I just received a very interesting e-mail from the trader behind Private Program 2. In it he included an article written by a “very prominent financial advisor” and by the looks of it a stock trader as well. I think its interesting because it give you an inside look into the mentality of a trader. I can definitely agree that when ‘there is blood in the streets, it’s time to buy!” However, as you guys probably know by now, I’m a proponent of the Austrian view of Economics and I definitely don’t have the same faith in the magical abilities of the FED that most stock traders do. I also think these very traders are partially responsible for the very problems they now find themselves into. But, fear not, big daddy US FED & ECB is here to the rescue! As always they apply band-aid solutions to gaping wounds. Anyways, my views aside, enjoy the article!
–begin quote —
I would like to include an extract received today from a member,
written by a very prominent financial advisor, it goes as follows, yes I know
it’s long BUT well worth a read:
ON TO THE MARKET SITUATION…….
It is probably best to describe this last 3 months as the worst I have
seen on the investment markets since 9/11 in 2001. The volatility has
been out of control and many investors, in fact most investors have been
punished. However, we should always keep in mind that periods like
this are normal and they will come along every 5 to 7 years. It’s simply
part of the larger economic cycle.
While the downside is very obvious, the upside is often lost during
these worrying times. You see, we all fear the worst, we think that this
will never end. Let me tell you some of the comments I have heard in the
last few months, and my comment.
“The US economy is terrible, weighed down with massive debt, and the
US dollar will collapse!”
Yes, the US economy is carrying high debt, most of it corporate (just
like Australia I might add). Yes, the debt has brought about a degree of
slowing in growth. Yes, the US dollar has been in decline for
sometime. However, US exports are starting to boom because of the US dollar’s
decline. Trade deficits are beginning to turn around and corporate
debt is reducing and getting cheaper all at the same time. So, bottom
line, the US economy is being primed right now for a surge late in 2008 and
Do you really think the US economy will fall over? People have been
predicting it since the cold war and it still hasn’t happened, nor is it
likely. You are seeing it at it’s worst right now. If you were to
remove oil imports from the US economy, they would be running a trade
surplus and inflation would be less than 1%. US inflation is still very
low, they nearly have full unemployment, interest rates are low and
exports are booming – Fact! That’s not a scenario where economies
collapse. If you reverse each one of those facts, then you have a good
“The world is heading for a depression!”
What rubbish, where do people get these ideas? From aliens? In fact, an
investing legend, Jim Rogers, has been making calls like these
recently. In fact, he’s abandoning the US and moving to Singapore. He
believes there is nothing but bad news out there and the center of the world
is now Asia. Yeah, good on him! Where does he think Asia exports to?
Where does Asia get it’s commodities? The Chinese even admit, if the US
falters, so will Europe, and therefore, so will China. So, Asia has
not “de-coupled” from the US economy at all as Rogers claims.
Everybody is entitled to their opinion. As I said above, the US economy is
still in pretty good condition.
“This is a crash and the stock market won’t come back for 3 years
Heard this one on the “Idiot Channel”. It’s also known as CNBC.
Funny this Wall St. guru hasn’t been back on for a week now. Wonder
why not? Where do they get these people from? You know what? If you keep
saying the world will end long enough, it probably will. Of course
until you are proven to be right you may be proved wrong several million
times. I remember a book that came out by Dr. Ravi Batra, “The Great
Depression of the 1990’s”…. what happened? The opposite.
Well, my advice is, realize that the bad times will always appear at
sometime. When it comes to the stock market it will be painful for only a
relatively short period. This is when you ignore your “flee”
instinct and instead “fight”. Which means when people are running scared
and dumping perfectly good stocks, you buy them. Eventually the mob
will return and offer you a good price to buy them back. Always stick to
the to some strict trading rules, such as the ones that I use on my
Portfolio where I have been able to protect my capital and profits. Then
at the moment things seem “terminal” and things seem to be close to
the “end of the world as we know it”, act, with both hands. The old
masters of Wall St. always used to say, when there is “blood on the
streets”, buy!. Haven’t you ever noticed in hindsight how the best time to
buy was when things were really crappy and the outlook was awful?
Have a look at the long term trend of the stock market in the US or
Australia, you’ll see there is nothing to worry about. Right now we are
seeing the very beginning of a recovery in markets around the world,
even though some days you wonder.
How and why can there be a “recovery” when nothing has changed?
Firstly, the sub-prime problem still exists and the losses and bad news
will continue all of 2008, after which it will ease. So, why a slight
recovery? Well, confidence in the US Federal Reserve has been restored
that they will move quickly to alleviate any credit liquidity and
interest rates problems. The most important thing here is that banks feel
confident to lend money again to businesses and lower rates encourage
this. Economic growth comes from people spending, the banks have the
Secondly, the stimulus package from the Bush government, while lame,
was at least something and it was supported by both parties. This gives
the market confidence.
Thirdly, the market likes certainty, even if it’s bad news. They just
don’t like “not knowing”. Now, they know. So, they always move
in anticipation of a recovery. The market is always six months ahead of
a recovery. So, you have to act quickly when things are really bad.
Yes. An unnatural act I know. Even, I had some sleepless nights. I’m
human after all, but after a few stiff drinks went down to my office and
4am and started placing buy orders on really bad days as you know. No, I
wasn’t still drinking at 4am, but it did seem like a good idea at
And lastly, companies profit announcements and guidance has been better
than many thought would be the case. Optimism has begun to return. No
the sky didn’t fall….see?
We are living through history
We are now looking at a HISTORIC buying opportunity in the stock
market. You probably won’t see an opportunity like this for many years. I
have never seen so much negative sentiment. This is definitely a Bear
Market. A US recession is completely factored in and what we are seeing now
is “capitulation” of weaker investors and a clean out of
The next few months will be rough and scary, the bottom of bear markets
always is, and we are currently bouncing on the bottom, or very close
to it. This is “almost” as bad as it gets. It still could get a
little worse… maybe 5% to 10%. So, don’t leap in with all guns blazing
just yet, take your time and buy say 25%-33% allocations of each stock
holding rather than 100% of a stock all on one day. This way you’ll
get the best average price. Only do this on bad days, don’t buy into
a bounce just yet.
Think about the future….
It’s not about what the stock price will be in 2 or 3 weeks but what
it will be in 6 months. Markets are not perfect – they are imperfect
and sometimes, most of the time, they get it wrong. Fundamentals are
The Return On Investment is all that matters and that comes from
growing and sustainable earnings