MARKET UPDATE 2009-08-21
Contributed by Charles Guest, SinoCentury Guest Commentator

It has been over six months since I have bought or sold stocks.  I was buying during the decline last year and early this year and have ridden the rally, but over the last two days I have been selling.  I am not selling everything, but I am raising cash levels to take advantage of opportunities which may arise over the next year. Let’s face it--neither I nor anyone else really knows where the market is going to go.  So why am I selling now?  Here are the reasons:

1.  The secular bear market that began in 2000 is not over. Price to earnings ratios (based on a 10-year moving average of earnings) never dropped below 20. During the secular bear markets in the 30's and 70's, the S&P 500 index’s P/E ration fell all the way below 7.

2.  The debt bubble that precipitated this secular bear market is still with us and it is even growing larger. Our total national debt (including government, corporate and private debt) is now over 370% of GDP. In the 1930's this measure peaked at 270% of GDP. Now private debt is being moved to the government's balance sheet to some extent. This debt has to be liquidated thru default, repayment, inflation, or a combination of all three. This process will take years.

3.  The market took 34 months to reach a bottom on July 8, 1932. The current cyclical bear market which began in October 2007 is only 22 months old.

4.  China, which is the world's main growth engine, is close to entering bear market territory with the Shanghai Composite Index experiencing a decline of nearly 20% since July's top. China led the U.S. down by a two-month lead last fall and then again led the U.S. market up with a two-month lead this spring.

5.  The BKX bank index is having trouble getting above the 45 level from which it dropped in January to a low of 17.75 in March. The financials could lead the overall market down once again, since they still have the same old problems.

6.  Insider selling this July reached the highest level since the market top in October 2007. These are the people in the know as to their companies' prospects.

7.  Bullishness of market timing newsletters is at its highest level since January when the Dow was last above 9000. This is a contrarian indicator.

8.   The market has had a good run since the March 6 low of over 53%. Why not take some profit and look for another opportunity down the road?

9. Last but not least, we are now moving into September and October, a part of the year that historically has seen many instances of bad things happening in the stock market.

So what did I sell? I sold 25% of my China holding (FXI) because China has had some of the biggest gains. I sold my last remaining bank holdings (KBE and WFC) which also had some of the biggest gains.  I sold half of my rather small holding of SPY since the S&P 500 companies derive much of their profits in China. I did not trim any of my holdings in Japan, agricultural commodities, oil and gas services, technology, pharmaceuticals or gold and gold mining since I think these have the greatest potential for gain over the long haul. I may be wrong, but that's my story and I'm stickin' to it.

Market Update: 2009-08-21

Hello everyone,

I guess you are wondering why I haven’t posted anything in months. Well, it is simple: nothing material has changed with regard to my opinion of the market. My portfolio is near a record high for the percentage of my portfolio that is held in cash. And for the most part, other than two agricultural ETF (DBA) purchases during the past month, I am not trading much at all right now. I did unload all of my remaining financial and bank stock holdings earlier this week, but that’s about it. If you are interested, you can follow my every trade on the Sinocentury Facebook fan page.   

I am leaving for China tomorrow, so I hope to have some comments to share about how China’s economy is weathering the storm upon my return.  I will visit Shanghai, Beijing and of course the pearl farming area in Zhejiang province to source some premium freshwater pearl jewelry for HinsonGayle Fine Pearl Jewelry, on the web at HGpearls.com. I am really excited about these pearls, because this will be a new line of what will be the best freshwater pearls available. The goal is to further differentiate HinsonGayle by moving the brand towards an upscale image.

In the meantime, I pretty much agree with my Charles Guest (my dad) as to where we stand in the markets. His is getting ready to contribute this week’s Market Update, and it is a very good read because he outlines nine reasons why the market is in trouble.

I’ll see you when I return from China. I have a feeling by the time I get back the markets will begin to change course. We will know more later. Until then, Happy Investing!  And be sure to enjoy my dad’s market commentary!

Market Update:  2009-03-30

I just returned from the United Arab Emirates on Saturday, after spending a week in the beautiful emirates of Abu Dhabi and Dubai.  While I was gone, it looks like the market wrapped up its bear market rally.  Since the S&P 500 marked its 2009 YTD closing low of 676.53 on March 9, the index managed a sharp rally of just over 23% to a close of 832.86 last Thursday, March 26. 

If you remember, in my last Market Update “Keeping my Powder Dry” on March 11, I said that I would consider selling some more of my S&P 500 fund to raise a little more cash if we get a meaningful rebound rally.  I wish I could have sold last week when it became obvious that the market was teetering, but I was too busy in Dubai to be bothered.  Today’s market pullback is enough to convince me that the next major move is likely to the downside, as you do not get a 23% market rally in less than three weeks during a bull market.  Such huge and rapid gains are usually only seen in the middle of a bear market.  Thus, I am 99.9% sure that the March Madness rally of the past three weeks was a head fake, and that later this year we will retest the March 9 low.  We may not pull back to exactly 676, but will likely at least fall into the low 700s. 

