on our daily charts.
• We appear to be in the process of completing a 5 wave down structure from the May 2008 highs.

TSX INDICES

An absolutely ugly week. The TSX Composite lost almost 10 per cent and is officially down 39 per cent (high close to low close this week) from the highs seen in May 2008. On an absolute high to low basis the TSX Composite lost 50 per cent. That is not as bad as the TSX Venture exchange which has lost 75 per cent from highs seen in May to the lows this week. As we have often stated you would think the junior resource sector caused the financial crisis instead of merely being innocent bystanders that got run over.

Speaking of the CDNX we were asked this past week what did we mean by accumulate selectively. Quite simply so many of the stocks are so beaten up they are trading for cash value or less. No value is placed on the resources in the ground. We are not recommending any specifically but what investors who are prone to play in that sector they can selectively accumulate stocks that they believe hold out a huge chance of eventual recovery. Unfortunately we can’t say ourselves with clarity which ones will make it. Many have battened down the hatches slashing staff and capping projects to weather the current storm. Not unusual in the business. On the other hand we have witnessed some huge insider buying going on in a number of junior mining stocks. This is the time to accumulate. When these stocks decide to move gains of 2, 3 and 10 times the purchase price are not unusual very quickly. The risk remains that they just go out of business.. [read more...]

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• Talk of an economic depression is beginning to make the rounds.
• So just how deep do we have to go to call it a depression?
• Pretty deep – 1929-1932 saw a 33% decline in GDP. 1974-1975 the worst one since then only saw a decline of 4.9%.
• The importance of China.
• Bankruptcies everywhere.
• The $4.3 trillion dollar bailout.
• The explosion of the monetary base.
• Vulnerabilities.
• You have to own Gold.
• DJI has a lot further to fall – on an inflation adjusted basis.

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BUY WHEN THERE IS BLOOD IN THE STREETS!

We are not sure who coined the above phrase. Some say it was Baron Rothschild, the scion of the Rothschild banking family. What it means is that when fear is at its highest, one must toss aside the bearish feeling and turn bullish. Of course the $64 million question is, “Are we there yet?” As the market sank this past week one could be forgiven if even the most optimistic amongst us turned out to be wrong as well.

The original quote is believed to be “Buy when there is blood in the streets, even if the blood is
your own”. Well, we have suffered some bleeding. We guess the question now is, have we bled
enough or is there more to come?

In last week’s Scoop we premised that the financial panic of 2008 was more akin to the financial
panics of 1907, 1937-38 and 1973-74 than the seemingly endless liquidation of 1929-32. We also premised that the equivalent of that famous 1930-32 collapse in the Dow Jones Industrials (DJI) was the NASDAQ in 2000-02. The DJI was the cutting edge index in its time, and it fell 89 per cent. The NASDAQ fell 78 per cent.

S&P 500 STRATEGY: STAND ASIDE (for definitions of terms see end of report)

• Lows of October 10 fell as we crashed into the anniversary of the 1929 lows.
• The new low was seen at 819. We closed 6.5 per cent off of those lows.
• Gloom is pervasive as the economic numbers are relentlessly bad.
• The good news is that while we saw the lows on Thursday the market did reverse that day and put in an outside reversal. A potential key reversal day?
• We bounced off of the bottom of a longer term down channel line.
• A number of indicators have turned up and the drop this past week did not turn these indicators back down again. Included is the VIX indicator that did not make new highs
  with the market’s new lows.
• This sets up the potential for a number of positive divergences.
• We may have completed a five wave structure to the downside but that would only be confirmed by a breakout over 940.
• The 2002 lows are at 769 a mere 50 points below this week’s lows.
• The S&P 500 has lost 48 per cent from the October 2007 highs to this week’s low. On a close basis the market has lost 44 per cent.
• This decline has occurred in just over a year what it took two and half years to
  accomplish in 2000-2002.
• If we are successful in breaking out over 940 targets remain for this rally to 1050 to 1100 and possibly even to 1150.

