The kingdom praises its king
All the kings’ horses and all the kings’ men are trying so desperately to put the nation back together again. In an action packed Tuesday, we started the day with testimony from the Prince (of darkness), Ben Bernanke, preaching the virtues of the capitalist system, and how it will overcome a decade of over-indulgence, greed and gratuitous consumption by peasant (if they weren’t then, they are now) and nobleman alike. The main part of the speech was a declaration that the government does not want to takeover the banks. Certainly excellent news to all, and particularly the stock market, as it staged a strong rally. The market feels that he is doing all he can and that he is being honest. That goes a long way. As I said last week, it certainly feels like Geinther is not giving us the whole truth.

The evening brought us an encore presentation from the King himself, sermonizing the caliber and righteousness of the American way, and how we will regain our strength. Welcome news to Americans who have been overwhelmed with negativity and pessimism. As I walk through the Denver airport I see the headlines of practically every paper: “We Will Overcome”. This is true, we will overcome this crises and a new Bull Market will emerge from the ashes, as hard as it may be to believe at the moment. The first step is optimism as it will lead to confidence. What did investors think? The market responded by dropping to new lows by weeks end. It’s clearly time to tell us the truth about how bad it is, and what it will take to fix it.

One thing is for sure is that the world situation is worsening. The risks to European banks are at significant risk and rising fast. The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. That would be the equivalent of a US bank bailout package estimated to be in excess of $10-14 trillion. In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to of 50:1! That means the ability to nationalize their banks is simply not there.

Western European banks have been very aggressive in lending to emerging market countries worldwide, according to the IMF, they are 50% more leveraged than US banks. "The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world. Help is going to have to come from larger countries. But as these countries problems increase at home, how will they sell that to their own people. The day they decide not to save one of these countries it could trigger a massive crisis with contagion spreading throughout the EU.

This goodwill may in fact be the catalyst for a long overdue rally, which could be ferocious. The building blocks are in place, as the incredible pessimism and bearishness is often the launching ground for strong rallies. It does appear that just a good bit of news could send the market soaring. Even Robert Prechter, the perpetual perma-bear has said as much. But how low do we go first.

When we do finally rally, will it be the beginning of a new Bull Market? Don’t throw caution to the wind just yet. The demographic challenges we as a nation face, as the baby boomer ages and spends less, which I discuss in depth in my original Economic Tsunami special An Economic Tsunami Lies Ahead – How to prepare for this perfect storm (Feb. 2008), will continue to have a dramatic impact for several more years. The housing crises is expected to worsen and the banking crises appears to still be in an early stage. Now we have Europe becoming a major risk to undermining a recovery. Considering the global nature of trade and banking, this could be significant. Simply put, new bull markets are typically characterized by strong, sustained Demand, not buying in fits and starts. Consequently, while a rise in Demand in the days ahead could lead to a substantial bear market rally, possibly even matching the advance off the Nov. lows, such increased buying, after last weeks weak follow-through, would be insufficient to indicate a new bull market is underway. Weak buying on any rebound rally, however, would most likely result in a very short-lived rebound leading to a quick retest and possible violation of the recent market lows.

What is the strategy you ask?
Back to the Basics baby. “Buy and hold” with "Stocks for the long run" has been weighed in the balance in Baby Boomers' retirement accounts all over the world and it has failed. The S&P 500 is now roughly where it was 12 years ago, although earnings in 1997 were higher than those projected for 2009. Ouch! A Tactical investment approach like our TDT™ Top-Down Tactical investment approach is designed for today’s difficult environment ting should be used over “buy and hold”.

Not understanding how to manage the risk of the stock market, or even what the risks actually are, investors too often buy high and sell low, based upon raw emotion. They read the words in the account-opening forms that say the stock market presents significant opportunities for losses, and that the magnitude of the losses can be quite significant. But they focus on the research that says, "Over the long run, history has overcome interim setbacks and has delivered an average return of 10% including dividends" (or whatever the number du jour is. and ignoring bad stuff like inflation, taxes, and transaction costs). . But for those of us in the Baby Boomer world, the long term may be buying green bananas.

Many investment professionals only have one tool. They live in a long-only world. If the markets don't go up, they don't make a profit. So, for them the markets are always ready to enter a new bull phase, or stocks are always a good value. That is what they sell, and that's how they make their money. What mutual fund manager would keep his job if he said you should sell his fund? Frankly, it is a tough world. The phrase I hate the most is “it’s not a loss until you take it.” Nothing is further from the truth. Be proactive with your finances. There are plenty of assets doing well. If you are not, get a 2nd opinion.

I hope I’ve helped you make sense of these crazy times. If you’d like to discuss how our money managing approach and our repair and recovery strategy can help you, give us a call.

Cheers –Keith
916-925-8900
www.keithspringer.com

P.S. Need a Speaker?
If your company, agency, professional or civic group would be interested in having me speak to them, I am available at no charge. I am a member of SOFA - Society for Financial Awareness, which is a 501C (3) non-profit speakers bureau that is dedicated to stamping out financial illiteracy. My educational workshops have been very popular given today's financial crises. www.sofausa.org. Check it out and let me know

Keith Springer is President of Capital Financial Advisory Services, a registered investment advisor, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith at
916-925-8900 or Keith@KeithSpringer.com