This is an eye-opener. Whenever I talk about the Great Depression and compare it with what is going on today, I get a lot of skepticism. I hear a lot of people say, definitively, “This isn’t as bad as the Great Depression.”

What you have to remember, though, is the Great Depression unfolded like a train wreck in slow motion. It took awhile before it became the Great Depression. It wasn’t like someone flipped a switch and poof! — bread lines, Hoovervilles and hobos.

Another point to remember is that the Great Depression was a global economic event. It wasn’t just confined to the U.S. You have a take a wide-angle view of the global economy to get a better sense of the breadth of the slump. And so it is today.

Take a look at the next few charts, from economists Barry Eichengreen and Kevin O’Rourke. The first plots world industrial output from June 1929 against industrial output from April 2008:

We’re tracking that path pretty closely.

Then there are world stock markets:

We’re actually worse off right now.

Finally, take a look at the volume of world trade:

Again, here we’re actually ahead of the pace set in the Great Depression.

There are several other charts, but I think you get the point. Eichengreen and O’Rourke conclude:

“To summarize: The world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the U.S. leads one to overlook how alarming the current situation is even in comparison with 1929-30.”

Even so, there are many differences between now and then. One big difference that doesn’t get much play is the fact that today we have large emerging economies such as China, India, Russia and Brazil.

Investment strategist Murray Stahl, in a recent letter, pointed out “the most important difference between that era and this era, which is the robust economic development of China, India, Russia and Brazil. During the Great Depression, those nations were in the opposite condition.”

China was in the midst of a civil war and then had to fend off a Japanese invasion. India wasn’t even on the economic map as anything of any consequence. Russia was backward and militantly communist. And Brazil had all kinds of political problems, including trying to put down a communist movement.

Today, those four countries are in much better shape. They are much larger and are still growing.

There are many more differences, and I don’t expect what we’re going through to play out like the Great Depression, except maybe in some of the broadest outlines. This is, or will be, known as the greatest crisis the world has faced since the Great Depression.

How it is similar is also in some of the valuations in individual stocks and securities. As Stahl writes, we share with the Great Depression the “bizarre valuations on highly liquid securities in the world capital markets [such] that I have never before seen in my 30-plus years of investment practice.” In that, there is opportunity.

As I’ve written before, I think there is room for investing even in a weak economy. There are lessons we can learn from the Great Depression. Some stocks will do better than others. I expect the needed commodities that fuel those big emerging economies will be good places to be.

And these hard assets also provide some protection in a world where paper currencies are not likely to hold their value as cash-strapped governments around the world crank up the printing presses.

Sincerely,
Chris Mayer

June 30, 2009

Depression Then and Now: Three Eye-Opening Charts was originally featured in the Penny Sleuth.

1. A double bottom with a shake out low.
2. A First Thrust Up

In order to give you a clue as to what these look like and what to be on the lookout for, below are a few examples in multiple time frames and frequencies. First up are the market lows of last week in a four-to-six day, one-minute time frequency.

The chart above is super historical! It’s the Great Depression lows. As you can see, the crash of 1929 was not the problem. It was the ensuing bear market that followed — that was where the real wealth destruction took place. Sound familiar? What you’ll really notice was that the market did not truly bottom until it formed a 1ST Thrust Up, then an eight-month Pullback Off Highs (POH)! Now let’s fast forward to the bear market of 2000…

The chart above is also historical. It’s a bear market we’ve all lived through — the Tech Bubble Bear Market of 2000- 2003. Look familiar? Again, you did not get your true lows until you got the First Thrust Up, then the Pullback Off Highs (POH). As you can see, this particular POH lasted four months. (Note: The crash of 1987 also showed this pattern.)

Now that you’ve seen a few key historical market bottoms and what the technicals look like, you’ll never have to listen to the talking heads on TV telling you what they think.

With this said, a retest of the lows by the market in the coming week will set up a boatload of issues on the longside and our final lows of the first leg down of this monster bear market. Then we get a reprieve of a decent time duration and a bear market rally.

