SLIPPERY SLOPE OF GLOBAL VILLAGE HOPE !

From the moment the House passed the Bailout Bill Friday, the Dow fell 470 to close at their lowest level since March 2007, reminding us that having money in the Blue Chips as been "dead money" for 18 months, now 28% off the year-a-go all time highs of 14,200. That number is -31% each for the S&P 500 and Nasdaq indices, which is more widely reflective of the "market" than the Dow. Since most your investments are not as diversified as these indices, you are probably down more than 31% in your investment and 401k's. Although most pundits will tell you that the average bear market in the past 100 years saw a drop of 28-34% so you should be buying here, that is a reckless argument. Just because the average bear was that number, the actual range of declines that are used to compute the average is much scarier than the average. Especially, the big ones in the 1930's, 1970's and early 2000's. Theses were periods when declines of 50% to 80% were common.

I'm hearing rationalizations like "if you think it's bad here, you should see Europe and Asia", which means we're relatively better than they are. But, if they decline 80% and we only decline 60%, is that tolerable? Not for me, which is why I've been on the sidelines with my safe money (CD's, money markets, and FDIC protected bank accounts) since summer 2005.

In case you missed it, California Govern-ator Arnold informed Treas. Sec. Paulson today that the credit markets are so stagnant that he'll need Federal assistance within a couple weeks to the tune of $7 billion to keep the biggest state in our country going. With many other states, counties, and cities in trouble, imagine the line up at the Treasury's door by the end of the year.

It's amazing that our government still hasn't admitted that we are officially in a deflationary recession, on the way to depression. Historically again, they'll do that within a few weeks of the ultimate bottom; finally admitting what we already know. Like I said in a blog post this week, when stocks, gold, silver, copper, crude, and real estate all decline together, that is deflation! When unemployment rises and payrolls plunge fall at the same time, along with government bailouts of the automotive and finance industries, that is recession. When they happen at the same time, that is the worst of all world: deflationary recession. And when it's a big one, like the 1930's in America, or the last 20 years in Japan, and many others in the past 100 years around the world, that is depression.

Action Steps: The "predictive" market theory used in our system has been preparing us for this decline for well over a year. It now tells us to expect a large corrective bounce higher to begin shortly, probably later in October. It's corrective because it will NOT come from the ultimate market low (unless there is an actual crash event in the next 60 days that brings the markets and economy to its knees), but from a trading low. This means that by the end of October/middle of November, with the Dow in the 8500-9500 range, the S&P in the 800-900 range, and the Nasdaq in the 1500-1700 range, a multi month oversold rally will arrive (sometimes known as the Christmas Rally) and "appear" to be the bottom. It will likely offer a very sharp rally and suck the ill-informed back into the markets, and/or convince the general public that "holding on" had once again paid off, and they've been saved again. To those that embrace it as a wonderful gift and look to lighten up on their losers below their break even levels, the gift will pay off.

The final market low will come in a few years when NOBODY wants to talk about stocks, own stocks, think about stocks, admit they own stocks, or be friends with anyone that does any of these. Like in the early 1980's, after 16 years of "net sideways" markets since 1966, including several 40-60% bear markets and several 60-100% bull markets, nobody admitted they owned stocks. It was all about CD's at 15-20% interest and buying real estate directly from banks for nothing down and just agreeing to make the payments. In 1982, which was the birth year for the bull market that advance the Dow from 700 to its 14,200 peak in November '07, very few Americans owned stocks. There were only a few mutual funds. It cost hundreds of dollars to buy a hundred shares of stock, unlike today's ten dollars per trade. There were no online brokers, discount brokers, or rich stock brokers. In fact, brokers were thought to be just below lawyers on the social pyramid (now barely above). You couldn't sell stocks to your grandmother who loved you unconditionally. That's how tough it was. Guess what? We need to get back to that to wash the system of the excesses that have built up in the past 26 years. When that happens, the best and last buying opportunity of our life time will present itself. Be ready.

Until then, if you are very nimble, objective, humble, saavy, and lucky, you can play many of the extremely violent up and down swings that are to come in the next few years in stocks, bonds, gold, silver, oil, euros, and maybe even real estate. Otherwise, get your money and mind ready for the gloomiest, hardest, scariest, toughest, and dangerous periods since The Great Depression. Will it get that bad? Who knows. But, unless you have certainty that it won't, isn't it better to be safer than sorrier?

Many will say that you can't afford to be out of the market, for when it turns higher, the big gains are made early. That is true of the past 26 years, when the greatest bull market in history was in it's final 26 years of it's 76 year life. But, if that great bull is finally gone, and we're in the correction of that entire move, then one year (since the 14,200 peak last Nov.'07) and only 28%-31% declines in the market averages is nothing compared to what it will take to correct the move from the 1932 Dow low of 39 to the peak of 14,200. The typical 50% correction will take the Dow to 7000. Since this was an "atypical" advance, logic would suggest that the correction needed will be atypical as well. My halucination points to 4,000-5,000 Dow, 500 S&P, and 500 Nasdaq. Like recent failures of WaMu, Lehman, AIG, etc., these stocks fell 50% per week from the time new investors bought in. If you bought WaMu because it was cheap on July 7 at 5.50, it was 3 by July 14. If you bought it at 3 because it was cheap, it was 1.50 by Sept. 14. If you bought it at 1.50, it was 50 cents by Sept. 25. If you bought it at 50 cents, it was 11 cents by the next day. There is always a way to get a 50% haircut on the way down. Those of you that were in the market during the Dot.com bubble burst, you know that you thought microsoft, yahoo, amazon, ebay, and all the others were cheap on their paths down from $100 or higher to $10 or lower from 1999 to 2003. Our human brains have enough trouble with arithmetic advances or declines, but very few of us can plan and execute in environments of geometric advances or declines. Know your strengths and weaknesses, and avoid situations where you are untrained or weak.

If you don't agree with me, that is okay. If you want to prove me wrong, just keep your funds in the markets for the next 3-5 years and invite me for coffee November 2012. If I was right, I'll buy, otherwise I'll need you to buy.

For what it's worth,

Ken