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[longBlackCandle]

Em http://www.3stocksonfire.org/trading/in ... #msg109167

Similarities with the 1990-91 Recession

1. Introduction

I've spent the Thanksgiving holiday with my family but unfortunately my mind was elsewhere, thinking about the current state of the stock market and potential future developments. All my adult life I've been a "macro-economist" until about eight months ago, when I've decided to embrace stock picking and investing for the long term from a business perspective, because I believe this is the most logical and productive way to build and grow one's wealth in a 30 to 40 years time span. I will never own a tenbagger (in Peter Lynch's terminology, a stock with a 1,000% return over the years) if I keep getting in and out of the market as I feel bullish or bearish.

But for this article I want to put back my economist's skin, because I believe everybody wants to read opinions on where this market is going and I think I got a valid idea.

2. The 1990-91 Recession and Now

I have a central thesis for my long term bullishness, but I wanted to find some evidence in history that things could and will probably unfold the way I predict. In my studies I found important similarities between the 1990-91 Recession and the period we're living. I've read several articles explaining what caused the early 90's recession and the mood of the moment.

The following excerpt of the " Economic Review - Federal Reserve Bank of San Francisco, 1993 » gives us a nice summary of what happened in 1990-91:

Does "pessimistic consumers", "debt accumulations", "jump in oil prices" and "credit crunch" ring a bell? It sure does, this is what we have now.

But back then, as I believe it is the case now, a much bigger and more relevant economic trend was going on in the backstage, and that's why the 1990-91 Recession had the following effect on the S&P 500:

3. Stock Market Reaction

The 1990-91 sure was a painful period for stock market investors and many if not most bailed out and said: "Stock market? Never again". Yet, it took just seven months for the S&P 500 to march to new all time highs and you see what happened from then on, the market jumped four fold between 1991 and 2000.

I believe this happened because the central theme of the bull market, which was a productivity spurt given by technological advances (with the personal computer taking center stage) was far more important for the US and the World economy than a simple cyclical recession.

At the present moment we also have a long wave of growth and bull market theme which is far more important than a cyclical economic fluctuation, so my best guess says the long term reaction of the stock market will be similar.

4. The Current Long Term Bull Market Central Theme

The current long term bull market central theme is Globalization and the emergence of new economic powerhouses in the World.

A few years ago there were only three relevant economic regions in the World, where just 13% of the population lives: North America, Europe and Japan. Now and just mentioning the biggest, we have China, India, Brazil and Russia emerging as economic powerhouses. In these four countries lives roughly half of the World's population. If, over the long term they get nearly as developed as North America, Europe and Japan, what you have is 3 billion more people with purchasing power in the World, which is an immense new market for companies to sell their goods and services. And there are no barriers ... if you have a superior technology you'll sell it around the World, not just in the US. If you have a successful business model you'll implement it around the World, not just the US. Forget the countries, it's just one World now. It is connected like it has never been, and this means ideas and innovation will spread faster than ever before.

A quadrupling of consumers will lead to a quadrupling of sales and a quadrupling of profits, in general. And this has to mean a quadrupling of the stock market, so I predict the S&P 500 will be around 6,000 points, say, in 2018.

5. The Stock Picker's job

Being a stock picker is a tough job, because one has to think long term and yet deal with all the short term developments. He has to pick a business, not a stock, that he believes will grow quite a lot over the next several years and then see if the price to pay for that expected growth is attractive or not. The stock picker's most important difficulty, in my view, is the non-linearity between the present and the future and the time it takes to get evidence that one is right. Stock prices don't say "you're right" everyday, they'll always keep you in doubt ... at the starting point and then in every step it takes to build a multiple bagger.

But just one tenbagger compensates for 10 complete disasters, you think about it (not that I think I own 10 complete disasters, of course I believe none is). This is why diversification is so important.

6. Conclusion

With this background in mind I'll just keep holding all the stocks currently in the Main Portfolio and will look to add three more over the next couple of weeks.

I hope you had a nice Thanksgiving and wish you a good weekend

Best regards,

David Randolph
3StocksOnFire.org Team

[TraderBoy]

A week of weakness seen for U.S. economy


http://www.marketwatch.com/news/story/w ... story.aspx?


guid=%7B26267B62%2DB250%2D4619%2D8026%2D58BB14036B24%7DAnalysts bearish on data as economy 'perched on the edge of a cliff'
By Robert Schroeder, MarketWatch
Last Update: 12:01 AM ET Nov 25, 2007
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SAN FRANCISCO (MarketWatch) -- "Perched on the edge of a cliff."
That's how one economist describes the U.S. economy as the markets get ready for a busy week of data, including numbers about the already damaged U.S. housing market, orders for durable goods and personal income and spending.