Sincerely,
David Grandey
AllAboutTrends.net

March 16, 2009

How to Spot a Market Bottom was originally featured in the Penny Sleuth.

Cycles are an inseparable part of the landscape of markets. Fortunes are often made in the valleys. I was thinking of this after I read several obituaries of Trammel Crow, who died this month. He was a guy who saw many booms and busts over his 94-year life.

Trammell Crow was a big-time developer and died a rich man. The Wall Street Journal once described him as “America’s biggest landlord.” His firm, Trammell Crow Co., estimates it built some 500 million square feet of real estate space. But it was a long road to get there from humble beginnings. His life is one of those great American success stories.

Unable to attend college because of the Great Depression, he took a number of odd jobs, including plucking chickens and unloading boxcars. Eventually, he landed a job at a bank, and then studied to become a public accountant. By 1938, at the age of 24, he was the youngest CPA in the state of Texas.

After World War II, he got his first experience in construction building grain elevators with Doggett Grain. Eventually, he managed to build his first warehouse with a partner and leased it to Rayovac Battery Co. It was his first real estate success. He was on his way.

There would be good times and hard times on this journey. The 1970s downturn nearly bankrupted him. But it didn’t take out any of his risk-taking nature. “I once heard it said that the cat that is burned on an oven range will never touch a hot one again,” he said in a 1980 interview. “True enough, but that cat won’t go near cold ovens either. The same is true for business. Failures that transform a businessman into a super-cautious individual can cripple.”

I also remember Trammell Crow from my career in banking. I started out banking when I was 22 years old. I remember working with a senior lender on a deal to finance a big real estate project. He pointed out that we had to be sure we liked the collateral because the developer might toss us the keys, like Trammell Crow. I must’ve had a somewhat puzzled look on my face because the lender asked me, “You know who Trammell Crow is, right?” And he asked it in a way that you might ask someone today if they know Barack Obama.

I honestly can’t remember what my answer was. I remember the embarrassment of not knowing who he was. Yet he was among the most famous developers in the country. A 22-year-old always thinks he knows more than he does. It’s one of those things.

Anyway, the senior lender was referring to a well-known episode Trammell Crow had with his bankers. He basically tossed a bunch of keys on the table on told them they could either give him new terms on his mortgages or take the keys. They reworked terms.

Old Crow was an American original. He left quite a legacy, and not only in the millions of square feet of real estate and the fortune he leaves behind. Many talented people came out of the Trammel Crow ranks and went on to become major real estate players. He had a huge influence on the industry.

Until next time,
Chris Mayer

January 26, 2009

Trammel Crow: Lessons in Real Estate Investing was originally featured in the Penny Sleuth.

“That evening, I received a phone call from him to look at my car and that ‘it’ would happen to me if I didn’t pay up.”

The next day, the woman received another call, this time from her brother-in-law who had been using her car. He told her that a bomb had blown her car to bits.

This is not a scene from a classic mobster movie. This story is, in fact, a true account of a 1960s loan shark case in Yonkers, N.Y. The woman – who remained unidentified in news reports – told just one of the many horrific stories about threats and violence used by infamous loan shark rings throughout the country.

Many of the stories involve physical harm, irrevocable monetary problems and even murder. Luckily, we don’t hear of these types of cases anymore. With other financial options opening up over the last several decades, the need for loan sharks has put many of these criminals out of business for good.

A Painfully Dismal 2009 Forecast Uncovers a Profitable Opportunity

Millions of people all over the world are facing tough financial times these days. All the pundits have compared this economic downturn to the Great Depression. And yes, there are some similarities.

Economists expect unemployment will reach between 8.5-10% in 2009. The only stock market to post a gain last year was Tunisia – a small North African country. Mega players like the UAE and Iceland were all but wiped off the international investment stage.