So, today I am selling a little of my S&P 500 fund to raise a tad more cash.  I am sure I will have an opportunity to buy more shares back later at a lower price.  The only question is, will that opportunity be at 700 or at 500?

Also, I was glad to hear that the Obama administration canned Rick Wagoner of GM today.  If the government is going to use my tax dollars to throw at a lost cause such as GM, the least our leaders can do is to set some rules of the game.  Mr. Wagoner was an abysmal failure of a CEO, just as are the top dogs at many of the large U.S. financial institutions.  If we are going to continue to flush money down the drain, the least we can do is to get rid of the guys that helped to create the problems in the first place!  Regardless, in the end I don’t believe that we will be able to stop the banks and other bankrupt companies from failing.  The U.S. currently has the largest debt bubble this country has ever had, and our economy must and will deleverage.  The government can only try to minimize the pain, which is a nice way of saying that the government can only try to stretch out the amount of time it takes us to actually get through this crisis. 

We will know more later.  Until then, Happy Investing!

Gregory Guest

Market Update: 2009-02-17

Now, right on cue, we find ourselves testing of the stock market’s November 2008 lows.

As I mentioned in last week’s Market Update “The Danger of America’s Free Market Infatuation”, I don’t believe that anything less than the full-fledged, FDIC-initiated nationalization of America’s largest insolvent banks, such as Bank of America and Citigroup, will stop America from falling into the abyss. I specifically said in that posting that “If we don't underpin our financial sector with the full faith and credit of the United States government, America really does risk reliving the 1930s.”

Mr. Obama has had one month to skirt around the banking issue, and it is the free market that apparently doesn’t like his administration’s resistance to bank nationalization (check out the new low on the BKX banking index today). The bank stocks are in freefall now because the free market knows that the banks are worthless and the government is going to resist nationalization as long as it can.

With a little more time, maybe more Americans will warm up to the idea of using bank nationalization as a means to attempt to save our capitalist system rather than insisting that nationalization is wrong while we watch our economy go to hell in a hand basket. This past Sunday even U.S. Senator Lindsay Graham (R-SC) admitted that nationalization may be the solution. On ABC’s This Week (2/15/2009), he said Senator Graham said, "This idea of nationalizing banks is not comfortable…But I think we've got so many toxic assets spread throughout the banking and financial community, throughout the world, that we're going to have to do something that no one ever envisioned a year ago, no one likes. To me, banking and housing are the root cause of this problem. I'm very much afraid any program to salvage the banks is going to require the government... I would not take off [the table] the idea of nationalizing the banks."

In my opinion, the Obama administration may only have several weeks to several months left to do what is right. If they continue to skirt around the issue, and continue to inject taxpayer dollars into insolvent banks just so that the banks’ shareholders and top managers can benefit financially while the country’s financial system bursts apart at the seams, then that is wrong and will never work! The American taxpayer should not have to take on all the risks just to allow the banks to remain independent and be profitable again. That is beyond not fair, it’s just plain wrong!

America, and the world for that matter, is now teetering on the edge of a financial depression. In my opinion, the only chance we have to salvage our economy, our way of life, and our national security (both externally and internally, i.e. to prevent widespread panic and social unrest), is for America’s government to throw its full weight behind our banking system. Anything less than the full faith and credit of the United States will not work.

Even nationalization of the big insolvent banks won’t magically fix things and make it all better. But at least it could make the next few decades a little easier to endure. The United States has an unprecedented debt bubble and that debt bubble is going to collapse. It will likely take 20 years or more for the massive amount of debt to fully unwind. The unwinding will be difficult for us all, but it has to happen. But how it happens, and whether or not the government is willing to soften the blow, is the decision Mr. Obama and all Americans have to make now.

Nationalization is not communist, but rather it is patriotic. As an American, I want America to succeed and for our capitalist system to live on. I think that the FDIC takeover of insolvent banks is necessary to save America’s capitalist system. Remember, capitalism must have capital to work; right now our banks don’t have any capital! America cannot sustain its capitalist system without a trusted and capitalized financial system.
America’s banks have failed us. Their greed and imprudence helped to create the problems we face. And now no one in America, or the world for that matter, has faith in our banks because of their track record of gross mismanagement and countless stupid decisions along the way. If we just sit back and continue to watch the banks falter, then our economy and stock market will most likely continue to fall. (For more insight on what failure to act now could mean for your portfolio, please read my January 20, 2009 Market Update “The Black Swan of 2009.”)

