Agora Financial’s Rude Awakening

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Laguna Beach, California

· Battle of the crashes – How today’s Dow stacks up to ‘29 and ‘87,
· “Stuff” companies to invest in that DON’T roll off a printing press,
· Protecting your wealth with the ultimate bear market strategy and more…

Eric Fry, reporting from Laguna Beach, California…

“No one said it would be easy…but no one said it would be this hard.”
- Sheryl Crow

Although Ms. Crow’s tear-jerking lyrics refer to a troubled romance, a nearly identical form of self-pity besets most of us investors these days. We realized that stock market investing can be a challenging endeavor, but that doesn’t mean we were expecting angels of death to visit our portfolios.

Our investment goals were modest and humble. We never expected to be a billionaire hedge fund manager. And we always accepted the fact that we would pick losing stocks from time to time. Furthermore, we understood that the investment process was a long-term affair.

But even so…”no one said it would be this hard.” Not even your editors here at the Rude Awakening.

It’s true that your editors spilled lots of ink during the last three years warning that a dark night of credit contraction was fast-approaching. And we repeatedly expressed our fears that a de-leveraging economy might also de-lever stock prices…especially bank stock prices. But honestly, we NEVER expected the mess we now find ourselves in. Even though we never ruled out the possibility that Depression-like conditions might descend upon the financial markets, we never really expected it.

There’s a good reason for our shock, nothing quite like this has EVER happened before in the U.S. stock market. As the nearby chart illustrates, the Dow’s year-to-date performance in 2008 is MUCH worse than the Dow’s year-to-date performances (through the end of October) during the epic crash years of 1929 and 1987.

So far this year, the Dow is down more than 30%. By contrast, the 1929 Dow finished the month of October down only 10%, while the 1987 Dow finished the month of October with a 5% gain! Obviously, we have not yet reached the end of October 2008, but the Dow would need to soar 3,000 points during the next two weeks to replicate the performance of the 1929 Dow!

The point is simply that the mark-to-market destruction of capital has been much more severe this time around than it was during the two previous crash experiences. Something like $6 trillion dollars of stock market value has disappeared so far.

The comparisons to 1929 and 1987 become even more frightening when one examines the percent changes from one year prior to each market peak compared to one year following each market peak. In 1929, for example, the crash merely erased the gains of the prior year, nothing more. The 1987 crashed caused even less damage. From August 25, 1986 (i.e., one year before the market peak) through August 25, 1988 (one year AFTER the market peak), the Dow produced a GAIN of 7%.

Applying the same analysis to today’s market produces a loss of 24%! That, my friends, is real wealth destruction.

And so what? We already know things are bad.

The “so what” is that the wealth destruction during this particular stock market crash – and credit market implosion – has been so severe that a rapid, broad-based recovery seems highly improbable. An S&P 500 Index Fund ain’t gonna cut it.

But that doesn’t mean that EVERY stock will languish or fall.

In the column below, Byron King, editor of Outstanding Investments nominates one particular stock market sector as “Most Likely to Survive a Nuclear Winter on Wall Street.”

—- Protect Your Assets: The Strategic Short Report —-

First Bear Stearns, then Fannie and Freddie, Lehman and Merrill…and now AIG…

WHO’S NEXT? (And how can you protect your wealth?)

Introducing…

The Ultimate Bear Market Strategy So Powerful, Governments Have Tried to OUTLAW It At Least Three Times

To Ensure Your Wealth Is Protected as Wall Street Crumbles, we’re revealing the five-step secret to the Ultimate Bear Market Strategy… Read On Here

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The Fed Versus Mother Nature
By Byron King

At least one good thing emerged from the gigantic bailout bill that passed through Congress recently: Renewable energy production will continue to receive important tax breaks, which means that renewable energy companies might be among the first stocks to rise from the ashes of the recent stock market flameout.

Under current tax law, the production tax credit PTC will expire on Dec. 31, 2008. Any renewable energy system that is not installed and running by the end of this year will not benefit from the PTC. This is negative toward the economics of renewable operations. It’s bad for future investment in renewable energy systems.

The American Wind Energy Association recently published an estimate that after Dec. 31, 2008, investment in renewable systems could fall by as much as 50% without the PTC. This would play havoc with the energy investment cycle and all but shut many things down next year. Losing the PTC will strangle the vendor base, disrupt the work force and curtail future output. Great, right? Let’s shut down investment in renewable systems just as the nation is going into a recession.

I know that some readers (you know who you are) don’t like the idea of “government planning” for the economy. Some of you have written to me and criticized the PTC for renewable energy systems. You say that it is disruptive to the free market. OK, I understand your point.

