Be wary of buy and Hold

Those receiving conventional buy-and-hold advice from their brokers and advisors should be leery. We referenced Barton Biggs', former Chief Global Strategist with Morgan Stanley, book Hedgehogging in our April 2006 issue, Losers: Why We Invest with Them.

"Secular cycles, both in markets and sectors of the market, make a big investment management firm a very conflicting enterprise to manage if you are a businessperson, because the rational things to do to maximize short-term profitability are exactly the wrong things from both an investment and a long-term profitability point of view. For example, during 2000, even as the bubble was bursting, Morgan Stanley Investment Management, which has a business-dominated management, acted like businessmen: they heavily promoted the underwriting of technology and aggressive growth stock funds because those were the funds the salespeople could sell and that the public would buy. Management was not evil; they were doing what they thought was right. Large amounts of public money were being raised and very quickly lost. Short-term sales profits were collected at the expense of, not only the public, but the firm's long-term credibility and profitability."

Those who are looking for warnings from our "trusted" government officials should consider their track record. On July 12th of this year, U.S. Treasury Secretary Paulson declared, "This is far and away the strongest business economy that I have seen in my lifetime." Several days prior, on July 2nd, he stated, "In terms of housing, most of us believe that we are at or near the bottom."

If the truth is not already obvious to us, history can be instructive. With the help of Dr. Mark Thornton, of the Ludwig Von Mises Institute, one needn't look far to find examples of misleading statements at major market and economic turning points. Paul Warburg, an early advocate of the Federal Reserve, was on the Federal Reserve Board when he made this statement in January of 1930.

"Happily, we have now turned our backs upon the events of this unfortunate event."

Even more incredulously, on November 22nd of 1929, William Green, President of the American Federation of Labor, stated:

"All the factors which make for a quick and speedy industrial and economic recovery are present and evident. The Federal Reserve System is operating, serving as a barrier against financial demoralization. Within a few months industrial conditions will become normal, confidence and stabilization in industry and finance will be restored."

As a final word of warning, we leave you with the words of Dr. Carroll Quigley, a noted historian, former professor of history at Georgetown University, and consultant to the U.S. Defense Department, the Smithsonian Institute, and NASA. His tome, Tragedy and Hope: A History of the World in Our Time was used as a resource in our December 2006 issue: Mind Games.

"All past history shows that espionage has been generally successful and intelligence has been generally a failure. By this I mean that no country had much success in keeping secrets, in the twentieth as in all earlier centuries,but neither has any other country had much success in evaluating or in interpreting the secrets it obtained. The so-called 'surprises' of history have emerged not because other countries did not have the information, but because they refused to believe it. The date of Hitler's attack on the West in May 1940 had been given to the Netherlands by the German Counterintelligence Office as soon as it was decided; the Western countries refused to believe it. The same was true of every one of Hitler's surprises. Stalin was given the date of the German attack on the Soviet Union by a number of informants, including the United States Department of State, but he refused to believe. Both the Germans and Russians had the date of D-Day, but ignored it. The United States had available all the Japanese coded messages, knew that war was about to begin, and that a Japanese fleet with at least four large carriers was loose (and lost) in the Pacific, yet Pearl Harbor was a total surprise."

While the evidence of trouble has just begun to surface in U.S. equity prices, the love affair with credit, as demonstrated by record profits in the banking and brokerage industries, has only made investors, especially large institutional investors, more attached to this bullish run than ever. But, with the continuing contraction in the housing sector, and its impact on borrowing, the early warning signals are blowing.

The following is an excerpt from the email we sent our subscribers last Thursday, July 19th, regarding our latest issue of The Investor's Mind:

"We are releasing this month's Investor's Mind early because a variety of technical indicators are pointing to an end to the bull market run that began in the fall of 2002. I thought it important to release this piece on three high-level financial meetings that have taken place over the last few months, which I believe make it clear that those at the top of the money game have known for some time that the end of this period will bring massive shifts to the global capital markets."

Doug Wakefield

Stocks to correct 15% by year end

If there is a single salient truth about the U.S. stock market, it
is that 2007 is a record setting year from almost every aspect.
While there are a few rare exceptions that place either 1929 or 2000
in the spotlight instead, our overall impression is that the mania
for stocks appears to be at least as emphatic now as it has ever
been. We have repeatedly illustrated margin debt extremes and the
historically low mutual fund cash-to-assets ratio as evidence, but
the best picture of the continuing mania for stocks remains the
sheer volume of trading. Not only is the volume of trading at a
historic high, the velocity of transactions have exceeded the
previous highs with such ease that one's only choice is the
assumption that a veritable mania is still in progress, and in fact,
never really ended. Apparently, the collapse and bear market that
endured from March 2000 to March 2003 was only a corrective phase to
the greatest stock market mania of all time.
We make the distinction of a "corrective phase" rather than a bear
market due to the observable fact that we cannot find one instance
of back-to-back stock manias in the past. Perhaps the semantics and
definitions do not work for some, but nevertheless, we find it
extremely difficult to dispute that the mania never really ended.
Even at the nadir in 2002, Dollar Trading Volume was still at a
level that equated to a 18.3% rate of growth in velocity from 1995,
when we posit the mania actually commenced. This seven year path
would have been extraordinary sans the final manic peak and
subsequent collapse!