If, and most likely when, we nationalize the insolvent banks, I hope that our economy will be able to stabilize. After a period of time (say 20 years) the debt bubble will work itself out. Once America’s economy and our balance sheet are back to a more normal level, it will be in our interest for the government to sell the banks back to the private sector. By then, hopefully our banking system will once again be strong enough that it will be worth a good chuck of change and the government will be able to use the spinoff IPO proceeds to help pay down some of our federal debt. And hopefully next time around, when the banking sector has rejoined the free market, our government will do a better job of regulating the banks and ensuring that we don’t find ourselves in another mess decades later.

Nationalize now, or forever hold your peace.  We will no more later.  Until then, Happy Investing!

Gregory Guest

Market Update:  2009-02-11

The XAU Gold & Silver Mining index is back to resistance again today and attempting to get above it, with a 7% rally this morning.  Gold is getting interesting, as this battle with resistance will likely be very volatile.  The gold ETF that I own and recommend accumulating is GDX.  But as with anything, don’t dare buy it all at once….just nibble over time.  Gold mining is very, very volatile.  Since the XAU bottomed a few months back, it has already doubled, with lots of big swings during that time.

In the meantime, crude oil was moving the opposite direction of gold this morning so I picked up a little more USO at $26.50. This is my third purchase of USO in the past three weeks. I expect that the actual commodity will bottom in $20-35 range, but my best guess is that the bottom will be in the upper half of that range. Oil has already been as low as $34 a month or so ago, and has fallen back to $37 today after rallying back to $48 just two weeks ago.  Once again, oil is very volatile right now as it is searching for a bottom.  In my opinion, oil under $40/barrel is a great deal longer term (i.e. 2-10 years).

Banks are looking shakier by the day. Even so-called socialist Obama is scared to seize Band of Amercia (BAC) and Citigroup (C). I think anything less than a full-fledged FDIC takeover of some of these clearly insolvent, big banks won’t work. Bottom line is, just like the Bush administration, no one really knows what the heck is going on in the U.S. financial system and what needs to be done to help stabilize it. Americans apparently have it stuck in their heads that nationalization of banks is a socialist move and bad for our country. But what they don’t realize is that the “free market” that America so claims to be about has failed our financial system.  The free market is not fixing or willing to fix this serious problem. 

Tax-evading Treasury Secretary Geithner’s talk about a public-private buying scheme for “toxic” assets is a joke.  Pretty soon all assets on the banks books will be “toxic” because not even the rich guys on Wall Street are going to have any jobs left to pay their jumbo mortgages and fancy car loans. If private citizens and corporations wanted to buy bank loans, they would already be doing it. That is the problem.  No one other than the government is able or willing to take on these banks’ assets.  And the U.S. government (both parties) is tip-toeing around the issue and pretending as though they can fix the problem by avoiding the nationalization of these insolvent banks.

As always, people don’t want to admit when they are wrong.  Americans can’t stand the fact of admitting that our banks were run down the hole by a bunch of greedy, “free-market-loving” free wheelers.  And now apparently we are just going to sit back and watch the country fall apart rather than to back up our banking sector with the full faith and credit of Washington. It the taxpayers are going to take on the risky assets of these banks, we should own the banks.  We should not continue to pour money down a bottomless “John Thain $1400” trash bin.

It is like everyone knows the patient is dying and in intense pain, but they don’t want to give the patient morphine because that is an opiate and opium is a drug. Drug use is bad, so you shouldn’t use drugs even if someone is screaming in pain.  Give me a break!

If we don't underpin our financial sector with the full faith and credit of the United States government, America really does risk reliving the 1930s. Job losses could soar and everyone will suffer. If you don't believe that, then read up on what happened between 1928 and 1934 to the unemployment rate (it went from just over 4% to 25% in just a few short years!).

Since “supposedly” the government can’t do anything right, my suggestion is this:  Why don’t we just go ahead and sell the U.S. Army to Bank of America and let Ken Lewis direct the war against the terrorists in Afghanistan. Let’s sell the U.S. Department of Transportation to General Motors and let Rick Wagoner decide how many roads your town requires and whether or not a road leading from your home to your job is really necessary. And let’s sell the U.S. Department of Education to Sirius XM Radio and let Mel Karmazin ensure your kids get a free K-12 education. 

Let’s face it, if the U.S. government is not capable of doing anything right, except when it comes to mismanaging America, why don’t we just go ahead and sell off all government-run agencies and use the proceeds to pay off our national debt. If we would just let the banks run the military to protect us, allow GM to pave our roads, and Sirius XM Radio to educate our children, America’s problems would be solved. After all, the private sector is so much better at doing things right.

What a joke!  Wake up America, before it is too late!

We will know more about how spinning off all government-run programs will end up working out later.  Until then, Happy Investing!

Gregory Guest