Killing The Bear

Killing The Bear

By James West | 12 February 2008

Its always hard to say unequivocally when a bull market ends and a bear market begins— even in retrospect. Far easier to point to a few events that could be described as seminal in what is to become a fundamental, albeit temporary shift in market dynamics. It also depends on the depth of connectivity an individual has to the industry segment that is going to become the center of the gathering storm. If you worked at Bear Stearns last spring, you probably had a leg up on the impending doom about to be unleashed on the rest of us, particularly the closer you were to the team running the High Grade Structured Leveraged Credit Strategies Enhanced Leverage Fund, or HGSLCSELF. Talk about a silly acronym. It just sounds dangerous.

Like another Bear Stearns fund that held similar assets but was not so heavily leveraged, the fund's assets consisted in good part of bonds backed by sub-prime mortgages, loans made to borrowers whose histories or incomes make them less-than-good risks. Rising default and late-payment rates called the value of the mortgages into question, prompting the banks that had lent the fund $6 billion to demand repayment of their loans. Since the fund had only $600 million in investors' capital, Bear Stearns had no way of repaying its creditors.

It tried and failed to find new creditors, and Bear Stearns, appropriately named, became the canary in the coal mine that now has markets around the world in a shambles. Bear Stearns awoke the bear. Those of you who subscribe to newsletters whose authors are regularly critical of the fiscal shenanigans among Wall Street’s so called elite were probably a little less surprised at the ensuing maelstrom than those whose information was restricted to more conventional sources.

Those are the same conventional sources who, once the tumbling of the Bear Stearns funds had initiated the domino effect that eventually affected almost every single major bank around the world, assured the public repeatedly that the effects would be minimal, isolated and temporary. They weren’t, and the result is the current landscape of stocks worth less than half their book value due to the sudden 'revaluation' of $TRillions in suddenly suspect assets, the absence of liquidity, and a pervasive fear of TEOTWAWKI^* from Wall Street to Main Street that has paralyzed the exuberance that ruled until last summer.

The effect of our enhanced instantaneous communications and information transfer infrastructure will be condensed financial cycles as the stabilizing effects of informed[!?!] and organized[!?!] institutional effort is deployed more rapidly, and this is evident in the recent joint initiatives by assorted banking and investment management institutions to shore up liquidity with additional commitments of capital [[but so far to little avail in wooing back the lenders: normxxx]].

Interestingly, the other effect of our phenomenally wired world is the ability for these condensed cycles to facilitate the repetition of past mistakes at far greater speeds. I refer to the bubble most recently popped we call the Dot Com era. Really, it's remarkable how the same essential transgressions against fundamental risk management precepts caused the over-valuation of assets whose intrinsic worth (e.g., the value of its stream of (potential) future earnings/dividends, depreciated by inflation and the cost of money— interest rates— over, say, 30 years(?); do most businesses really last that long?) became grossly exaggerated as a result of hyperbole. [[What's really remarkable is the ability of these pushers of crap quickly to believe in their own BS.: normxxx]] This is true for that bubble and this one [[and the next one.: normxxx]].

In the case of what will become infamous as the Sub-prime Mortgage Crisis, there was an extra layer of self-delusion afforded by the ratings agencies who helped out by declaring most of the ABCP, SIVs and CDOs worthy of a triple "A" rating [[It should be noted that the General Obligation bonds of the sovereign State of California, the sixth largest economy in the world, with nearly unlimited taxing authority, is rated several levels lower at A+: normxxx]]. The regulatory fallout from that reality has not even begun, as the lawsuits that should be filed against these shamelessly incestuous agencies may never materialize in the public eye, because their major victims are their bedfellows, and those implicated have many times greater resources than you or I when it comes to ducking responsibility. Still, we should at least be given one or two scapegoats (as for Enron, etc.) to hang.

The Dot Com bubble’s burst in 2001 was preceded by some of the biggest deal making activity then as now. At that time, Time Warner paid way too much for AOL, and this time around, the ego-driven consolidations of corporate North America are legion [[with MSFT recently offering 3X the value of YHOO to swollow it whole: normxxx]]. Then, as now, the party was followed by an ugly hangover, at that time, compounded by the horror of September 11th and it is my sincere hope that no analog to that latter event is forthcoming.

The point I am trying to make is this: as human beings, regardless of our impressive technological accomplishments, we remain emotionally driven, herd mentality creatures bound to repeat our mistakes (especially en masse). The bear now ambling grumpily among us will inevitably be retired by a fresh round of overblown, over-hyped exuberance (another bubble, of course), as that is the lesson again repeated from which we refuse— or simply cannot— learn.

The way to protect yourself as an investor is to be where the bear is not. And the Bear is not in gold. The Bull rules the gold and precious metals markets. This applies to those of us who lack the experience and foresight to be "speculators" mopping up cheap stocks before the herd catches on. At the time of the Dot Com collapse, the groundwork for the bull market in commodities had already been laid, and the real estate bubble was half inflated. Speculators were already busily acquiring mining companies, and mining companies were busily acquiring mothballed mines and exploration projects.

[ Normxxx Here:  And what prevents Gold from being the next overblown asset, when the next burst occurs!?!  ]

The Bear’s reign historically lasts until the markets have reacted and then over-reacted, and equities reach a state where they are severely oversold. Such is not yet the case, as investors continue to punish the banks most humbled by their foray down Jurassic Park Avenue, to borrow a term coined by Don Coxe, Chairman and Chief Strategist of Harris Investment Management, and Chairman of Jones Heward Investments.

According to Don on a conference call on February 4th, "the subprime mess is just getting worse…". He continued, saying, "Gold is now selling off, in response to the strong rally that’s going on in the stock market and the assumption that the problems have been solved. And I don’t believe that. So, my view is this pullback in gold is only a temporary development."

So whereas the Bear is the king of Wall Street for now, it’s the Golden bull investors need to embrace if they want to kill the bear in their own portfolios [[but don't forget what happened to the 'Golden Calf'.: normxxx]].

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TEOTWAWKI^* The End Of The World As We Know It

Normxxx    
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