Toshio Masuda

Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder No.511

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"Straight from the shoulder " by Toshio Masuda March 2, 2009
( Free of charge to the people I met)

The Lower the Fundamentals, the Higher the Market Upside

The fundamentals of the United States economy today are worse than they were in 1929, the year that the Great Depression began. Last week, for example, New York stock prices dipped to their lowest level in some 12 years, easily falling below the previous nadir attained last November 21. This development spelled collapse for the myth that investing with a long-term vision of 3 to 5 years, and thus avoiding the pursuit of shortsighted gains, is a hands-down key to making money. Faced with such a stern outcome, it makes perfect sense that American investors would also feel the urge to pull their money out of the stock market. Buffeted by a storm of negative information, day in and day out, it is also hardly surprising that share prices remain in the doldrums.

I recently stated my belief that: “The only time the market is truly correct is the instant that it shifts from a sellers’ to a buyers’ market.” Right now, the daily movements on the New York market may be described as a search for “rock bottom.” In this sense, the major source of interest for all investors is just when that low will be reached.

With investors cashing out market positions and leaving those funds in liquid assets, the propensity to save is rising in inverse proportion to stock prices. In short, consumers are begrudging themselves the luxuries in life in favor of toning down their standard of living. The combination of the rise in savings and the curbs on consumption naturally sends spending into retreat, with the GDP continuing to follow a downhill curve. This naturally prompts the question of just when the market can be expected to stage a turnabout.

The answer to that, in layman’s terms, is, “When the stocks being sold off dry up,” or, “When there is no further room to trim the household budget or otherwise cut back. In view of the prolonged slide in market volume that has come to pass, the type of massive sell-off seen last November is highly unlikely to be repeated. With U.S. society being so dependent on automobiles, the rise in the price of crude oil to a peak last year of $147/barrel (and corresponding pump prices far above $4/gallon) forced many Americans to the practical limits of any further lifestyle belt tightening.

As we know, however, this peak was followed by a dramatic reactionary plunge in the barrel price of crude, with gasoline now available most everywhere in the U.S. for around $2/barrel. That has providing a bit of breathing room on the income front, sparing Americans the dire fate of being forced to the true brink of bare subsistence living.

Before long, though, the jobless rate in America is projected to climb above 8%, with that likewise threatening to push the average standard of living to the limits. Ironically, therefore, staking hopes to a renewed stream of bad news is about the only reliable road to any meaningful rise in stock prices. The latest U.S. unemployment data will be announced this week. In my view, a figure of 7.8 to 7.9% should be considered a “buy sign” for the market.

On the verge of a market reversal, therefore, a severe recession may be just what the doctor ordered to score some handsome portfolio gains. I would advise my readers, therefore, to consider the option of taking advantage of what could very well turn out to be a historic market rebound.

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Written by Toshio Masuda