Agora Financial’s Rude Awakening

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Wall Street, New York

· What to do when Warren Buffett buys and CNBC screams “bottoms up!”
· Back to the basics after America’s late, great age of “financialization,”
· The new New York just ain’t what she used to be and plenty more…

Eric Fry, reporting from Baltimore, Maryland…

Yikes!…Another day, another harrowing stock market collapse. “Just when you thought it was safe to go back into the water,” as we remarked yesterday, the “Jaws stock market” returned to sink its teeth into a few more unsuspecting investors…and rip a bit more flesh from their bones.

The Dow Jones Industrial Average tumbled more than 500 points, to close the trading session a mere 70 points above its lowest closing price of the current bear market. Theoretically, the stock market is bottoming out…at least that’s what CNBC tells us. But the real-time experience feels very different. If the current market action is supposed to be good, I’d rather have bad.

Maybe the stock market is bottoming out, albeit in an erratic, gut-wrenching fashion. Or maybe the stock market can see things that are not visible to the naked eye. Maybe it sees that the economy is even worse than many of us fear. My recent observations in New York City support the latter, gloomier, interpretation.

When I stepped off my transcontinental flight Monday, I stepped into a very different New York City than the one I left behind two years ago. The “new” New York seemed somewhat less frenetic than the old one. The airport terminal seemed quieter; the traffic on the interstate seemed lighter.

But since memories are about as reliable as Amtrak trains, I sought additional empirical evidence to corroborate my first impressions…

“So how’s business?” I asked the town car driver, as we sped toward Manhattan.

“If f***ing sucks!” the driver grumbled. “Its awful. My business fell off a cliff.”

“Did the problems at the Wall Street firms cause the slowdown?”

“I guess,” he said, “All I know is that business sucks.”

A few minutes later, I was rolling through remarkably light rush-hour traffic on the West Side Highway, and breezing across Manhattan, right through the middle of Time Square.

“Where are all the cars?” I wondered to myself. “Where’s the congestion I used to know…and despise?”

A few moments later, the town car deposited me at the $450-per-night Intercontinental Hotel in Midtown. But I did not pay $450. I paid less than half that amount by entering a lowball bid on Priceline. Not since the months immediately following 9/11 had I paid so small a sum for so nice a hotel.

Such anecdotal impressions of economic torpor don’t prove anything, of course, but they certainly create a compelling circumstantial case. The more I wandered around Manhattan, the less it resembled the city I remembered. At 8:00 PM Tuesday evening, some friends and I strolled into Manhattan’s famous steak house, Smith & Wollensky. We expected to find a packed bar, a full restaurant and a haughty response to any query about dining without a reservation.

Instead, we found a bar with exactly seven patrons, a restaurant with vastly more empty tables than occupied ones…and a cluster of maitre d’s that were so eager to help they seemed almost servile. But we decided to dine elsewhere. There’s nothing sexy about going to an expensive restaurant that’s EMPTY.

Over the ensuing 24 hours, I observed many other indications of non-boom conditions. A lot of bars were full, but most restaurants were empty. Somewhat perversely, therefore, Manhattan is more delightful than ever…assuming you’ve got the scratch to dine in one of its many outstanding, but vacant, eateries.

But I did not journey to New York City to conduct an informal economic survey, I came to attend the Grant’s Fall Investment Conference. The “Grant’s crowd,” like the “Rude crowd,” tends to distrust richly valued stocks, paper currencies, complex financial instruments and government bailouts. On the other hand, this crowd tends to trust lowly valued stocks and tangible assets that will hold their value over time. So I was not too surprised to learn that many of the speakers and attendees at the Grant’s conference were stepping in to buy stocks in the midst of the recent carnage. But I was surprised to learn how confidently they were doing so.

“One must put money to work in a bear market,” one famous bear remarked at the conference, “knowing that prices will almost certainly move lower.” Upon hearing this remark, I felt twinges of bullishness. But moments later, when the same bearish investor disclosed that he had been buying stocks “hand over fist.” I felt less bullish. And when he said, “I’ve been holding about 40% cash in my portfolios for years, but now I’m down to 15%,” I felt even less bullish.

It did not bother me that the bears had become bulls, it bothered me that the bears had become CONFIDENT bulls.

Does the stock market make its lows at the exact moment when congenital bears become confident bulls? Does the stock market make its lows when Warren Buffett writes op-ed pieces in the New York times boasting that he is buying stocks? Maybe, but this scenario seems a bit too pat and poetic to be trustworthy.

A bottom might be in, but we’re not so sure that THE bottom is in. In other words, selective stocks may have made lows that will never be seen again, but the overall stock market might sill have some work to do…on the downside. Nibble at stocks, if you wish, but don’t rule out lower prices.

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Crisis Investing
by Chris Mayer

The “financialization” of the American economy is an era coming to a close. It’s back to the basics of wealth creation, to the basics of owning and making useful things. Because of their intrinsic usefulness, these investments hold their value over time. In the current turmoil, the market is tossing out just about everything. So you’re getting good prices for picking up these basics. One of these basics is the ability to produce food.

