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Chances are your stockbroker or financial planner is telling you to buy stocks now. Oh, there is a chance they will go down in the short run, he or she will say, but in a fairly short time you will realize that late fall of 2008 was the time to buy stocks because they were so cheap. “Buy when the blood is running in the streets” is the relevant Wall Street adage.

But there is another Street axiom: “Don’t try to catch a falling knife.” While it’s true that many stocks are very attractive if the recession is moderate, and any rally could go on, there are three good reasons to ponder before putting your toe in the water: (1) This may be a secular (as opposed to cyclical) bear market. (2) A deep recession may grind all through next year and even into 2010. (3) The world’s governments and central banks are now throwing trillions of dollars at the credit crisis to fight deflation, or falling prices. But once they are successful, all that money and credit will cause the opposite: nagging inflation. That could be three years from now, but stocks and bonds will move in advance of the data.

Let’s take them one at a time. We are all used to cyclical bull and bear markets that last about a year. However, a secular bull or bear market is one that hangs on 15 to 17 years or more. For example, 1983 to 1999 represented a secular bull market. Stocks rose an average of more than 15 percent a year. Whoopee! From 1950 to 1965, they rose 10.6 percent a year. But look at the gloomy side. Those who bought stocks at the peak in 1929 didn’t get their money back until the early 1950s. From 1966 to 1982, stocks rose about 1.6 percent a year, but inflation was horrendous then, often running more than 10 percent. Stock buyers lost massively in that secular bear.

Now, this doesn’t mean that you can’t make money in a secular bear market. There are cyclical bull markets that take place inside the secular bear — periods of a year or so when the market trends upward. Also, even if you are in a cyclical bear inside of a secular bear — theoretically the worst of all worlds — you can make good money on certain stocks if you choose correctly.

The consensus of economists is now that the U.S. economy will contract in the fourth quarter of this year and the first and perhaps second of next year. But there are some who say this downturn could last well into 2010. Be forewarned: the economists who are most pessimistic now made the accurate predictions months ago, when the optimists thought there might be no recession.

World governments and central banks have taken unprecedented moves to get banks to make loans again. Wielding the prod, governments now own big chunks of the biggest banks. The rationale is that inflation is bad, but deflation is awful, as the world learned in the 1930s. But the gobs of money and credit used to whip deflation may cause inflation three years from now.

E. James Welsh of Carlsbad’s Welsh Money Management believes that we’re in a secular bear that will last to 2016 or 2017. It may have begun with the shorter bear market of 2000–2002 or the current one that began midyear 2007. For months, he has been telling his clients to sell their stocks and go into cash equivalents. “You may be making 1 or 2 percent in a money market fund, but if assets are going down 30 to 40 percent in value, your purchasing power is going up,” says Welsh. He thinks the Dow Jones Industrial Average, now above 9000, could go as low as 6000 or 7000. “It may not happen until next year sometime. Most of the guys will say the market is cheap, there will be a recovery in mid-2009. If we see some stabilization in the credit markets, the bulls will come out and cause selling pressure to dry up. But the idea of a recovery in the second half of 2009 is too optimistic,” and reality will drive the market back down.

Welsh also suspects that in three years, after all the money has been thrown at fighting deflation, inflation will raise its ugly head again. “Government deficits will be gigantic. We’re in one hell of a pickle.”

Robert Snigaroff of Denali Advisors concluded that we were in a secular bear in September of 2000 and has had well over half his portfolio in cash equivalents since then. Stocks may stage rallies in the short run, “but they are not that good a bargain now and are not likely to do well in the long run,” he says. Greatly because of the trillions of dollars of dangerous derivatives poisoning the financial system, “We are in a slow-motion crash.”

Neil Hokanson of Solana Beach’s Hokanson Associates thinks there is a “good chance” that this is a cyclical bear, but he, too, doesn’t know if it started in 2000 or 2007. Analysts often wonder whether an economic or market recovery will be V-shaped (bouncing right back), U-shaped (bouncing back after a pause along the bottom), or L-shaped (plunging and then running flat along the bottom for a long time). “What will surprise people is that the recovery may not be sustained. People will think we are off to the races, but it will be kind of an L-shaped recovery, a longer slog” for both the economy and stocks, he says. He believes inflation may return: “Government is borrowing from the future. At some time that has to be inflationary.” But this could cause bond yields to rise, making stocks more competitive against bonds.