Home foreclosures are expected to reach an all-time high this year, which will only add to the unbelievably high rate of homes for sale. Prices are still crashing – currently sitting about 35% below a year earlier.

Credit is nearly frozen. Banks and credit card companies alike are buckling down and leaving very little money free to loan out – even with the drastic actions undertaken in Washington.

We aren’t writing this to shock you. But you have to understand how bad it’s getting for some families. Bills don’t go away when the economy turns sour. And many people will need to turn to short-term lenders to get through these tough times.

The Solution to Millions of Americans’ Financial Problems

Many view payday loan shops as corrupt, greedy modern-day loan sharks. That’s simply not the case. These payday loan companies are providing a needed service. And as today’s current economic situation worsens, payday loan shops are cashing in.

No one likes to hear of families being turned out of their houses because of missed mortgage payments. Cash advance businesses offer a solution to these millions of families. Instead of eviction, one solution for a working family is to take out a short-term seven- or 14-day payday loan. Obviously, this is the last option. But faced with foreclosure, it’s becoming a more frequently used solution for many who never thought they’d be in that position.

Families facing foreclosure aren’t the only ones running to cash advance stores. Many are taking out payday loans to fund unexpected expenses. With more families living paycheck to paycheck than ever before, even paying for the basics is becoming difficult. Electric, telephone and grocery bills are becoming huge hassles for many.

In our newest issue of Penny Stock Fortunes, we’ve found one company that has its hand in many essential services that millions will inevitably look to over the next 12-18 months. This business is a key player in payday loans, check cashing, and money transfers. You can learn all about this great penny stock play by clicking on the link below to sign up for Penny Stock Fortunes…

Sincerely,
Jim Nelson

January 16, 2009

Profiting from Payday Loans in 2009 was originally featured in the Penny Sleuth.

Well, let’s just take one last peek at 2008, since the final score card is in. As bad as 2008 was, it was not the worst year on record. The Dow fell 33.8%, securing the third worst spot, behind the 52.7% drop in 1931 and the 37.7% drop of 1907 vintage. As for the S&P 500, which dates only to 1923, it too recorded its third worst year, with a 38.5% drop, just ahead of 1937’s 38.6%. The worst year for the S&P 500 was also 1931 — a 47.1% drop.

But there is always a sunny side…

That’s the way Phil Carret looked at things. Born in 1896, Carret (rhymes with “hurray”) was one of the more inspiring and successful investors of the 20th century. In the pit of the Great Depression — 1932 — Carret decided to start his own mutual fund. Yes, a quarter of the work force was out of work. But that left three-quarters working. And the Dow did lose 52.7% of its value in the prior year, but that meant that 47.3% remained.

Carret’s Pioneer Fund went on to compound shareholder capital at a rate of 13% annually for 50 years, despite slogging through losses in the early going. After he sold it, Carret managed his own money and private accounts. He was the great endurance man of the investing world, its Lou Gehrig or Cal Ripken.

John Rothchild discusses Carret’s exploits in The Bear Book: Survive and Profit in Ferocious Markets. Even at the age of 100, he put in a normal work week. He was a Wall Street marvel. He was 70 before cable TV or personal computers even came along. He was 85 before Microsoft was a public company. He remembered the triumph of Harvard’s undefeated and untied season in 1913, because he was there.

Carret played through all the great booms and busts of the 20th century. He remembered 1929. He remembered how no one saw the Great Depression coming.

He was giving a speech in Rome on the day of the 1987 crash. “They all wanted to know what was going on,” he remembered many years later. “I didn’t know myself. I still don’t know.”

Old Carret was a cool hand to the end, always looking for the bright side. He turned very bearish on stocks in 1997. The Dow was 7,000. Asked if he was selling stocks, Carret said: “I’m not going to do anything about it in my own portfolio. If stocks go down, they go down. I’m 100 years old and due to conk out any minute. If I conk out at the bottom of a bear market, it would save a lot of estate taxes.”

