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Harry Newton's In Search of The Perfect Investment Technology Investor.

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9:00 AM EST, Wednesday, January 7, 2009: I'm getting "buy signals" for the stockmarket from all manner of newsletters, including Fred Hickey's normally ultra-bearish High-Tech Strategist. Hickey's calling it a 1930-style Little Bull Market," which," he says, "could occur with the enthusiasm surrounding the new Obama administration."

Timing stockmarkets ranks right up there with reading tea leaves. You could easily argue that this bullish call is too late. The market's already up 20% from its November lows. This chart plots weekly movements.

This chart plots daily movements. You can clearly see the rise since November.

There are other indications. For example, oil, which spiked last July at $145 a barrel before plummeting around 79% to just over $30 in December, has come back sharply, too. On Tuesday, it traded as high as $50.47, closing at $48.58 a barrel. It's up over 40% from its low.

There is a raging debate about this being a Sucker's Rally. It's hard to avoid the lousy continuing news. When the economy goes awry and earnings drop, you simply can't have a sustained long-term market rally. An example from today's Wall Street Journal,

Alcoa to Cut 15% of Work Force, Unload Assets. Alcoa Inc. announced the elimination of about 15,000 jobs, more plant closures, plans to sell assets and a 50% cut in capital expenditures to contend with the sustained recession.

Meanwhile Nouriel Roubini, the famous Dr. Gloom, predicts in his RGE Monitor. (The logo is the best part):

We believe the U.S. economy is only half way through a recession that will be the longest and most severe in the post war period. U.S. GDP will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last close to two years.

One last look at 2008 will reveal a very weak fourth quarter with GDP growth contracting -6%, in the wake of a sharp fall in personal consumption and private domestic investments. We see the real GDP growth contraction playing out through the year as follows: Q1 2009 -5%; Q2 2009 -4%; Q3 2009 -2.5%; Q4 2009 -1%, adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009.

You have to ask yourself, "Will Obama's massive upcoming trillion dollar deficits save the economy and cause the stockmarket to boom?"

Hickey writes and I agree with him:

I'm not a believer in the theory that massive amounts of government debt-driven spending can simply replace the loss of consumer spending, allowing the U.S. economy to go merrily on its way.

In short, I'm skeptical and largely in cash. However, I am intrigued by Cramer's suggestion last night that China has its economic stimulus act together a lot better than the U.S. China is pumping jobs. The U.S. is pumping failed financials. Cramer suggests buy the China EFT called FXI.

A happy story. Yesterday's email exchange with my dear old friend:

Buyer: Bought the gun business Nov 1st - did $1 million in sales in 38 days. Average sale is $406. You should have bought in!

Harry: I'm seriously happy for you. I'm glad it's working out. How did you end up financing the business?

Buyer: I had one helluva time finding money, as you know. There wasn't a lender anywhere that would buy in. I sold everything I owned, shoes, cars, horses, jewelry, children, etc. to come up with a down payment. I borrowed $50K at 20% interest as part of the down money, so that'll be the first money that gets paid off. I had a neighbor come in for 20% which left me with 80% so it's a great deal for me. The Seller graciously took back 50% of the financing which is what made it work. I'll have him paid off in 9 months and then it's mine. It's amazing the laws that won't let us ship ANYTHING to NYC so I can't even arm you, sorry.

Endemic mistrust is what we now face. Jim Surowiecki is a favorite writer. He writes in the New York. His latest piece is excellent:

Cheat, Pray, Love
by James Surowiecki January 12, 2009

Along with slashed payrolls, rising foreclosures, and plummeting stock prices, 2008 brought another unwelcome development: a surge in bank robberies, which were up more than fifty per cent in New York. This wasn’t shocking: we typically expect property crimes to rise in hard economic times. There is, though, one crime against property which bucks this trend: defrauding investors. On Wall Street, fraudulent schemes tend to thrive during economic booms, and to blow up when times turn tough. While bank robbers are getting busier, the Bernard Madoffs are starting to get caught.

Madoff is just the latest in a long line of fraudsters who took advantage of investor euphoria. Time and again, as asset markets have become frothier, fraud has flourished. During England’s South Sea Bubble, in 1720, a host of bogus joint-stock companies arose, including one that described its enterprise as “nitvender,” or the selling of nothing. The boom of the nineteen-twenties featured men like Arthur Montgomery, who ran a Ponzi scheme promising investors four-hundred-per-cent returns in sixty days, and the Match King, Ivar Kreuger, who sustained match monopolies all over the world with forged bonds and doctored books. More recently, the stock-market bubble of the late nineties gave rise to enormous frauds at companies like Enron and WorldCom.

