Thursday, April 29, 2010

Are we going into a double dip recession? How am I supposed to know?

Does it matter? Has the Easy Money been made? Whine, whine, and whine!

Ok, I’ll give you all the answers. And I will of course be correct until the day that I am wrong. So take it for what you think it is worth. But I don’t think we are going into a second recession. On the contrary, I am predicting a next high for the TSX to be... 18,000-19,000 and we will reach that in 3 to 4 years. After that we will crash to about 11,000 and everybody will say this is the worst they have ever seen and that the world is coming to an end. The bankers and politicians and the speculators should be shot and blablablablabla.

Look at the TSX graph below (B.T.W. the Dow doesn’t look that different). B.T.W do you know what B.T.W. means in Dutch? Yes of course, ‘Belasting Toegevoegde Waarde’! You didn’t know that? Well here you read it first! The B.T.W. in Holland is Canada’s G.S.T. Now that is funny! (for an investment geek like me).

So look at all those ‘Bubbles’! If you had a magnifying glass, you may recognize October 1987, the ‘Worst Crash Since The Great Depression’. Oh, and the previous Worst Recession Since The Last Depression’ was 1982. You need a Electron Scanning Microscope for that one! Ready for some math?
  1.  Take the value from the 1982 low, the 1987 high and the October 1987 low. 
  2.  Take the value from the 1987 low, the 2000 high (yes there was a recession then) and low.
  3.  Take the value from the 2000 low, the 2001 high and the 2003 low
  4. . Etc.
Now calculate the average stock market fall from the high and increase from the low. Here are my results based on the median. The big surprise was the consistency of the loss from peak to trough (around 45%) and the increased value from the trough to the subsequent peak (145%). Right now, we have recovered 72% or so from the 2008 low. Darn, this is so easy, you don’t even need high school for this.

So when you step back from the ‘The End of the World is Near’, things seem to be more predictable, as long as one sticks to generalities. Can you predict exactly when to sell before the next peak? If you listened to Peter Lynch, you know you can’t. But you sure can have an idea as to when you would like to start taking profits and when to have cash on hand for buying during the next downturn.

See you don't have to be dead on. Remember, Bulls and Bears do fine, but Pigs get slaughtered. Why, because of the pigs' greed and fear; they want to buy as cheap as they can and sell it for the most possible. In real life, that is not do-able and the pigs tend to miss the boat or worse. But you can buy at the right price and take some profits when things become 'frothy'. Never forget this is a game for the long haul and the investor who panics is most likely to lose.

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