Always looking for the bright side, indeed…

Until next time,
Chris Mayer

January 6, 2009

Phil Carret: The Pioneering Investor Who Always Looked on the Bright Side was originally featured in the Penny Sleuth.

We teeter closer to the sequel no one wants to see: Great Depression II. We got horrible news on the job front last week. Unemployment climbed to 6.7% as the nation lost another half a million jobs in the month of November alone. It was the worst rack of numbers in 34 years. One in 10 American mortgages is now either behind on its payments or in foreclosure.

Businesses are cutting back. Consumers are cutting back. Commodity prices have collapsed. The stock market is down more than 40% this year. When we close out the books for 2008, you’ll have to go back to the 1930s to find a comparable disaster for stocks in a single year.

So I find myself looking back at the 1930s often these days. What survived and what did not? The story of American Home Products is worth a quick look, as it offers one idea of what did make it — and winded up doing pretty well.

American Home Products was an anomaly in American business. Started in 1926 by a group of businessman long since forgotten, AHP was a maker of household products. It started out as a true small cap and grew quickly through acquisitions. Nothing so unusual about the tale so far. After all, the second great merger boom in American business took place in the 1920s. The period gave us many names we still know — including General Motors.

But AHP was unusual in two respects. First, it continued its acquisition spree through the Great Depression when everyone else was battening down the hatches. It could do this because its finances were top-notch and its earnings power robust. Ben Graham, that great old investment writer from long ago, gave AHP a mention in his 1940 edition of Security Analysis. He gives us an appendix with the stock prices, earnings and dividends of AHP from 1929-1939.

AHP was not immune to the Great Depression, whose effects linger on its financial record. But the stock never came close to reporting a loss. Peak earnings of $5.49 per share in 1929 fell to $3.93 in the depths of 1932. It recovered by ‘39, turning in $5.23 per share.

Investors who held it through the Great Depression did all right. The stock price bounced all over the place, as you would expect. It hit a high of $86 in 1929 and a low of $25 in 1932. But by the late 1930s, it was still humming along in the $50s and would hit $60 per share in 1939.

All the while, it paid its investors nice dividends — a total of $34.35 over the decade. Considering what happened to the rest of market, and keeping in mind the dollar held its value better then, you would’ve been happy to park some money in AHP that decade.

There is a second trait that marks AHP as an anomaly: It bought businesses in unrelated industries. It owned firms in floor wax, coffee, oil, cheese products, insecticides and much more. It was the early model of a conglomerate. In this, AHP defied the wisdom of the times, which consolidated related business. It was the age of General Motors and General Foods and International Harvester. Big empires built in one industry. But perhaps AHP’s diverse platform helped it weather the Depression better than if it had only a floor wax business.

So here we have a model of survival in the worst of times. AHP was a well-financed business that did more than one thing. It was an opportunistic business in the best sense of the term. It bought firms when and where they were cheap, without regard to the lines that divide industries.

Well, maybe the conglomerates of today will also fare better in today’s harsh climate. We own quite a few of these kinds of businesses in our Capital & Crisis portfolio. You can join my readers and check out these stocks while they can still be had on the cheap.

Until next time,
Chris Mayer
December 9, 2008

Conglomerate Stocks: The Great Depression Success of American Home Products was originally featured in the Penny Sleuth.

What follows is some shoptalk gathered at a recent investment conference in Hollywood, Calif., that reinforces these three principles. Let’s start with lessons from the Great Depression…

The Great Depression was a terrible time to own stocks. During the entire span from 1929 to 1939, stocks delivered a negative return. Small-cap stocks were hit the hardest, losing more than 5% a year on average. Bonds were the only place to hide, scratching out a relatively robust 4.7% per year.

Or maybe not…

Two great investors, Robert Rodriguez and Steve Romick, both money managers at First Pacific Advisors (FPA), show that a little discipline — a little attention to prices paid — would have given you good returns, even in the Great Depression.

