“Yes, Vir-Gennia, there is a Santa Claus.”

Let’s revisit the old Christmas story about Virginia, the little girl who wrote to the newspaper editor to ask him if there really was a Santa Claus. Only instead of a little girl, our inquisitive child is America’s biggest manufacturing company. General Motors just floated the second largest public issue ever floated; she sold $20 billion of treasury shares so far, and there is a possibility that number could rise to $23 billion because of certain options issued to her investment bankers. Yes, Gennie Motors, there is a Santa Claus – and he came early this year.

I feel like the wide-eyed child on Christmas morning. I am just fascinated by the investing world. Yes, investors tend to be intelligent and well informed. Yes, they tend to be sophisticated and positive. But, my, don’t they have short memories!

Didn’t Toyota sell 600,000 more cars than GM in 2008, to become the world’s biggest auto manufacturer? And didn’t GM, the second biggest car company in the world, go broke anyway? How can a company (GM) sell 8.3 million cars in 2008 and declare bankruptcy in 2009? And then, miracle of all financial miracles, how can they raise $20 billion in new capital in 2010? What’s wrong with this picture?

The only logical course for a typical investor is to revisit his understanding of Santa Claus. When we were seven years old, our beliefs were quite different from when we were only four. But maybe we were wrong when we were seven – maybe our opinions as a four-year-old were closer to reality than when we were seven. What is reality and what is fantasy?

Reality check #1: The governments of Canada and the USA invested billions in GM in 2009.
Reality check #2: GM declared bankruptcy anyway, and her shareholders lost all their money.
Reality check #3: investors just ploughed another $20 billion into GM.

Ordinary investors need to live in the real world, not the illusionary world of high finance. Our world is the world of low finance: this is the world in which we must survive. Our job is to be the guardian of our own personal wealth. Check in on your own reality. It’s not about GM – it’s not about government bail outs. It’s about your financial survival in the real world.

General Motors stock is a great vehicle for day traders: it is newsy, volatile and trades millions of shares per day. But if it starts to drop in price, big American pension funds will jettison it just as fast as they recently bought it. The reality of GM in the twenty first century is stark and Grinchy… not what you want in your stocking on Christmas morning.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

The Election That Doesn’t Matter

Two years ago the Americans elected President Barrack Obama: his job was to save the economic world. And, so far, the economic world has not collapsed. Whatever they did, it worked!

But, there is a certain inevitability to America’s demise: and Canada’s demise too. Canada’s financial future is tightly tied to America. Pierre Elliott Trudeau once said: “When the America sneezes, Canada catches a cold.” When America needs to be rescued, Canada could use a hand too.

Why did America’s mortgage melt-down almost blow out the world’s banks a few years ago? What went wrong? And whom should we elect to fix it?

Humble Beginnings
America’s last melt down occurred from 1929 to 1945: sixteen years of depression and war. When it was over, her international competition lie in ruins: European and Asian infrastructure had to be rebuilt. And America was in business to help her former enemies rebuild. When the troops came home from WWII, America had a new beginning. Ordinary soldiers-turned-workers got to reap the rewards of their victory. All those young women who had kept the home fires burning, were looking for husbands and families. That generation’s humble dreams had been shaped by those years of depression and war. They borrowed some money to buy a house – and their dream was to own that house mortgage free. Their goal was to get a steady job and establish financial security. These are the ones who gave birth to the Baby Boom generation.

Bigger dreams
The Baby Boomers wanted more. Raised in times of prosperity, the Boomers expected more than 2.4 children and a small house in suburbia with a late model Chevy in the driveway. Actually, those 2.4 children seemed like a lot of work: if we’re going to work that hard, we deserve a bigger house… even if Mom has to get a part time job to help out with the mortgage payments. Maybe it would be smarter to have 1.8 babies so she can have that part time job. After all, a bigger house and a bigger car means a bigger mortgage and a higher family income. And what’s wrong with a full time job? Women are as good as men! Why shouldn’t women have full time jobs, the same as the men? So what if we have to cut back to 1.4 babies! Why shouldn’t we go on vacation to the same places rich people go to? Why shouldn’t we live in big houses like rich people? In fact, why shouldn’t we all retire rich like Warren Buffet? And whom should we elect to help us with this new expanded version of the American Dream?



Even Bigger Dreams
Young adults today understand leverage: they know how to borrow and buy. They live in a world of monthly payments and plastic money. Student loans? No problem! Max’d out is part of their vocabulary.