As it now stands, DTV has grown 18.1% from last year's record total
and exceeds the fateful year of 2000 by 28.1%. Compared with Gross
domestic Product and total stock market capitalization, we are close
enough to record extremes to posit the possibility that a similar
outcome to 1929 and 2000 should eventually be at hand.
DTV is more than three times the size of GDP
for only the second time in history.
DTV versus market capitalization is 223%, only nominally lower than
the 228% registered in the Roaring Twenties.
If there is only one salient truth about the stock market today, it
is that the mania remains largely unrecognized by professionals and
the public, who blithely continue without concern, taking larger
risks with greater exposures than ever before, while denying
investments in favor of trading, per se.

We define Speculative Fervor as the one-year differential in DTV
compared with the level of GDP. A market that trades an additional
$2 trillion while GDP rises by 3% is more speculative than a market
that trades an additional $1 trillion while GDP rises the same 3%.
Although Speculative Fervor has not reached the levels registered in
1999 and 2000, this indicator has remained at "Roaring Twenties"
levels for four full years. It is easy to posit that recent high
levels have reinforced the notion that stocks can do no wrong, hence
the game is still played to the hilt. We believe it is imperative
to note that Speculative Fervor remained between +15% to -10% for a
stretch of 64 years (!!!) from 1933 to 1996, equating to the
historic norm. A return to these levels will result in a huge
dénouement for traders and investors. In our view, this outcome is
inevitable. We do not expect an identical collapse such as occurred
from 2000 to 2003, but an initial shock followed by a consistent and
steady disenchantment with the inability of stocks to recover over
the long term.

Stocks are overowned and clearly, overtraded.

New York Post on an FOI re the PPT

My request for information about the actions of the secretive Working Group on Financial Markets at the Treasury Department "seems to have fallen through the cracks," according to the wording of an internal government document I just got my hands on.

That document, dated April 5, 2007, indicates that the Treasury's Disclosure Services division spent quite a lot of time discussing the request I made last summer under the government's Freedom of Information Act.

In fact, "Spotlight on New York Post FOIA Request" is the final issue on a seven-item agenda. And the 13-page PowerPoint presentation titled "Bottom Line" devotes a page and a half to the Post's request.

One of the "lessons learned and the way ahead," according to this presentation, is to "process and respond to Mr. Crudele's requests ASAP."

It's now more than a month since that meeting and I still haven't received documents or even an official letter. I guess ASAP might mean something other than "as soon as possible" in government lingo -- perhaps "as soon as pigsfly."

For those of you who haven't been following this saga, let me fill you in.

Back when Goldman Sachs Chairman Henry Paulson took over as Treasury secretary nearly a year ago, I did a multi-column investigation of the Working Group on Financial Markets, which is also endearingly nicknamed the Plunge Protection Team.

As far as I can tell, variations of the group have been in existence since the late 1980s. The PPT operates in that shadowy space between the government's desire to keep the market safe for national security reasons and Wall Street's desire to keep prices up for selfish reasons.

Other newspapers have since reported that -- unlike his predecessors -- Paulson calls frequent meetings of the Plunge Protection Team, which now seems to include Wall Street big shots as well as top officials such as Federal Reserve Chairman Ben Bernanke and New York Stock Exchange Chairman John Thain.

It's nice that all these folks have time to get together. And it is wonderful that the naive media think these meetings of government and finance brains are innocent. But I'm suspicious.

Of what?

I believe the Plunge Protection Team has emergency powers to protect the stock market if the situation warrants it. (Incidentally, I wholly support such action.)

But I also believe that the Plunge Protectors -- left unchecked -- could cause a tremendous loss of confidence in our financial markets. And they could create the very national security problems they think are fixing.

That's why I've asked for the minutes of meetings of the Plunge Protection Team on very specific dates when the stock market pulled a couple of rabbits out of its hat.

I didn't want to get greedy, so I kept the scope of my search narrow.

But apparently I must have guessed right and asked about sensitive enough issues because the Treasury ignored that first request and hasn't been any more obliging in response to follow-up letters.

It was only after I wrote an open letter to Paulson and published it in this column on April 3 that Treasury seemed to get the message. Two days later I was on the agenda of its FOIA Operations Overview.

At that meeting it appears that the folks at Treasury decided that my "request does not meet the criteria for an expedited request and asked the OGC [Office of General Counsel][for] concurrence on April 4."

Expedited! The request for this information was made last July!

I also got the impression when I spoke with a Treasury official last week that my request was about to be turned down.

A spokesman at Treasury told me that the government was trying to determine who the "appeals officer" was for this case -- an indication, I imagine, that I'm going to be asked to beg someone else for the information to which we are legally entitled.

I'm not surprised. Congress has tried to crack the mystery of the Plunge Protection Team and failed.

After my first FOIA request was filed, Rep. Ron Paul, R-Texas, last fall asked for the very same things I did -- the minutes of the Working Group's meetings.

"An informal inquiry to Treasury from our office yielded nothing. They claim such minutes are not taken and don't exist," one of Paul's people told me in an e-mail last September.

Very interesting! This intriguing group of government officials and private financiers meets regularly under Paulson and nobody keeps a record of what they discuss or do.

Why am I so interested?

If the Plunge Protection Team is doing what I suspect -- namely, coming to the rescue of stocks whenever it deems it necessary -- this would not only change the entire nature of investing in this country but would be the biggest financial story ever.

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