TSX INDICES

It wasn’t a pretty week for the TSX Composite and the sub-indices. The market suffered another broad decline and a number of sub-indices made new lows. New lows were seen for Info Tech, Consumer Discretionary, Metals and Mining and Real Estate. As well the CDNX Venture Exchange reversed the previous week’s gains and also saw slight new lows.

There are some positives though as some sub indices eked out gains. Gains were seen from Consumer Staples, Telecommunications and Utilities. These are the early leaders when we are starting to come out of a deep hole. So there is some hope here amongst the gloom. Some daily indicators have turned up in a number of sub indices and thus far the pull back has not pulled these indicators back down again.

While we remain hopeful that a bottom is in the process of being made we do caution that the only ones showing any real signs of bottoming are the aforementioned Consumer Staples, Telecommunications and Utilities. But even those are now at resistance levels. [read more...]

Subscribe to David’s reports and read more about:

• Buy when there is blood in the streets! Coined by Baron Rothschild?
• The Great Depression stock market collapse 1929-32.
• A walk through the panics of 1937-38 and 1973-74.
• Comparison with the financial panic of 2007-08.
• Comparing the conditions of the 1930’s with today.
• A bottom, not the bottom.
• What could still go wrong.
• Comparison of the 1930’s markets with this decades.
• The oil crash.

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HISTORIC VICTORY! NOW WHAT?

Congratulations to President-elect Barack Obama on his historic win on November 4. He does
represent a watershed in American politics. But once the applause dies down, as inevitably it will, the real hard slog begins. He has inherited a mess.

So just what kind of mess?

• The worst financial crisis since the Great Depression, with bailout commitments that could add upwards of $2.2 trillion to the US debt.
• A fiscal budget debt that could hit $1 trillion in the coming year.
• Two unpopular wars that have cost the US taxpayer $860 billion and counting (source: CRS Report for Congress, October 15, 2008). Despite a desire to get out of Iraq it will probably prove to be difficult. Add to that cost the commitment to up the ante in Afghanistan and it will add billions to current costs.
• Deteriorating infrastructure, much of it old, leading to destruction by hurricanes or failures, as witnessed by the infamous collapse of the Minnesota Bridge and the New Orleans leaves, all needing to be repaired or replaced at a cost of upwards of $2 trillion.
• Healthcare, although probably the best in the world, currently costs over 17 per cent of GDP, the highest in the industrial world. But control of healthcare lies with insurance companies, and over 50 million Americans have no coverage.

S&P 500 STRATEGY: STAND ASIDE (for definitions of terms see end of report)

• Low made on October 10 has thus far held. We are now four weeks off of those lows.
• The low was made on October 10 at 840 and a successful retest was made on October 24 at 852.
• A brief strong Election Day rally was snuffed out with the two biggest down days ever recorded after the election.
• We closed up on Friday suggesting that the pull back was just that – a pullback.
• As long as we can stay above 875 we should be okay.
• November 7 was a natural square day and often a turn date.
• A negative is that the hedge funds year is around November 15 and we could still see selling into that date.
• We broke out over the 20 day MA but the Wednesday/Thursday fall brought us back under.
• Breaking out over 935/940 would be positive and above that level we should go up.
• Targets remain for this rally to 1050 to 1100 and possibly even to 1150.
• Friday’s rally came on the back of the very negative unemployment numbers.
• Speculators can be buyers on Monday if we continue back up.
• We remain confident that a significant low has been seen but cannot rule out a test later in December.
• Buy SPY or SPY Dec options.

TSX INDICES

Last week’s reversal week failed to see any follow through as the TSX Composite and most of the subindices closed down. Most of the down week was made in the two days following the US election when the market was pummelled. Friday’s mixed up day was hopeful that the coming week may see a resumption of the reversal up that started a week earlier.