In November 2010, the average American owes 128% of his/her annual income. (Incidentally, the average Canadian owes 148% of his/her annual income.) How far can they push The American Dream? And whom will they elect to set the stage for the next generation’s financial ambitions?

I feel like a Yuk Yuk’s comedian telling a joke that’s far too long. America has come a long way since WWII. In order to explain the futility of the American save-me election, I will revert to the comedian’s line: “-but, seriously folks…”

Seriously
How far can they push The American Dream? Over the years America’s bankers have degenerated just as seriously as America’s consumers. In the 1950’s, the financiers of that era worried about banking in depressing war-like times. That’s was their experience. They had learned to be conservative: to lend relatively small amounts of money to consumers. And only those with steady jobs. And good collateral. And a conservative life style. And they would consider only the husband’s income: what if the wife got pregnant and couldn’t work? (Actually, they were reluctant to lend money to single women with good jobs because they might get married and stay at home with the kids… and not be able to pay back the loan.) The March 15, 1958 edition of The Saturday Evening Post featured an article entitled “We Couldn’t Pay Our Bills” written by “An instalment plan slave.” It was a different era. Today’s readers should ponder this for a while. What would it have been like to lend money to consumers in the 1950s? Those consumers had modest dreams, shaped by their experience in the 1930s and 1940s. And the bankers had learned their trade at the same time.

In Canada, the bank act is refreshed every ten years. Parliament amends and re-approves it. Every ten years bank executives lobby for the banks to be allowed to be more aggressive. They are the surging horses, and the government holds the reigns. Ever since WWII, the bank act has become a little more liberal every ten years. Each generation of consumers has become a little more aggressive about borrowing to buy.

And now that game is over. The utter collapse of the American mortgage business and the near collapse of the world’s banking system have made that clear. The collapse of American house prices has changed The Dream. And it won’t be long before the bank act changes yet again.

Whom will Americans elect to change their bank act? What kind of changes will they make? Whom will they elect to re-establish financial prosperity?

Do you see that they have no choice? America is max’d out. It doesn’t matter whom they elect; they have blown it. Collectively, it’s payback time. Democrat or Republican: it’s still payback time.

Enough
Don’t worry about an American Dream based on borrowing and buying. Don’t search the horizon for a White Knight politician who will save us all. Dream the humble dream of those who experienced the depression and the war. And save yourself. Sell off your assets and pay off your debts. And vote your conscience.

Canadian Afterthought
Yes, you read that right: on average, Canadians are further in debt than Americans. It doesn’t matter whom we elect either: it’s payback time in Canada too.

The End of the Equity Cult?

Robert Buckland, Citigroup’s global equities strategist, published an article on September 2, 2010, entitled “The End of the Equity Cult?” He was openly bearish on the long-term outlook for global stock markets.

He pointed to the popularity of stocks in US pension funds: “U.S. pension funds allocated just 17 percent to equities in 1952, according to Citigroup. By 2006, those same funds were putting 69 percent in stocks and just 18 percent into fixed income.” He described this 50-year invest-ment style change as an “equities cult.”

Those who follow my Fridge Notes (http://kennorquay.blogspot.com/) will see the similarity between Buckland’s views and my own. There is a big problem in stock market investing: the long-term up-trend is over. More precisely, it was over ten years ago. We are in a different era now. For the past ten years, stocks have not been good long-term buy-and-hold investments. They provide great returns when they go up and big losses when they go down. The Golden Age of Mutual funds is over.

But there’s a big difference between Mr. Buckland and me. He is the chief equities strategist for the biggest bank in the world. I am some obscure financial philosopher in a small investment management firm in Canada. Buckland has credibility ― big credibility.

Hold that thought. Hold the thought that one of Wall Street’s giants has openly discussed the high level of risk associated with the stock market at these levels.

The following quotation is from my article on financial hangovers, which appeared in the June 2010 issue of The MoneyLetter):
“In June 2010, the investment manager Gluskin Sheff released their calculations of the 10-year rates of return of a variety of US investment classes. The 10-year rate of return for the US stock market was -2.3%. Big American pension plans have lost money in the stock market over the past ten years.
“What about the bond market? The ten-year return for US bond portfolios has been 11%.
“Based on the math, it’s clear that the big US pension funds should be heavily invested in the US bond market and only slightly invested in the stock market. On the surface, it seems simple and logical.”
I was warning MoneyLetter readers to lower their expectations toward stock-market investing and to sell a significant percentage of their stocks and replace them with government bonds because that is what America’s big pension funds will be doing until they get their giant portfolios in line. The stock market has a huge overhang of stocks waiting to be sold and replaced with bonds.