I was recently in the Chateau de Courtomer, one of the last chateaux built in Normandy, France, shortly before the French Revolution. A large, old painting of the Marquis de Courtomer still hangs in the stairwell. Bill Bonner, my publisher and the owner of the chateau, told me the man lost his head — literally — during the revolution. The chateau was also a regional headquarters for German operations in Normandy during World War II.

It’s a great old building, made of sturdy brick and stone. Imagine all that it’s seen over the centuries: wars, market crashes, all kinds of disaster. Yet it still stands. It’s retained its usefulness, even after all these years. That durability is a good thing — an enviable thing — and not so common among most of our material possessions.

Durable old investment ideas are on my mind today. With the credit crisis gathering power like a hurricane over the warm waters of the Gulf of Mexico and laying waste to the stock market in the process, it seems natural to focus even more on ideas with impregnable staying power.

One night at dinner, we had an interesting discussion about what sort of assets we’d want to own during times of crisis. We talked about gold — which had very recently enjoyed its best day ever, when the price rose by $50 per ounce. We talked about silver. Dan Prescher, the editor of International Living, though, had a different idea.

“I’d own a cow,” he said. “Think about it. What would you rather own if things got really bad? Gold coins or a cow?”

I think he was onto something. A cow is, of course, a useful animal to have around. Maybe some chickens, too, and some farmland with ample water and a good stand of fruit trees. These things have always had value to mankind. We need to eat and drink. During times of crisis, people may make do with an old sweater and forgo buying a new one. They may patch up that old couch, skip the movies and pass on the latest iPod. But they always eat and drink.

I’ve been thinking more about the global food chain lately. In the last issue, I wrote to you about what I called the “topsoil crisis.” Fertile land is becoming an extremely valuable asset. And what I think will happen is that the whole food chain will become more valuable with it. It’s sort of like the oil story.

As the price of oil rose, oil reserves became much more valuable. But so, too, did the whole energy infrastructure — pipelines, refineries, companies and people who can build and repair oil rigs and such. I think the same thing is happening — or will happen — with farmland and the entire food network that feeds this hungry planet. The ability to supply hogs and chickens and grains will become much more valuable.

I’m working more on these ideas, and I’ll have some new research to share with you in your next issue. This market turmoil could create some truly awesome opportunities to get in pretty early on these emerging trends.

Also, the market turmoil has created some great opportunities within our existing portfolio. There are several names I have at “hold” that I am looking to upgrade to “buy.” Otherwise smart investors who may balk at the idea may want to consider some more advice from Templeton.

On Thursday, I shared with you some quotes from John Templeton taken from the latest issue of Outstanding Investor Digest (which I recommend).

Here are a couple more ideas worth rolling around in your head as you think about investing:

The stock selection process is complex. Remember that unlike other professionals, a prudent and wise investor cannot afford to do what other investors do. For example, if 10 doctors tell you an appropriate prescription, then it’s wise to accept that consensus.

Likewise, if 10 engineers agree on the design of a bridge, then that’s surely the right way to build it. But if 10 investment analysts tell you to buy a particular stock — or gold, deutsche marks, denominated bonds or whatever — it is probably the wrong thing to do.

Investing inhabits a peculiar world. You have to walk with the minority as an investor. You have to have the fortitude to stand against the crowd. As Templeton says below, the only way to pick up bargains is to buy what people are selling:

Buy those things that are depressed. A security is depressed in price only when people are selling. There is no other reason why the price should drop to an undervalued level except the pressure of selling. So in securities markets, you have to be prepared to do the opposite of what most investors are doing if you are going to get bargains and make superior profits in the long run.

These are certainly trying times. The recent market crash will test the nerve and resolve of every investor. But there is not much to do other than wait it out. And for those who have the stomach for it — and the means — it’s also a time to pick up some great bargains.

[Joel's Note: Bargain or bust? In such uncertain times, when multi-hundred point selloffs abound, it can be difficult to tell one from the other. Treading back into the market can result in some spectacular buys, but also, as we mentioned yesterday, some torn limbs and shredded flesh. With that in mind, we recommend taking a cautious, well researched approach and, if possible, employing a guide to help you navigate the rough seas.

Right now, Chris is offering readers of his Capital & Crisis newsletter the chance to sort the trash from the treasure with what he calls his “Paycheck Portfolio” program. In short, it’s a way you can unleash a steady flow of work-free income by investing in just a handful of companies. If you’re interested, here’s a link to the free report Chris sent over to us. You can qualify for two “paychecks” per day on at least 24 of the days listed. For more information, read on here

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[Rude Endnote: Again we see some ominous streaks of red on our screen this morning. Asian and European markets extended losses while their U.S. counterparts slept. China’s Hang Seng ended down over 3.5% as we write while Japan’s Nikkei 225 finished down 2.5%. The Aussies got clobbered too, as is the expression there. The Australian All Ordinaries index slumped 4.39% at the close.

London’s market has been on a rough ride too. As we write to you the FTSE sits down around 1.75%.

Early indications suggest the Dow will fall somewhat at the open with the DJ Stoxx 50 down around 56 points as the Euros prepare to pack it in for the day.

That’s all from us for now. Keep a look out for your 5-Minute Forecast arriving sometime after midday.

Until tomorrow…

Cheers,

Joel Bowman

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