Money is a serious subject. It's the source of your family's future happiness or misery, depending on how carefully you handle it. Only someone with too much money they never made themselves can afford the luxury of treating the stock market as a form of entertainment, like a casino or race track. 

 

Consequently, when it comes to the financial media, those of us who understand the value of money dislike seeing the stock market portrayed with glitter, drama, and hyperbole. Financial news should not resemble entertainment news. Rather, money should be treated as seriously as cancer, war, or any other subject where lives hang in the balance. No financial reporter should speak except from knowledge and sober assessment.

 

This week, we take issue with some of the reporting on CNBC and other media outlets that have failed to take the current financial crisis as seriously as they should. 

 

No one at TCI watches CNBC – at least not during work hours. That alone is one reason we have consistently outperformed the market.  The moment you become as emotionally caught up in stocks as you would in a Hollywood musical, you're sunk.

 

Nonetheless, we know from acquaintances that in March 2000, when the NASDAQ first hit 5,000, CNBC held a celebration. That hype and euphoria prompted average investors to throw billions of dollars of hard-earned cash into a severely overvalued market. The NASDAQ eventually fell 80%, which means an index investor would have needed to make a 500% return after that just to break even. Considering that 10 years later the market remains well below its 2000 high, that's a lot of crushed dreams.

 

That should have been a lesson to everyone not to take advice from the financial media. But not everyone learns from experience the first time around.

 

A few weeks back, Jon Stewart did a hilarious interview and send-up of Jim Kramer, in which he pointed out some of the worst stock tips Kramer ever gave.

 

To be fair, Kramer's advice has been better than that of many TV personalities. From what we gather, his tips have performed more or less in line with most index funds. Unfortunately, people don't treat his advice like an index fund. Rather than buying every stock he tips in proportion to its market cap, they tend to go the whole hog on a few of his hottest stocks. One of those hot tips was Bear Stearns, and we all know how badly that turned out.

 

We aren't taking any bows for our performance during last fall's meltdown – we wish we had done better. But at least our Growth Portfolio beat the market substantially.

 

More recently, we have been alarmed by another piece of financial hype...

 

 

RECESSION'S END?

 

A certain reporter has recently been claiming with near certainty that the recession is over. We admit, we don't know his reaction to last Friday's employment number, but we doubt it forced him to recant.

 

Ironically, this reporter could have a point. The recession might be over. We can't say for sure. But so what? The end of the recession, whether it's now or next year, does not equate with the return of good times.

 

Consider that the recession of 1929 that led to the Great Depression actually ended sometime in 1932-33. Yet the rest of the 30’s were hardly good times. The Depression itself continued until the start of World War II, when economic growth hit the mid-teens.

 

Remember that the end of a recession simply means a shift from negative to positive growth. It doesn't imply strong growth. In fact, growth could be positive yet lackluster for years following a recession. Yet it will take a lot more than lackluster growth to rationalize the recent stock market gains.

 

By cheering for the end of the recession, we fear the media is again encouraging investors to make risky bets when the evidence does not justify them. If all we get is growth of 1-2%, the market will still struggle and could even retest the March lows.

 

This brings us to some important data released last week, just below the radar...

 

 

THE REAL STORY TODAY

 

Even more disturbing than the employment numbers is the fact that mortgage applications declined of late – both new purchases and refinancing. Banks remain very disinclined to loan money.

 

I personally know someone who has enough cash in the bank to buy his home outright. 

 

However, for tax reasons, he would rather refinance his mortgage. Despite his enviable cash position, his bank is insisting on very stringent qualifications before agreeing to a new mortgage. His business needs to be at a certain level of profitability, his income must be a certain level, etc. Clearly, the toxic assets remaining on banks' balance sheets are making them afraid to make loans. That's not likely to change quickly, even if the recession has ended. So the tough times may last for a while.

As for Friday's employment report, it speaks for itself. Regaining the 400,000-plus jobs lost in a single month will take more than just the end of the recession. It requires rapid growth. Yet, we see little evidence that rapid growth will break out anytime soon. 

 

Even achieving average growth of 3-4% may take time. The prevailing winds are against the 70% of the economy represented by consumers. Banks are unwilling to lend. Stimulus checks won't arrive next month. Unemployment will make many people curtail spending. So how can the stock market make real progress?

 

Rather, the gains we have seen in the market in recent months smell like panic buying. We see investors chasing high beta (riskier) stocks. No coherent groups have formed. It seems that people are simply trying to quickly recoup their losses, rather than invest for long-term growth. The danger is that another downturn could leave many investors with little in the way of retirement funds.

 

That's not a certainty, but it is a risk.

 

Our advice right now is that you turn away from any kind of market cheerleaders – whether they are CNBC, government spokesmen, etc. Instead, watch the employment numbers. Pay attention to how easy it is for friends to get a loan. That will give you a better idea of whether strong growth is taking place.

 

Eventually, growth will return – even if it means the end of the U.S. dollar as the world's reserve currency. Even if it means very high interest rates. And once the U.S. economy takes off, the emerging economies will grow that much faster, and resource-rich economies will soar. (Stocks in resource-rich, emerging economies may offer the best gains of all.) These have been the strongest economies so far this year, and will continue in this line.

 

We also continue to recommend commodities and gold. The only way out of our economic morass will be through inflation that will make these investments highly profitable.

 

If you see some positive development we've missed, do let us know. We're as desirous of a strong market as anyone. We certainly do not want to see people's savings suffer in any way. But we feel that today you should avoid the financial cheerleaders and focus on cold reality.

 

Until next time,

 

Stephen Leeb, Ph.D.

Editor

The Complete Investor