Question: When Ken Norquay writes his Fridge Notes, who pays attention?
Answer: His mother, a few clients, and a few followers.

Question: When the global equities strategist for the biggest bank in the world declares the end of the equities cult, who pays attention?
Answer: The biggest financial institutions in the world.

Does Buckland’s pronouncement mean that the bearish case for the stock market is receiving more and more credibility in big-money management circles? Will this result in an acceleration of the pension funds’ desire to reduce exposure to stocks and increase exposure to bonds? Is the jig finally up? Is the next stock-market sell-off imminent?

On August 13, 1979, Business Week published a famous article entitled “The Death of Equities.” It made the point that stocks were no longer a viable investment ― similar to Buckland’s view. Business Week is a credible resource in US investment circles. The Dow Jones Industrial Average closed at 875 that day. Exactly three years later (August 13, 1982), the 16½-year-long bear market finally ended. Long-term bear markets end with a huge wave of selling, moving prices even lower. Pessimism has taken over completely and investors, especially professional fund managers, have finally give up on the stock market. Those who once believed no longer believe.

Is this what’s ahead for today’s stock market? Will the long-term bear market that began in the year 2000 end in three years, now that big-money management can accept the obvious truth about their unfortunate situation? Will the secular bear market end in autumn 2013?

Academics and theoreticians can continue grappling with this interesting conundrum. But what should an ordinary investor do today?

Sell stocks. Buy even more government bonds. Whether you call it an equities cult or an overhang hangover, the game is over. The long-term up-trend in American stocks ended ten years ago. And the long-term bear market isn’t over yet.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Talk’s Cheap

When I was the manager of a small office of Merrill Lynch back in the early 1980s, my boss used to say, “Talk’s cheap. It takes money to buy land.” I never really understood the part about buying land, but I came to a true and deep understanding of “talk’s cheap.” As a stock broker in those days, I talked for a living. I would phone investors and offer them trading ideas. The extent to which I could talk them into buying was the extent to which I could earn a living.

It became easy to talk people into buying something. I was taught what to say. I learned the jargon. I became really good at talking people into buying. But I soon realized that cheap talk wasn’t really what counted. What counted was what my clients actually owned.

If my clients owned stocks during up-trends, I could make a really good living using my skilled cheap talk. And if they owned stocks during down-trends, no matter what I said, I couldn’t talk them into anything.

Most of us who invest get a certain satisfaction from talking about economic things. We love to read the financial press and follow the latest theories on what’s happening in the economy. We love the talk. And most of us have a viewpoint: we think we understand the economy and we might even have an opinion about what’s going on in the financial world. Most of us love to participate in the talk.

But here’s what we should be talking about: what investments do you own?

In my investing book, Beyond the Bull, I refer to the cycles in the stock market and how they relate to interest rates and the economy. But the most intriguing discovery I offer readers is how the talk changes through the cycle.

At the bottom of a stock market cycle, the talk is all gloom and doom. At the top, the talk is all optimism and enthusiasm. That’s how we identify the tops and the bottoms: we observe the talk. It’s called the Theory of Contrary Opinion ― and here’s how it works. When the talk is excessively negative, we buy. When the talk is inordinately positive, we sell. So the investments we own should be contrary to the talk about those investments.

For example, government bonds have gone up about 10% in the past three or four months. And the talk has been about the inevitable bankruptcy of the USA, about the fact that America can never repay her foreign debt, about the possibility of hyperinflation in the US, and about the US dollar being fiat money. As long as this negative talk persists, US bonds will continue in an up-trend. When the talk turns positive, as it inevitably will, bonds will be near a top.

A second example is gold: people love gold these days. An overwhelming majority of investment gurus are talking very positively about how the gold standard may soon return, how the currency wars that are developing will be positive for gold, and how all this talk of economic disaster is really positive for gold. And the more positive the talk is, the harder it is for the price of gold to go up.

The investments we own should reflect these two examples of economic cheap talk: we should own a lot of bonds and little or no gold.



To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

American Alzheimer Investors

I have been living temporarily with an older lady who is afflicted with dementia. She forgets a lot and repeats herself a lot. A lot! She lives in her own little fantasy world.

But for me, it’s easy to live with someone who lives in her own little world, who forgets and who repeats herself over and over. After all, I’ve been in the investment business since 1975.

David Rosenberg of Gluskin Sheff observed that the S&P 500 index is currently at 1,109 and reminds us that it first hit 1,109 on April 1, 1998.

