Saturday, January 17, 2009

A Rollercoaster Ride called "Confidence" is now Avaiable.

Have you ever been on a roller coaster ride?
My son Nathan and I are the only people in our family who would and did ride roller coasters, we are both in the money management business so I guess we like the thrill of the ride of a roller coaster and the markets. Nathan and I had the last ride on a wooden roller coaster at a park in Scranton PA. The next ride it broke and they closed the ride and the park.

If you have ever ridden a coaster, you know that you start out level and then you start to climb. The climb gets steeper and steeper until you reach the top. For one split second you are to the crest and stop and then you start to move forward over the top. You look down and all you see is the straight drop to the bottom. Your eyes are fixed at the bottom of the ride; you cannot see the next uphill move coming. As you continue to fall to the bottom, you gain speed and you are sure you are going to die.

As you move through the ride the next high point is lower than the previous high and the twists are less and less powerful until at the end you are back to level ground and you are where you started the ride safe and almost sound. I often wondered if they have somebody at the end of the day who goes underneath the ride and collects all the loose changes that falls out--that is for another Blog. What I have described is the chart pattern for the S&P 500, not only for the last four months, but for the last 10 years. If the return on today’s T-Bills up to one year out is zero, then the return on the S&P 500 is less than zero, in fact for the last 10 years the return on the S&P 500 is -31% (see chart above). This S&P 500 roller coaster ride set a new bottom in 2008.

Just when we think we have hit bottom in the stock market and are starting up hill again we take a sharp drop. I believe what we are seeing in the markets is a lack of confidence. The market moves up and we feel good. We think we have made the turn and when we get comfortable that everything is OK. We are moving to the top of another hill and find ourselves swooping down again. These swings in the market demonstrate how fragile the consumer and business confidence is in the US and in many other places around the world.

One thing is clear to me, many people and businesses can only go so long earning zero on their saving or cash. The pressure continues to mount every day for the people and businesses that need income. If they get no income then the only thing left for them to do to pay their bills is to sell their assets. Recently a major US bank revised it's interest rate forecast. In December, that bank was expecting the Fed to start increasing interest rates in the second half of the year. The bank was calling for three, quarter point increases in the Fed funds rate in the last 6 months of 2009. They bank recently reduced that to one 25 basis points increase in August and I think in another month or two they will revise their forecast again.

The Fed Chairman said in a recent speech in London that he expected low short-term interest rates to be around for an extended period. While he did not say specifically how long I suspect he was thinking longer than five and one-half months. When people finally come to grips that a low level of short-term interest rates will be with us for a long time they will look for a ticket to ride on the up side of the roller coaster and buy something other than 90-day T-Bills. Right now, there is no waiting line to buy equities. However, as with everything else everyone will want on the ride when it is too late. The serious money in common stocks will be made by those who have the confidence to get on when the ride is flat. So, consider buying some roller coaster ride tickets today.

Dan Perkins

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