In this slog period, there will be winning stocks. Certain consumer stocks are generally stable, such as Johnson & Johnson and Teva Pharmaceutical, the Israeli maker of generic drugs. Femsa, a Mexican seller of both soft drinks and beer, fits in perfectly with the young population there, says Hokanson.

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Comments

JohnnyVegas Nov. 5, 2008 @ 12:11 p.m.

The bad news has been compressed into a short time period. “This is a head fake,” says Stolper. “We will have a short, sharp recession,” says Stolper. There will be a V-shaped recovery in both the economy and stocks. “A year from now, we will have difficulty remembering whether the swoon took place before or after the election.”

This guy sounds like one of thoe pump and dump real estate agents, where the market only goes up and NOW is always the time to buy.

I have a C-note that this guy Stopler is wrong by a country mile.

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a2zresource Nov. 5, 2008 @ 6:59 p.m.

In my mind (meaning this likely has noooo relationship to "reality") the problems with the economy go to the foundations of globalization as a market paradigm. My ideas on fixing things and making them go are probably too radical even for the Reader.

Still, it should be obvious that as long as America needs globalization to make things go, there will always be a need for large defense outlays, large international bank loan guarantees secured with American debt against tax revenues, and unavoidable overseas political triggers to commiting American armed forces to the rescue... all of which tax the economy and prevent the use of otherwise-dedicated resources for expansion and growth.

America could dump globalization if we had a commercially-successful program of space exploration and colonization where our technological advantages froze out foreign competitors and restricted terrestrial anti-American terrorism to a relative rarity, but again... such a thing is too radical to consider even here.

The only reason for bringing this up is that severe market contraction is probably the best time to make plans for a different future.

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gbear92038 Nov. 6, 2008 @ 8:56 a.m.

Heard of the Amero "dollar"...yet? The theory is that the US dollar will eventually devalue to 0 (due to forien debt/China)?Everyone worldwide will lose trillions in dollar denominated assets? The Tresury has already produced Amero dollars that combine the currencies of the USA, Canada and Mexico? Is this true/possible and what short/long term effects could we face?

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a2zresource Nov. 6, 2008 @ 9:39 a.m.

For general information: The Security and Prosperity Partnership of North America (SPP) and the Amero were things I've never heard of before, but there is information about the partnership at http://www.spp.gov/ which does not indicate that it rises to the level of a Senate-approved treaty.

Could it be that rumors of the Amero are being floated to improve sales of gold-related mining stocks?

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valueinvestingisdead Nov. 10, 2008 @ 8:49 a.m.

The bad news has been compressed into a short time period. “This is a head fake,” says Stolper. “We will have a short, sharp recession,” says Stolper. There will be a V-shaped recovery in both the economy and stocks. “A year from now, we will have difficulty remembering whether the swoon took place before or after the election.”


This guy is probably one of the remaining Bush supporters who think everything is great with the economy. We have lost major financial institutions, people have lost their house or house value, their retirement accounts are shattered, jobs are plunging with no hope for re-hire, bankruptcies are flying but this guy says we are in a head fake....talk about being out of touch?

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Don Bauder Dec. 1, 2008 @ 9 p.m.

Response to post #1: Stolper is a pro; he would be first to admit he could be wrong. Best, Don Bauder

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Don Bauder Dec. 1, 2008 @ 9:02 p.m.

Response to post #2: A severe economic and market retraction is definitely the environment to make some tough decisions and do some creative thinking. Best,, Don Bauder

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Fred Williams Dec. 2, 2008 @ 7:15 p.m.

Don, are things bad enough in San Diego that we'll finally get the council to stop paying tens of millions annually to Spanos and Moores?

Will we convince the city that CCDC, SEDC, and the Housing Commission are albatrosses?

Can the egregious Grantville eminent domain abuse be stopped?

See this new video:

Grantville is Not "Blight" --http://www.youtube.com/watch?v=k9Tcze...

There are so many opportunities to cut waste right now.

Then there's the public employee pensions...which voters seem unwilling to touch going by the results of the election.

Don, what do you propose for getting the city out of its hole?

Best,

Fred

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