Technically nothing has given us a buy signal and it is highly unlikely that anything will anytime soon although it is possible. Most indices remain well below their key 40 week MA and the 200 day MA. But that doesn’t mean one can’t buy. Where we would concentrate on any buys is the sectors that bucked the trend this past week and actually closed higher..[read more...]

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• The economic mess facing President Elect Barack Obama.
• Obama greeted with sharpest two day sell off ever following an election.
• Stock market history through the Presidents.
• A market in endless liquidation this will not be.
• No 1930’s style Great Depression. Instead a series of rolling bull and bear markets.
• Looking at previous financial panics.
• The positives for Obama.
• Lurking in the background huge monetary stimulus.
• Monetary stimulus leads to bubbles.
• What will be the next Bubble? Will of course we believe Gold!

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REBOUND

Investors must be breathing a sigh of relief. The rebound last week has taken some pressure off what has been the worst decline since the 2000-02 high tech/dot-com collapse. More importantly, we believe it signals at least a temporary end to the collapse. But is it the absolute end? Probably not, but relief rallies can be quite impressive.

There is the old saying of “sell in May and buy in November”. It is now November. Is it the time to buy? Well, according to the Stock Trader’s Almanac November is the best month of the year for the S&P 500. Since 1950 there have been 39 up Novembers against only 18 down Novembers. And in an election year, which this is, the S&P 500 puts in an above-average up performance. The stars appear to be aligned and we would agree.

We wouldn’t blame if investors could be forgiven for having had a nervous breakdown through
this collapse. It ranks right up there with the worst bear markets. Ned Davis Research Inc.
recently highlighted the worst bear markets since 1900 (Institutional Hotline – October 28, 2008). We noted in our Technical Scoop of October 13 that the two-week collapse that got underway on September 29 and ended October 10 was comparable with the two-day collapse of October 28 and 29, 1929 and the one-day panic of October 19, 1987. While those latter two were impressive because of their fierceness in a short period, this one was just as fierce even if spread over several more days.

S&P 500 STRATEGY: STAND ASIDE (for definitions of terms see end of report)

- Low made on October 10 has thus far held.
- Closed over the 20 day MA but we need to build value above that level.
- Last time we closed over the 20 day MA we also quickly ran into the50 day MA which acted as very stiff resistance.
- 50 day MA currently near 1100 and that is prime target for this rebound
- Indicators turning up with positive divergences on the daily charts.
- Indicators on weekly charts still in deep oversold territory with no positive divergences
- Leaves open the probability that once this rebound is completed we have more downside to go.
- This could be wave 4 of a five wave down move with a 5th wave to come to complete the third wave to the downside.
- If this is a 4th wave correction then a 5 wave decline tells us that this is not a large ABC but merely the third wave of a larger degree.
- A correction now of larger substance would tell us that it was a huge ABC down move from the October 2007 highs and we should now embark a more substantial correction. Unfortunately we will not be able to determine that until we see the nature of this coming correction.
- VIX Indicator has fallen from its recent record high levels but remains above the 1997, 1998, 2001 and 2002 highs.

TSX INDICES

It was a week of reversals as the TSX Composite after putting in new lows for the recent move closed up 5 per cent on the week. Every sector made reversal up moves although a couple Financials and Healthcare failed to get into positive territory. Even the horribly maligned TSX Venture Exchange managed an up week proving that some of the junior mining stocks have some life in them after all.

Besides the TSX Composite seeing new lows the TSX 60, the TSX Venture joined them. This meant that all of the indices saw new lows. But only three sub indices saw new lows including the Financials, Metals and Mining and Consumer Discretionary. But mostly the story of the week was the reversals seen giving us some hope that a bottom might be in.[read more...]

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• The market rebounded last week
• Worst bear markets (again)
• Where are we on the big picture
• Gold and energy should rebound as well
• Bonus – the Bush legacy

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