During the whole 12 years and five months since April 1998, our friends in the financial planning business have been telling us the market goes up on average about 9% a year and we should buy high-quality stocks and hold them for the long term. When the stock market went up, they were happy; their buy-and-hold slogan could be repeated like a meditation mantra. And the followers of these dollar-store gurus were lulled into a mindless paradise, dreaming of financial security. No worries: soon we’ll all be rich like Warren Buffet. And when the market went down, they repeated the same mantra. Eventually, they were right: the market did bounce back up.

But they seem to have forgotten the part about the market going up 9% a year. All those planned projections of financial well-being based on a 9% return seem to have disappeared like a sweet dream in the morning.

Human nature is an amazing thing. In my investment book Beyond the Bull, I discuss the ways in which investors can be their own worst enemy. Our minds naturally try to avoid pain. It’s a painful experience when US stock market investors realize that they have had no growth for 12 years. Our minds seek to avoid these painful messages. Sometimes it’s less painful to slip into a state of voluntary Alzheimer’s and forget about investing ― to repeat the ‘buy and hold for the long term’ slogan over and over. And to fantasize about a recovering economy.

I am enjoying the opportunity to teach my mother. Medical professionals say Alzheimer’s patients can’t learn, that they are, in fact, un-learning what they once knew. And, to a certain extent, the professionals are right. But I have been successful in teaching her how to breathe in a certain way. My years in the martial arts have taught me that deep, controlled breathing relaxes the body and eases muscular tension. Breathing in that way relaxes the body and helps us avoid physical pain. My mother has been able to learn to use my breathing technique to help ease her headaches. I wish I could teach the voluntary Alzheimer’s investors some techniques to ease their financial headaches.
American stock market investors need to learn about selling their stocks. Buy and sell ― not just buy. It’s a little like breathing. We buy stocks at certain times (breathe in) and sell them at other times (breathe out). Holding your stocks when they are going down is like holding your breath. If you do it long enough, you will not like the results.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Rebirth of a Philosophy of Life

My father died last month.

His generation was quite different from ours. He was born in the 1920s, was an impressionable teenager in the late 1930s, and fought in a war in the 1940s. His generation experienced the ups and downs of life much more intensely than our generation. In his day, the economy heated up for short periods and cooled off for long periods. The attitude of his contemporaries was: we will survive. We baby boomers experienced long periods of economic prosperity interrupted once in a while by short, inconvenient cool-downs. Our attitude: we want it all. The dark side of my father’s generation was the fear they’d lose it all. The dark side of ours is entitlement: we think we deserve it all.

My father crossed over in his 88th year, leaving his soul mate behind. My mother was his dependent. She, as did the other women of her generation, relied on her man to provide for her; her job was to keep the home. Women of her generation accepted their roles as mothers and keepers of the hearth. (She had her brief career when he was off trying to win a war.) My mother is deep into her adventure with Alzheimer’s now. Now she truly is dependent. But my father continues to provide for her, even after his death. He has left me to look after her and he has left her some money. The combination of a steady job at the steel mill and the lessons he learned in the 1930s allowed them to save a sufficient amount of money. He had learned that you never risk your capital and you live a frugal life.

His son was of a different generation; he learned different lessons. His teenage years were the 1960s. What economic lessons did the 1960s teach? Nothing compared to the 1930s. What survival lessons did the 1970s teach? Nothing compared to the 1940s. The baby-boom generation was raised in a time when my father’s dreams were all coming true. Our generation was the dream-come-true generation. My father’s son, and all the other so-called baby boomers, learned that dreams can and do come true. And his son, unfettered by threats to his survival or the fear of losing everything, set out to make his dreams come true.

My father’s dream was to have a steady job, own his own home, and retire to financial security. His dreams came true. Initially, baby boomers had similar dreams, but expected them to come true. And why would we be content with just one home? Surely we could assemble a few rental properties too. And what about our RRSPs? Why settle for financial security when we can have prosperity? That famous financial-planning book of the 1990s was called The Wealthy Barber, not The Financially Secure Barber.

The boomers were raised by the Depression generation. Boomer values were once the same as my father’s values. But all that changed in the 1990s. As boomers’ attitudes shifted in those years from security to wealth, they ploughed billions into the stock market. Billions and billions! It was a change of social mood. It was a generational shift. It was the abandonment of my father’s “we will survive” attitude and the embracing of the “we want it all” approach. And it was the final chapter in the story of the Golden Age of the American Stock Market.