"What we're looking for is confirmation that indeed the U.S. economy is slowing sharply in the fourth quarter," says Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ. Zentner said that within a month, it could be apparent whether the economy is slipping into a recession or not.
"The U.S. economy is really perched on the edge of a cliff right now," says Zentner.

Housing has been a big drag on the economy and this coming week's data forecasts don't offer any hope that the housing outlook will improve. Analysts surveyed by MarketWatch are expecting existing home sales, for example, to drop to a seasonally adjusted annual rate of 4.99 million in October from an eight-year low of 5.04 million in September. The existing home sales report is due out at 10 a.m. on Tuesday. See Economic Calendar.
On Thursday at 10 a.m., analysts are forecasting that new home sales for October will fall to a seasonally adjusted annual rate of 730,000 from 770,000 a month earlier.

"We don't expect any good news on housing anytime soon, specifically on the demand front," says Ryan Sweet of Moody's Economy.com. Demand will remain weak for the remainder of the year and well into 2008, he says.
In other housing-related data, October construction spending is expected to fall by 0.2% following a modest rise of 0.3% in September. That release is scheduled for 10 a.m. Friday.

Two home-price measures are due out this week also: the Case-Shiller Home Price Index on Tuesday and the house price index from the Office of Federal Housing Enterprise Oversight on Thursday. For the third quarter, the Case-Shiller index is expected to fall by 5.01%, while the Ofheo index is expected to be flat in the third quarter.

The Fed's viewpoint

Federal Reserve officials believe a substantial decline in home prices is a big risk to the economy, according to forecasts released for the first time by the Fed on Tuesday. The Fed's forecasts, combined with the summary of its October meeting, appeared to show more concern about slower growth than higher inflation. This focus on weakening growth differed from the FOMC statement released at the end of the committee's October meeting, analysts said. See full story.

However, many analysts are skeptical the Fed will cut rates at its next meeting on Dec. 11. "We still think the Fed will stand idle at the December FOMC meeting, but it has become a much closer call," said Sweet of Moody's Economy.com. "Growth is fading and uncertainty is growing."
Jim O'Sullivan of UBS believes that the Fed will continue to cut rates, including in December.

"I suspect they're going to be surprised at how much weakness there is" in the data this week, says O'Sullivan.

In particular, he said, consumer spending and the labor market will bear watching.

Economists say the labor market may be weakening after a government report on Wednesday showed more Americans continuing to receive jobless benefits. The number of Americans receiving state jobless benefits increased 7,000 to 2.57 million in the week ending Nov. 10, the Labor Department reported. Initial jobless claims fell to 330,000 but analysts are watching to see if they get worse.

"Recent data on initial jobless claims suggest layoff activity is gradually accelerating as the full effects of the fallout from tighter credit conditions and the housing recession are realized," notes Sweet. He says a sustained run of more than 350,000 initial claims coupled with continued softness in hiring "would signal much deeper issues in the labor market." The Labor Department will report weekly jobless claims on Thursday at 8:30 a.m. Eastern.

The pace of consumer spending is also expected to have fallen in October. On average, analysts surveyed by MarketWatch are expecting consumer spending to increase by 0.2% in October, down slightly from its 0.3% gain in September. Sustained weakness in consumer spending, says Sweet, "could be the catalyst that tips the economy into a recession."

While the jury is still out on whether to expect a recession, the Fed is at least expecting the U.S. economy to slow by more than previously thought in 2008. But the central bank is predicting inflation will remain tame. In the forecasts released on Tuesday, Fed officials said growth would slow to a range of 1.8% to 2.5% next year, down from growth around 2.45% in 2007.
Other data

Also due this week are data about durable goods orders and third-quarter gross domestic product, as well as the Fed's Beige Book.

The GDP number is a revision to the third-quarter figure and is expected to show a rise to 4.4% from a previously reported 3.9%. However, Zentner of Bank of Tokyo-Mitsubishi UFJ says she'll be watching for downward revisions of fourth-quarter growth after the report. The GDP report is due out at 8:30 a.m. on Thursday.

Durable goods orders are expected to fall by 1.7% for the second consecutive month. That report is due Wednesday at 8:30 a.m.
Also Wednesday, the Fed releases its latest Beige Book survey of economic conditions in each of the central bank's districts. That, too, should point to a slowdown, says O'Sullivan of UBS.

"Chances are it showed a bit more slowing than growth," he said in an interview.

The question to answer, said O'Sullivan, is what kind of slowdown the economy's heading for. "Is it a 'suddenly falling off a cliff' slowdown...or more of a gradual slowing?" he asked.


Robert Schroeder is a reporter for MarketWatch in Washington.