Thursday, October 8, 2009

Time for high fives or time for a pause for thought?

A piece I stumbled upon while looking for something else - boy the internet can sidetrack me - got me thinking pessimistically again about the stockmarket and economy in general:

From EFT Guide, By Simon Maierhofer

A 50% rally, Warren Buffett, extreme levels of optimism, rallies based on vague reports of improvements, etc.; all the aforementioned are parallels between the 1929-1930 bear market rally and the rally from the March lows. If the parallels hold up, a mere rhyme to history (let alone a repeat), will wipe out millions of next eggs. Here’s how to avoid repeating your grand parent’s mistakes.It’s been said (and perhaps you are getting tired of hearing it) that those who don’t learn from history are doomed to repeat it.

If the parallels of the Great Depression continue to hold up as they have (and according to historical indicators they will), history doesn’t have to repeat itself to severely hurt investors. A mere rhyme to the Great Depression would be enough to wipe out tons of portfolios.But who cares about history when the market is up and the forecasts call for better days ahead. The Dow Jones (DJI: ^DJI) and S&P 500 (SNP: ^GSPC) have rallied over 55% while the Nasdaq (Nasdaq: ^IXIC) has soared nearly 70%. Wall Street is anxiously expecting another earnings season, which is expected to be predominantly good.

Reuters reports that “earnings optimism lift Wall Street” while Credit Suisse encourages their clients to buy bullish Alcoa options in advance of Alcoa’s (NYSE: AA) profit reports.

If there is one thing we should have learned from history, it’s that the bear strikes hardest when least expected. Pierre Corneille hit the nail on the head when he said that “danger breeds best on too much confidence.”

Black Monday’s or Thursday’s wouldn’t be called “black” if they were expected. Market tops are always marked by extreme levels of optimism.

In January 2009, with the Dow Jones slightly above 9,000, the ETF Profit Strategy Newsletter noticed elevated levels of optimism and warned of a severe decline with a target of Dow 6,700. Today, sentiment readings are even more extreme than they were in January. The implications are obvious.

If there is just one time you want to take a lesson from history, it is RIGHT NOW. The parallels between today and the Great Depression are numerous and strikingly similar. This 5-minute history lesson might be the best investment you’ll ever make. Continue article here

I was aware of the sucker rally of the 1930s that the author discusses but it certainly gets one thinking about where we might be right now and if the authors research and main points are accurate then it makes for grim reading.

The apparent economic "recovery" (green shoots my arse Mr Obama) that has led to markets skyrocket over the last six months is based on large amounts of State money borrowed from the Chinese or money simply being printed.

Banks and financial institutions in the US, which have made up a large part of the rally, have better looking balance sheets thanks to the aforementioned handouts, not for any concrete economic reasons.

Lets not even go into the massive debt that many Western countries have on their balance sheets - personal and State.

I don't think things are as bad or necessarily the same as what was experienced during the Great Depression - it very well could be worse I suppose - and I have been buying stocks ( 1 2 3 ) before the current rally but the general message from the writer is one that should be taken on board as an added risk factor when considering any type of investment in the current cycle of economic uncertainty.

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