Fraud is a boom-time crime because it feeds on the faith of investors, and during bubbles that faith is overflowing. So while robbing a bank seems to be a demand-driven crime, robbing bank shareholders is all about supply. In the classic work on investor hysteria, “Manias, Panics, and Crashes,” the economist Charles Kindleberger wrote that during bubbles “the supply of corruption increases . . . much like the supply of credit.” This is more than a simple analogy: corruption and credit are stoked by the same forces. Cheap money engenders a surfeit of trust, and vice versa. (The word “credit” comes from the Latin for “believe.”) The same overconfidence that leads investors and lenders to underestimate the risks of legitimate investments also leads them to underestimate the likelihood of fraud. In Madoff’s case, for instance, his propensity for delivering inexplicably consistent returns month after month should have been a warning sign to his investors. But in the past few years besotted investors were willing to believe lots of foolish things—like the idea that housing prices would just keep going up.

An oversupply of credulity doesn’t last, of course; when the crash comes, and people get more cynical and cautious, the frauds are exposed. As Warren Buffett put it, “You only learn who’s been swimming naked when the tide goes out.” Did the share prices of Enron and WorldCom start plunging after their fraudulent actions came to light? Actually, it was the other way around: the financial mischief was exposed only after their stock prices tanked. In Madoff’s case, the steep across-the-board decline in asset prices curbed investors’ appetite for risk, so that many started to pull their money out. That effect may very well have forced Madoff to dispense more money than he could keep bringing in, especially since recruiting new investors, which you have to do to keep a Ponzi scheme going, would have become harder after the crash.

When the Madoff scandal erupted, some people argued that investor confidence would be further shaken—that the scandal would make America’s markets look more like Russia’s, notoriously rife with scams and suspicion. That hasn’t happened. After the Madoff story broke, the market jumped almost five per cent, and it’s now well above where it was when Madoff was arrested. One reason is that a stock market that lost seven trillion dollars in value in 2008 knows how to take a fifty-billion-dollar loss in stride. And Madoff was running money largely for an élite clientele, which gained access to his services primarily through inside connections, limiting the market-wide impact of his malfeasance.

But the main reason that Madoff didn’t destroy investor confidence is that it was already gone, thanks to a year when just about every institution that the market depends on—rating agencies, accounting firms, regulators, Wall Street C.E.O.s.—had messed up. The whole web of intermediaries and knowledge brokers that modern asset markets have come to rely on has become frayed. That helps explain the current credit crunch—bank lending has dropped fifty-five per cent this year—and the dismal state of the stock market. Discovering what the crooks have been up to is disillusioning, but not as disillusioning as coming to terms with what the so-called honest people did.

In David Mamet’s movie “House of Games,” the grifter played by Joe Mantegna explains to a former mark, “It’s called a confidence game. Why? Because you give me your confidence? No. Because I give you mine.” So the bankers gave us their confidence, in the form of mortgages and other forms of credit, and we gave them ours. This culture of credulity did plenty of damage to the economy, but now it has given way to something even more corrosive; namely, endemic mistrust. Because if there’s one thing worse than too much confidence it’s not enough. Fraud impoverishes a few; fear impoverishes the many. As long as mistrust prevails, people will keeping pulling money out of the system—sometimes even at gunpoint.

The barber shop.
A young boy enters a barber shop and the barber whispers to his customer, "This is the dumbest kid in the world. Watch while I prove it to you."

The barber puts a dollar bill in one hand and two quarters in the other, then calls the boy over and asks, "Which one do you want, Son?"

The boy takes the quarters and leaves the dollar.

"What did I tell you?" said the barber. "That kid never learns!"

Later, when the customer leaves, he sees the same young boy coming out of the ice cream store and says; "Hey son! May I ask you a question? Why did you take the quarters instead of the dollar bill?"

The boy licked his cone and replied, "Because the day I take the dollar, the game's over!"

The Imponderable
A little boy says to his mother, "Mommy, how come I'm black and you're white?"

His mother replied, "Don't even go there! From what I can remember about that party, you're lucky you don't bark."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.