September 20, 2008 – Ho hum

by JDH on September 20, 2008

Ho hum. Uneventful week. The DOW was basically unchanged on the week. Nothing unusual.

Except:

This may go down in history as the most eventful week in U.S. history. Not just in U.S. stock market or financial history, but U.S. history.

This is the week that the U.S. government started nationalizing the U.S. economy.

Scary, isn’t it?

The United States of America has always been a capitalist country. People from around the world come to America to seek their fortune. It is, or at least was, the most business friendly country in the world. As a result, there have been more inventions, technological advancements, and creative accomplishments in the United States of America in the last 200 years than there have been in the whole of human history.

(Of course I have no proof for that statement, but I don’t think I’m far off).

So what happened this week? The SEC banned short selling, “temporarily”, on 799 “financial” stocks, and the government bailed out AIG , the big insurance company (after helping out in previous weeks Countrywide, Bear Stearns, Fannie Mae and Freddie Mac, etc.).

The U.S. government is working on a plan that will probably cost $1 trillion, and will involve the U.S. taxpayers buying up distressed mortgage assets. If the government likes you, they will save you. If they don’t like you (ie. Lehman Brothers), they won’t.

These bailouts are a very dangerous precedent. Lenders lent money to people who had no hope of repaying it; the debtors didn’t repay; the loans inevitably went into default. Instead of allowing the market to crash and wipe out the speculative excesses so we could start over, the government is bailing everyone out.

I assume the next step will be the government buying up the North American auto makers, because the bankruptcy of General Motors, Ford and Chrysler would be “bad for the economy”. Then presumably the airlines will be nationalized, because their failure would be “bad for the economy.” We are walking down a very slippery slope.

The purpose of this blog is not to talk about politics, and it is not to advance the cause of capitalism over socialism. Therefore, I’m not going to talk about it further. (However, if you would like my more detailed thoughts, you may read them, and comment on them, on a brand new blog, john-galt.ca).

The real question, of course, is what does all of this mean for the market?

On the surface, everything looks great. My portfolio recovered six points this week, so I’m “only” down 34% on the year. But there are still some scary facts.

For example, did you know that on September 16, 2008, there was not a single company on the TSX Venture Exchange that made a 52 week high? I don’t believe that has ever happened before. That day 499 companies made a new 52 week low, which is about 38% of all companies traded that day. Sounds like a bear market to me.

Yes, I’m happy that K.TO – Kinross Gold Corp. was up 18% this week. The 3 month chart appears to show a break of the down trend line:

But looking at a three year chart gives a different story:

It would appear that the uptrend extends form the August 2007 lows to last week’s lows, but we are still in a medium term steep down trend.

What does this all mean?

First, in case you haven’t guessed, the best description for these markets is volatile. Tomorrow gold will go up $80, then the Fed will bail someone out and it will go down $100, then something else will happen and it will be back up $200. I don’t know the exact numbers, but whatever happens it will be volatile.

Second, stay away from margin for now, because with this volatility, if your timing is off by a day, you could be wiped out.

My plan will continue to be simple:

I will over weight the golds and silvers and uraniums, because hard assets are important. Very important. The more money the Feds print, the less valuable it is, and at some point the world will realize it’s gold or nothing.

Second, I will take what the market gives me. If we have three strong up days, I’ll take some profits on, say, 25% of my holdings (leaving my core position intact). Then, if we have another crash, as I’m sure we will, I’ll be buying with that cash.

I can’t time the tops and bottoms, but I will try to grab some profits where I can.

I have much more to say, but I was out to see the Blue Man group with my family last night, so I’m a little sluggish this morning, so I’m going to leave it to you to continue the conversation on the Buy High Sell Higher Forum; see you next week.

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