Great Depression Online Archive Issue:

Caveat Emptor - Let the Buyer Beware

Great Depression Online
Long Beach, CA
November 25, 2008

Inside This Issue You Will Discover…

*** Snuff
*** Relative Returns vs. Real Returns
*** Caveat Emptor – Let the Buyer Beware
*** And More

Snuff

Today we’ll begin by considering one unpleasant word: Snuff.

Smokeless tobacco, that is.  Not the dry stuff that’s snuffed through the nose.  But rather the moist stuff that’s dipped between the gums and the inner lip…the disgusting habit of baseball players.  That’s what we are considering today.

Here’s why…

Of the 500 stocks that comprise the S&P500 Index, as of last Thursday, 483 of them – roughly 97 percent – were in the red.  And of the 3 percent of companies to actually churn out some capital gains this year, UST Inc. is the one topping the charts (i.e. U.S. Smokeless Tobacco Company).

“U.S. Smokeless Tobacco Company is the world’s leading producer and marketer of moist smokeless tobacco products, including its two marquee brands, Copenhagen and Skoal, which outsell all others in the category,” says the welcome note on the UST Inc. website homepage.

~~~Warning: The Current Economic Crisis Will Worsen~~~

Warning: The current economic crisis will worsen and more and more people will become homeless, jobless and broke.  There is however a way you can protect yourself, your home and your assets starting today.  It’s all outlined in “The Insider’s Guide to Surviving the Recession.”  Learn all about it here: "The Insider's Guide to Surviving the Recession".

~~~~~~~~~~~~~~~~~~~~~~~~~

At market close last Friday UST was up 25.9 percent for the year.  By comparison, the S&P500 Index was down 45.5 percent.

Relative Returns vs. Real Returns

Mutual fund managers like to talk in terms of relative returns, not real returns.  That way when the market goes up they can take credit for making you money, and when the market goes down they can still claim success.

For example, if your retirement money is invested in an income mutual fund that has lost 40 percent year-to-date, as opposed to the 45.5 percent that the S&P500’s lost, your mutual fund manager will claim they’ve beat the market by 5 percent.  Like you, we don’t take much consolation from this…especially if when opening your account statement, you see that the $200,000 you’d saved over the last 15-years is now worth just $120,000.

So while UST Inc. certainly doesn’t need it, if they were to take the mulligan that your mutual fund manager takes, they could say that they’ve beat the market by 71.4 percent.

What’s the point?

We don’t have much of a point to this.  Though we thought it was an interesting little factoid that snuff is the biggest winner in the S&P500 this year.  Nonetheless, if you believe that to make money in the stock market you must buy low and sell high, then buying shares of UST Inc. right now – after the 25 percent increase – may not be a good idea…especially since its P/E ratio is at 19.62.

This brings us to the point we were scratching for…

Caveat Emptor – Let the Buyer Beware

With the S&P500 down 45.5 percent this year, and 48.9 percent from its October 9, 2007 high, there must be numerous companies that were unfairly punished by the sell off.  Moreover, if the recession drags into a depression, what business sectors will still be making money?

For one, consumer discretionary companies will not be making money.  In other words, people won’t be spending their last paycheck at Ralph Lauren Polo or Tiffany & Co.  Consumer staples on the other hand, will likely be the last sector to lose its customers.  UST Inc. is a consumer staple, and so are companies like Tyson Foods and General Mills.

Year-to-date consumer staples are down 20.8 percent.  While this is less than half of what the S&P500’s lost, it is still considerable.  In this respect, there are likely a number of good companies that are priced well below what they’re worth.  While we wouldn’t suggest that the bottom is already here and that now is the time to buy the S&P500…if you’re looking for a cautious place to enter back into the market, consumer staples may be it.

The market, the old timers say, is a forward looking animal.  That means it should start trending upward before the economy begins its recovery.  But when will the economy begin its recovery…and how much will it stumble before it gets some good traction?  Your guess is as good as ours?

An old Marine told us the other night, “Prepare for the worst; it has yet to come.”

We liken losing money in the stock market to be the same as a root canal…we’d rather not suffer such pain.  In fact, we’d rather miss the first 20 percent of the uptrend versus losing 20 percent because we bought too early.  We consider it simple mathematics – if you lose 20 percent, you must then make 25 percent just to get back to even.

And if the worst is really yet to come for the economy – a statement we agree with – then how much more must the market fall to fully appreciate this?

The point is, stocks go up and then they go down.  So, too, they go down and then they go up.  But sometimes times they go down and then they go down some more.  For what’s absolutely the right time to buy at one time is spectacularly wrong at another.  And what’s spectacularly the wrong time to buy at one time is absolutely right at another.

From September 3, 1929 to November 13, 1929, the DOW lost 47.9 percent.  Then, as rarely noted, it rallied 48.1 percent through April 17, 1930…bringing good money, good optimism, and good people back to the market.  But alas, it was the bear trap of all bear traps…the market subsequently crashed 89.2 percent from its initial peak along with the hopes, dreams, and aspirations of a generation.

Over the last two trading sessions the DOW has rallied 11.8 percent.  Could this be the start of the next big bull market run?  Or is it a good old fashioned bear trap…a suckers rally?

Caveat emptor – Let the buyer beware. 

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Many financial experts, including George Soros and Bill Gross are saying that we are facing the worst economic conditions since the Great Depression.  There is however a way you can protect yourself, your home and your assets starting today.  It’s all outlined in “The Insider’s Guide to Surviving the Recession.”  Learn all about it here: "The Insider's Guide to Surviving the Recession".

 

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