In my book Beyond the Bull, I discuss the mechanics of the stock market. It is important to understand the details of exactly what makes the stock market go up and down. In the 1990s, it was baby boomers buying billions and billions of dollars of mutual funds that made the stock markets of the world rise in unison. Money moved from seeking security to seeking growth. The actual flow of money into the stock markets is what made the market go up. And that change of attitude was complete at the end of the 20th century as the stock market ripened into the dot-com high-tech craze. The inevitable “correction” occurred in 2001/2002, when the blue-chip stock market averages dropped in half. Then the swan song finale occurred when the market surged into the oil-and-gold resource craze of 2005 to 2008. The “inevitable correction” knocked the stock market in half in 2008.

Will there be another stock market craze that will take the stock market up yet again? Where will the money come from? What fuel will fire the big bull market that the wealthy barber needs to break even?

The boomer dream of buying the stock market and holding it until you become wealthy is over.

I invite you to share my father’s dream instead. Learn what he learned about frugality in the 1930s. Learn what he learned about survival in the 1940s. His dream was to have a steady income and a modest life ― and not to take inordinate financial risk. Frank Alfred Norquay (1922 – 2010): may you rest in peace and may your dream be reborn in this generation.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

Shooting Star Month

Each summer we get a special treat. In mid-August, the earth’s orbit passes near the asteroid belt, resulting in the season of shooting stars. We see far more shooting stars in August than any other month. Shooting stars are really meteors that enter the earth’s atmosphere and burst into flames. All we have to do to see this annual show is gaze at the night sky in mid August: the odds are we will eventually see one. If we stay long enough, we will see several. It’s a seasonal thing, tied to the orbit of our earth around the sun.

But, in order to see it, we have to look up. And most of us spend our busy lives attending to our earthly affairs; we rarely have time to gaze upward at the night sky.

I wonder who first discovered Shooting Star Month. Ancient literature has many references to the heavens. The Greeks seemed to have particular wisdom in this area: was Shooting Star Month discovered by an ancient Greek who spent a lot time looking up? In order to notice the August shooting star phenomenon, he would have had to look up all year long. Only then could he notice the increase in shooting star activity in August. And he would have to verify his work by looking up over several years. Discovering nature’s patterns is difficult work.

But, once some noble hard working Greek discovered the phenomenon, it becomes easy for the rest of us to participate in his genius and enjoy August’s shooting star show. All we have to do is read about it somewhere, wait for mid August and look up at night. The hard work had been done long ago.

In my investment book, Beyond the Bull, I discuss the phenomenon of using other people’s knowledge for our own financial benefit. Is there a financial pattern that someone may have observed long ago, that we might be able to use for our own well-being. Is there a Shooting Star Month in the financial world?

It turns out there are many examples of such occurrences in the money world. The most relevant right now is known as secular alternation. Secular alternation refers to the tendency of the stock market to alternate between long term secular bull markets and long term secular bear markets. This financial gem is the key to planning our investment futures. Here are examples of how secular alternation has worked for the past 100 years or so:
1. In the late 1800s, there was a rail road boom in North America. This rail road boom gave rise to a stock market boom that ended in 1906 when that secular bull market ended.
2. 1906 to 1921: this secular bear market included World War 1 and hyper-inflation in Germany. [15 years]
3. 1921 to 1929: the roaring 20s produced a short powerful secular bull market. [8 years]
4. 1929 to 1942: the US stock market experienced a secular bear market accompanied by a depression and a world war. [13 years]
5. 1942 to 1966. Secular bull market. [24 years]
6. 1966 to 1982. Secular bear. [16 years]
7. 1982 to 2000. Secular bull. [18 years]
8. 2000 to now. Secular bear. [10 years so far…]

During the secular bull markets, the stock markets went up a long way. Those who bought stocks and simply held them as long term investments did well during these times. The secular bear markets either took stocks down a long way or took them sideways for a long time. Simply buying stocks and holding them resulted in either severe or minor losses. In the long term secular bull markets, investing in equity mutual funds was profitable. In the secular bear markets, it was not. Secular alternation dictates which investment strategies make sense at any given time.

What makes sense in a Secular Bull Market? Ordinary stock market investors can buy reasonable stocks and hold them for extended periods. In a rising market, that strategy works. “Buy and Hold for the Long Term.”

What makes sense in a Secular Bear Market? Ordinary stock market investors have to buy reasonable stocks when they are depressed in price and sell them when they are reasonably priced. “Buy Low, Sell High.”

What makes sense today? We have been in a secular bear market for ten years. If stock market investors have been buying low and selling high, they have had great opportunities to earn solid investment returns. If investors had been holding stocks for the whole ten years, they have been disappointed. They feel like the sky gazer who looks for shooting stars in January.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.