Wild Ideas Begin to Spawn…

I’m not going insult you with a play-by-play or recap a tale of market devastation.

If you could find this webpage (or any webpage, for that matter), you would have already stumbled across news stories detailing the misery taking place across the board.

Instead, how about an analogy. Picture a teenager being arrested for driving while intoxicated. His father shows up to the jail cell where he’s being held, and instead of posting bail and punishing him at home, he lets him stay in prison to be treated like a dress-up doll.

I agree that these banks, as lenders, deserve to be punished. However, there is no way to inflict punitive damages towards those deserving without inflicting pain and suffering to others along the way.

Don’t get me wrong – personally, I don’t care.

Part of me wants to be happy that Congress is standing up to the banks and holding them accountable for the mess they find themselves in. However, in reality, I realize it’s because most persons in Congress don’t have the financial intelligence to understand what’s going on, and instead are distracted by a price tag with the number “7” followed by eleven zeroes. There are just too many commas in that number for many people to press the “yes” button.

Dow 36,000… 6,000?

Remember a little book that came out in 1999 called “Dow 36,000”? It was released at a time very close to the peak of the market, before the ensuing collapse.

Something similar is beginning to happen, only from the reverse direction. Obviously, Glassman and Hassett were over-optimistic, used a little bit of faulty logic and poor assumptions, and were just plain wrong. That’s ok. The interesting thing is that when they made this claim, even perma-bulls were a little bit skeptical. This marked the height of optimism, or as “Easy Al” so famously put it, “irrational exuberance”.

Instead of labeling stocks bearing P/E ratios of 100 as cheap, we are now entering a time when more and more people are coming out as extreme – four horsemen and floods-type – bears. After all, nothing is safer than a weatherman saying there’s a good chance of rain while there’s a hurricane ripping roofs off of houses.

Most recently, the manager of the Prudent Bear Fund (BEARX), David Tice, was interviewed on CNN Money spewing his ideas across the screen.

Once, Tice, three times a bear.

The process of this man sharing his thoughts on the market came across as a thinly veiled reassurance that although his fund is up 20% year-over-year, it’s not time to take profits and sell the fund. In fact, come on in.

Earlier this year (very early, January, in fact), Mr. Tice expressed his conviction that we were headed for quite a slide in the markets this year. At the time, the Dow had just taken a dip below 13,000 – Tice was predicting a 50-60% slide to somewhere around 6,000. In his recent interview with Poppy Harlow, he stood by this statement, comparing the recent bull market to a long night of drinking followed by a nasty hangover.

Should this occur, it would be an economic collapse of epic proportion, comparable to the slide from the highs of 2000 and the ensuing tech collapse that dragged the market down by 45-50%, depending on your index (I don’t look to the Nasdaq, as it is not a great broad-market indicator).

In addition to a nose dive that would take us 40% below our current levels, Tice predicts that gold has not yet seen its highs, and is headed for “$1,500 to $2,000 per ounce at least.”

I like Tice. I like his analogies, and I like the way he ended the interview with the statement, “the Fed can’t just cut interest rates to 1% and say ‘party on, Garth’”. Nicely done.

However, I cannot share his profound pessimism that would chop the value of all equities in the market in half and just about double the price of gold. And I’m a pessimistic person. It was just too apparent to me that there was some interest in self-preservation from a man who makes more money when the market tanks.

Instead, I believe we could go somewhere in-between. After all, we’re at the lowest levels in the indices in about four years, and we’d have to look back to ’96-‘97 to find the Dow Jones Industrial Average at 6,000.

With all the technological expansion, all the mergers, all the new real estate (whatever it’s worth), and new money flowing into the markets since then, can we really believe that the value of the markets has not increased in the past 12 years? It’s hard for me to have that outlook.

I’m not going to be so bold as to say we can’t play with this 10,000 mark a little bit, maybe overshoot it some, but a drop of 4k seems a bit extreme. It would take the failure of one of the big boys (the real big boys, like BOA or Citigroup), oil prices to shoot through the roof, and another military debacle all happening in succession to put us at that level, in my opinion.

A month or so ago, I mentioned that I’m going to start picking up some broad market positions over the next couple of months, with each downturn we face. And I intend to do so, because I have a few decades of investing left in me and I can wait it out.

I would love to buy some SPY at $75 per share. I just don’t think I’ll ever get the chance.

John K. Whitehall
Analyst, Oxbury Research