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Macro Economics
Advising "Martha"

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By RaptorD
October 28, 2008

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Hi Martha,

I was out of town and sick this weekend, but gave the current investing environment (especially yours) considerable thought. Here's a quick rundown on part of what I've come up with. Note that the plan from here on must be guided by you and not me, although I would like to toss out some ideas for your consideration. But first ....

I'm glad you dumped one advisor and maybe a little disappointed that you were convinced to keep another, but that's fine. We need to move on.

I think we need to get moving quickly, so I'm throwing a Hail Mary pass to you here. You must let me know which of these thoughts you disagree with, and please add your own and let me know what they are. This is crucial. It's critical that you don't just follow me blindly. You know all the reasons, right? If not, please ask! One of the most important reasons is that I could be very wrong. Things are moving quickly and often are unforeseen by most investors. Consider that most investors have been wrong for the last 12 months and losing tremendous wealth. Realize that you and I are no smarter than most of them so we could make bad errors right now. Our goal will be to minimize mistakes, not make a fortune. You must agree with this right now or we need to take a step back and quickly regroup. (It is quite alright if you disagree and it certainly beats moving forward with untold reservations on your part.)

Keep in mind that in any or all views I may be wrong. Always think for yourself. Disagree where you need to!

10/27/08

Some Facts (My interpretation of) For Your Consideration:

  • Market volatility is higher than ever before. Sudden moves have become the norm.
  • Several governments around the world are intervening in markets.
  • Several governments around the world are propping up local markets.
  • Several governments around the world are propping up U.S. markets.
  • Several governments around the world are propping up their own currencies and banks.
  • Several governments around the world are propping up the US dollar
  • China is moving to make the yen a (the?) world currency to replace the US dollar.
  • Several governments have taken over many banks, insurance companies and pension funds.
  • Several markets have closed temporarily (and all have re-opened as far as I know.)
  • Many countries and/or their banks have purchased huge amounts of low- or non-performing US mortgage tranches and derivatives.
  • Many foreign banks have attempted to become world-class by investing and leveraging in US and other (including Latin America) debt that is now in question of viability.
  • The Euro is in under great pressure from many angles.
  • Iceland is bankrupt and asking the IMF for help. The IMF was intended for third-world countries, e.g., Africa, Bangladesh, etc.
  • Other countries are expected to follow Iceland, asking the IMF for help.
  • Spanish real estate is in free-fall.
  • China is slowing greatly. Near-term ramifications are disputed by experts.
  • Iranian markets are isolated and are up over 100%. This could become important later.
  • The re-alignment of countries with common interests to the U.S. is changing rapidly before our very eyes and will continue.

Plan Influences & Opinions
Notes:
My views are fluid, quickly & ever evolving.
Where appropriate, all phrases below should be considered to be preceded by, "Without major intervention ,,,,,"

  • The US and most other countries will see considerable deflation before massive inflation.
  • There is great pressure on most all markets as hedge and mutual funds must deleverage. This pressure will continue until all sellers are gone or there is major market intervention. (1-3 quarters?)
  • Corporate earnings will continue downward until .... major intervention by ...... someone.
  • Business interest rates will remain level or possibly increase for 1-3 quarters. The next direction is unknown.
  • We are not at the bottom of the market UNLESS there is a sudden, major outside intervention by ...... the Fed or someone else.
  • The market will move downward overall over the next 4-8 quarters.
  • The market could well move drastically upward OR downward at any time. Duration and degree of "permanence" will depend upon the source and details of the catalyst(s). A move in either direction could be a quick 10-20% and an even stronger move would not surprise me at all.
  • The US dollar will continue strengthening in relation to most (but not all) other currencies over the next 2-3 quarters.
  • Fed interest rates will move toward (eventually to) zero.
  • Market statistics and fundamentals are not driving the markets right now as much as fear, greed and government intervention. P/E and similar ratios are becoming meaningless.
  • As a group, banks will continue to under perform historical earnings rates and other sectors for 4-18 quarters.
  • The consumer will continue to retrench for 2 quarters or more.
  • Unemployment will continue upward for 2 quarters or more.

Current Considerations for Martha's Investing Plan

  • We will not strive to get rich. We will always invest with our first goal in mind; that is, not to lose money.
  • Avoid consumer cyclicals and descretionaries.
  • Avoid financials in general.
  • Carefully and slowly embrace infrastructure, materials and energy sectors. Watch tech closely.
  • Quicikly become positioned for any possible rally, including a major bear market rally.
  • Avoid all investments which require large cash infusions for continued operations.
  • Foreign stocks will be considered case-by-case only.
  • Goal: Remain defensive but agile.
  • Attempt to benefit from any major rally.
  • Protect against major losses to the extent possible.
  • Hedge new positions to the extent possible until a clear trend is apparent.


Needed Now:
Points of disagreement and your thoughts considering above points. Note that even "FACTS" are MY INTERPRETATION OF FACTS. As always, assume nothing.


Coming Next:
Depending on your thoughts and the number of disagreements on the points above, I have a particular comprehensive strategy in mind for your consideration. I think you'll like it, but we need to discuss your opinions on the points listed above first.
Martha: Is this too fast? Are we on the right track to get you where you want to go? Are you serious about this? Are you confident about this? Do you have time for this right now? Do you disagree with anything major so far?

After all this time, Martha, ...... hang on, we're getting closer to develop Martha's Investing Plan. Now .... Talk to me.

Best,

Dan

ps: It occurs to me that this discussion could be of interest to others. If I keep your identity guarded, would you mind if we share part of our discussions at The Motley Fool? Feel free to say no and as always, I will understand completely. Either way, this plan will remain 100% custom-made for you and created 100% for you. Your investing plan must always come first.