They show that waiting just two years — until 1931, instead of 1929 — turns negative returns to positive ones. Suddenly, small-caps beat out the alternatives.

Between the market lows of 1931 and 1939, small-cap stocks outpaced bonds. And if you factor in the deflation that occurred during the 1930s (as opposed to the inflation that we all know), small-caps delivered an even more impressive result. Because the 1930s were a deflationary time, a dollar in 1939 bought more than a dollar in 1929. If you factor that in, the real return on small-cap stocks was 9.2% annually during the Great Depression.

Rodriguez and Romick are not market-timers. They are stock-pickers. They buy stocks when they are cheap. They hold onto them. So their basic message is simply this: Stick with buying cheap stocks. You can still earn good returns even in a lousy market. If you could buy all small-cap stocks and get a 9% annual real return during the Great Depression, think what a stock-picker could have done by just sticking with the cheapest stocks in a friendlier investment environment.

Stock-pickers are a minority these days. As James Montier, a researcher at Dresdner Kleinwort, recently observed, “Stock-picking has become a minority occupation. But if no one else wants to be a stock picker, then this is, most likely, where the opportunity lies.”

The second part of Rodriquez and Romick’s presentation had to do with patience. Investors, as a group, are not patient. They flip stocks too often. They sell when prices fall and buy when prices rise. The fund flows into (and out of) Rodriguez’s own fund offers a classic example of how most investors behave.

The FPA Capital Fund, run by Rodriguez, has been one of the best mutual funds in the business for about two decades. Through 2005, in fact, it was the best-performing mutual fund over the past 20 years, beating the market by a sizable margin.

In 2006, the fund slipped a bit and lagged the market. Despite Rodriguez’s two-decade-long performance history, some investors actually pulled money out of the fund. The fund lost 8.6% of its money under management to redemptions in the first quarter of 2007 alone. This has happened before. When the fund lagged the market in 1999, it lost 15% of its assets due to redemptions. In the following year, it lost a whopping 25% of its assets from redemptions. The fund subsequently beat the market by 35 points in 2001.

The FPA Capital Fund’s experience illustrates a classic case of investor impatience. There are several studies out there that show the average investor actually earns returns less than what mutual funds report. Why? Because the average investor tends to take his money out at bottoms and invest it near tops.

The typical investor trades too much. Again, Montier, commenting on empirical research exploring the link between turnover and performance, wrote: “Unsurprisingly, those funds with the highest turnover deliver the worst performance, while those funds with the lowest turnover do the least damage to net risk-adjusted returns.”

So the lessons to take from Rodriguez and Romick’s presentation are twofold: First, pay attention to the price you pay and you can make good returns, even in a bad market. Second, don’t chase past returns. Instead, be patient with your investments and give them time to bear fruit.

Lastly, focus on your best ideas…

Zeke Ashton is on nobody’s list of great investors — at least not yet. But he is a rising young star. His presentation brought home another trait that successful investors have: They tend to focus their money on their best ideas.

Again, research supports the idea that the best-performing investors concentrate on their best ideas. The average mutual fund owns 128 stocks. Among the top 25% of all funds, the average is only 63 stocks. The bottom 75% own over 140 stocks. In short, the best investors own fewer stocks. As Ashton said, “The goal for all investors should be to get the most value out of your best ideas without risking significant capital loss if you are wrong.”

What makes a great investor is endlessly fascinating to me. I love to study how great investors play the game. Doing so also helps reinforce good investing habits. Sometimes, these habits are relatively easy to copy: pay attention to price, trade less and focus on your best ideas.

Sincerely,
Chris Mayer
October 29, 2007

P.S.: I use these principles when I look for investment ideas for my Capital & Crisis readers. It has paid off. I’m not saying that I pick them any better than Rodriguez or Romick, but I’ve had my share of big gainers. In fact, I just had one just last month go for a 230% gain. I will soon be giving my readers some serious ideas from my trip throughout India.

Investing in Bad Markets was originally featured in the Penny Sleuth.