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Bob's Journal 
What's this?______________________________________________ NOTE FOR MEMBERS: An expanded and more frequent version of Bob's Journal now appears on the members' site at www.RetirementWatch.com. Check in there for more commentary and insights on all the financial aspects of retirement.
January 22,
2008 02:10 p.m. It seems I caused a substantial decline in world stock markets. Last week I posted the February 2008 issue of Retirement Watch in which I argued that today’s market environment is more like 2001 or early 2002, with more losses to come, than it was like late 2002 when the economy and markets were forming bottoms. Saturday morning I spoke to the Washington, D.C. chapter of the American Association of Individual Investors. There, I reiterated that it was not yet time to be a hero and go bottom fishing in the markets. I’m just kidding. Ascribing the market sell off to my opinion is as rational as attributing it to investor reaction to the current fiscal stimulus proposal or disappointment over the Fed’s actions. Long time readers and readers of my recent book know that the markets have wide swings in price because investors move between extreme optimism to extreme pessimism. The moves are based on interpretations of news and market events. No one knows why investors worldwide began steadily selling stocks the few weeks. The risks in the credit markets and to the global economy have been well known since last summer. Yet, only now investors are fleeing risky assets for safety. No one can say why. That is why in our investing we practice risk management. We look at the risks in the markets and reduce or avoid the risks we don’t want to take. That is why I added some new sell signals in the February issue of Retirement Watch. While the media focus on the panic and the extent of the sell off, there is some good news in the recent action. ? Much is made that recent days are the worst since August 2002. That was a bad time, but it also was near the bottom of the bull market that began October 2002 or March 2003. Perhaps we are forming another bottom now. ? The Federal Reserve and the federal government are responding to the problem. ? Commodity prices are retreating. That could keep inflation down and help businesses with stressed profit margins. ? Prices of many investments, except treasury bonds, are falling, resulting in much more attractive valuations than even a few weeks ago. ? Investor pessimism is rising, which increases the probability that we are closer to a market bottom than a top. Market prices are low enough that we could be near a temporary oversold bottom. I don’t see this as a long-term buying opportunity yet. There is the potential for stocks to rise 10% or more in coming weeks as some investors are attracted by the recent declines. Yet, there still are unknowns in the credit markets and significant problems that need to be resolved. I think any rally will be temporary until there is a catalyst that will turn around the economy and bring a resolution to the credit market problems.
January 7,
2008 11:00 a.m. As the New Year gets rolling, it looks like those who used caution to position their portfolios did the right things. Investors entered the year expecting the economy to stay strong, or at least steady, and inflation to be restrained. The economic data of the first week caused investors to question that outlook and reposition their portfolios. As a result, stocks declined. The Dow lost 4.2% for the week, and the S&P 500 lost 4.5%. Barron’s reported that 2008 is the Dow’s worst three-day start to a year since 1932. The outlook for the economy, if last week’s data is representative of the big picture, is a gradually deteriorating economy with steady or rising inflation. It isn’t clear yet if a recession is in the cards, but the economy is due to slow. Consumer confidence is declining. Bridgewater Associates reports that of the 27 statistics is tracks that are indicators of economic growth, 21 now are negative. These are the big negative indicators. The labor market appears to be weakening. Job growth is slow, and unemployment claims are rising. In addition, mortgage applications still are very low. These factors indicate that consumer spending will continue to slow into the near year. Stocks appear to be reasonably valued by historic standards, but profit margins are at all time highs. Will these margins be sustained if consumer spending declines and commodity prices stay high? If not, then profit margins will decline. Stocks likely would follow. Another problem is that the carry trade is reversing. The carry trade is when investors borrow in one low interest currency, such as the Japanese yen, to buy assets in a higher interest currency. Because of declining rates in the U.S., it is less attractive to borrow in yen to invest in the U.S. A few more danger signs: The securities and lending markets still are weak from the credit crisis of last summer. Banks are accumulating assets instead of making loans. The dollar is weak. Foreign investors want the Fed to raise rates while U.S. investors want it to cut rates. Also, there are some initial signs that despite the weak dollar U.S. export growth is slowing. Export growth is the main factor holding up the stock market and the U.S. economy. All in all, it is a good time to be cautious on U.S. stocks and bonds. Invest with a hedge in U.S. markets and look for opportunities in overseas markets.
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E-mail: BCarlson@ Bob's Journal Archives January 2007
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