Friday, October 2, 2009

Faber College

(This blog was initiated in part shortly after I read how Dr. Faber recommended maintaining a notebook or file system to cut out or transcribe articles of interests or organize books of interest because he couldn't remember everything he had read, or he couldn't find what was referenced.

He is expecting a correction and Reflation Rally 2.0 -AM

Dr. Marc Faber Market Commentary October 1, 2009

I started to work on Wall Street in 1970. What has ever since captivated my mind is how so many investors fail again and again to perform by making repeatedly the same mistakes. They buy at the wrong time the wrong stocks or asset classes and then sell again at the wrong time the wrong stocks and wrong assets. I often think that most investors are always out of step with the market. They buy when everything looks perfect and when a trend has been in place for ten years or so and, therefore, prices are high and then get out at any cost when an asset has been under pressure for a considerable time and when prices are low. I suppose that given the shape of the wealth pyramid (few rich people at the top and many poor people at the bottom), by definition, the majority of investors must lose money to enrich the few who are successful and who buy low and sell high. This is not to say that I am a successful investor.

I often think that if I had invested all the money I have earned since I started to work in 1970 at just 5% interest per year, I would today be wealthier than by having dabbled all over the world in all kinds of assets.

...My principal concern remains that asset markets are quite stretched. The Euro is overbought, the US dollar is oversold, and American and other equities are by and large overbought.

Each time, the percentage of S&P 500 stocks above their 50-day moving average goes above 70%, a market correction follows which then brings down the percentage of S&P 500 stocks above their 50-day moving average to around 30%.

However, we should not lose sight of the fact that the current US administration and economic policy makers are desperate to engineer a recovery. And whereas such a recovery will largely bypass the average household in the US, money printing and ever increasing fiscal deficits are likely to further boost some assets such as equities and precious metals. In my mind the US government is determined to make cash unattractive through zero interest rates now and later through negative real interest rates (short term interest rates below consumer price increases). Therefore, following a correction, I still expect equity prices to move higher as money flees cash deposits and moves into more risky assets.

Consequently, I still like precious metals, oil, and mining and related stocks. But also in this asset class I expect a correction short term. The Baltic Dry Index has recently been very weak and oil and copper prices seem to have rolled over.

One last comment: I would become more concerned about stocks having made a high for the year if the S&P 500 fell in the period directly ahead below the early September low at 992!

(Add-on: Methinks Mr. Faber likes Mr. Elliott. -AM)

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