But really Congress just approved a $700 billion bailout of the banking and finance industries. And you surely know that the U.S. energy industry is highly regulated. From the caribou preserves of Alaska to the power switches in your house to the gas pumps down at the filling station, the energy industry is regulated. There is no free market in energy or energy systems. It’s just that some markets that are more regulated than others.
My view is to be thankful that there’s something in the bailout bill — the PTC extension — that might benefit our geothermal investment portfolio.

Speaking of bailouts, did you ever read the classic book The Little Prince (Le Petit Prince), published in 1943 by the great French writer and aviator Antoine de Saint Exupery? In this gem of a book, the king claims that he has the power to order the sun to rise and set. But this power can be exercised only at certain times of day. Cute, right? It’s a children’s story, after all.

Here’s my point. Saint Exupery’s tale illustrates that an obsession with control may be only the illusion of control. You can try all you want to “plan” things to happen. But you still may not be able to accomplish anything that was not going to occur in any case. And it’s the same thing with the bailout legislation.

That is, Congress has worked to pass a large-scale bailout of Wall Street and the bankers. The justification is that the credit system is seizing up. Banks don’t trust other banks, and interbank lending is grinding to a halt. People and institutions are having trouble accessing even their own funds on deposit — allegedly on deposit, in some cases. Short-term commercial paper is drying up. You might have trouble getting a car loan, despite your own stellar financial background.

So Congress is empowering the Treasury to “take charge.” The “control” faction within the nation wants to shape the national economy, if not alter the national destiny. But the control types also want to avoid the Darwinian consequences that would normally befall individuals, firms and governments that have collectively made a whole lot of bad decisions.

So will the bailout work? Will the bailout change what was going to occur in any event? Will the bailout make things better? Or will it make things worse? Hard to say, but let’s consider a couple of old sayings for some guidance…

“Don’t fight the Fed,” goes one of the sayings. And who am I to argue with that? But what’s that other famous old bit of advice? “You can’t fool Mother Nature.”

The tide is going out on a large chunk of the U.S. economy. For several decades, the U.S. has been a nation that favored net consumption over net production and savings. The U.S. imported oil, autos, electronics, food… you name it. U.S. consumers bought it all up and went into debt to do so. The U.S. paid for its imports with dollars — lots of dollars. And foreign banks accumulated the dollars and returned them to us via purchasing U.S. bonds, stocks and other kinds of assets.

The U.S. economy continually leveraged itself. Prices for a lot of things went up. And people called it “wealth creation.” On Main Street, houses went up in price as if by magic Price increases came with nary a new coat of paint or a single square foot of fresh concrete. It was financial wizardry that caused this beguiling levitation. On Wall Street, people swapped financial instruments back and forth, and everyone booked a profit. How does that work again? It was fun while it lasted. But it’s coming to an end now.

Things are starting to change, and they will probably change in ways that few of us can truly anticipate. So what do you do with your money, especially your investment funds? Take it all out of the market? Put your money in the bank? Stuff the mattress with cash? Buy gold? Move offshore and wait it out? These are just some of the ideas that I’ve seen in your e-mails to me.

I sure don’t blame you for being totally defensive. But you don’t want to lose sight of the larger picture, either. We’re at the edge of a deep ditch. It’s going to be tough getting through the ditch. But over time, we’ll get to the other side and climb out. And then you are going to have to deal with the previous issues — overshadowed by recent events — of depleting energy and mineral resources. We’ll be back to a world of energy and scarcity. In fact, we will never leave that world. We’ll just be distracted along the way.

But let’s try not to get too distracted. The extension of the PTC reminds us that SOME companies can prosper even in the midst of Depression-like conditions. Therefore, SOME stocks can appreciate, even in a sideways-to-downward market. I would expect renewable energy stocks in general – and geothermal stocks in particular – to begin a sustained period of outperformance. Keeps your eyes on this space.

[Joel's Note: The world’s cadre of central bankers might be able to multiply the amount of dollars in circulation. They can even shuffle the deck and reallocate funds to those who least deserve it. One thing these Wall Street wiz-kids cannot do however, is to create more finite energy resources.

It is on the back of this immutable truth that Byron has developed his groundbreaking Energy & Scarcity Investor research service. As the hot air hisses out of Wall Street’s bubble, be sure you are positioned in the kinds of companies that can not churn products out of printing presses at will. For a look at a few that Byron’s got his eyes on, check out his latest research report right here

You junior editor is heading back up to Cairo tonight after a couple of hectic days here in Luxor. We’ve got a few stories to tell and some odds and ends you may find useful. Look out for them next week. For now, that’s all from us.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com