CMD Advisors

MARKET COMMENTARY
11/30/2009
___________________________________________
Back to the Future………………. 1938 - Continued
• Current market activity is very similar to what occurred in 1938.
• This suggests the market is very close to the final high for the current cycle.
• The markets should soon enter a gradual slide which lasts several years and
take the market back to the lows experienced in March of this year or lower.

===============================================================
Summary

In my previous report released back on March 9th I stated:

• “Current market activity is very similar to what occurred in 1938.

• This suggests the market is currently very close to the final low (within 5% or so)
for the current cycle.
• The markets should turn up with in the next month and will likely rise by more
than 50% before year end.”

All of these things have come to pass. March 9th was coincidentally the final low of the
bear market that started in 2008. As of November 25th, the S&P 500 has hit a high of
1110.63 up from 676.53 the closing low on March 9th or 64% from the low.

The March report suggested that the current period appears to be very similar to that of
1937-38 in terms of market behavior, which continues to be the case. Based on this
analysis, the market is unlikely to rise much further and may have already put in a peak
for this year and likely for several years to come. I expect the US markets to trend down
for the next few years through the spring of 2013 (3 ½ years). This will likely correspond
to a period of realignment of the US economy characterized by anemic growth. The good
news is that following this final low in 2013 the US market should launch into a new
secular bull market.

CMD Advisors Inc.

14 Thornhill Avenue, Toronto, Ontario M6S 4C4
cmdwight@gmail.com

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 CMD Advisors
MARKET COMMENTARY
11/30/2009
___________________________________________

1928 to 1938 vs. 1999 to 2009 the turn of this century and although the
official recession only lasted 6 months,
Many comparisons have been made the slow down lasted from
between the current economic downturn approximately 2000 until early 2003.
and the depression era. When looking at This slow down was accompanied by a
the markets, the depression is the right prolonged market slide that was very
comparison, however not the period similar to what happened from the 1929
following the crash in 1929. The market Crash through the first 3 years of the
behavior of 2008/9 has been similar to depression with the Dow (1929-33) and
the period of 1937/8. In fact, the market the NASDAQ (2000-2003) declining by
behavior of the current era has been more than 80%. While the Fed
closely mirroring that of the late 1920s succeeded in preventing a major
and 1930s since at least 1999. Chart I downturn in 2000 this was only achieved
below, running from October 1928 until through excessively loose monetary
March 1938 is overlaid with the policy and excess liquidity. This
NASDAQ market from October 1999 to liquidity extended the increasing build
March 2009 and shows the similarity of up of leverage that has been developing
the two periods. The NASDAQ is used through at least the last several credit
for comparison as both it and the Dow in cycles and is unsustainable long-term.
the 1920-30s were highly speculative
markets. As a result, the NASDAQ The 2008/9 recession which has rolled
during the dot com bubble would be the through various financial markets and
closest proxy for the period. the real economy has begun to deflate
the credit bubble. The Fed which has
Chart I attempted to prevent the deflation of the
5000
DJIA 1928-1938
500 credit bubble was unable to do so
4500 450
4000
NDX 1999-2009
400 through normal mechanisms; however it
3500
3000
350
300
did cushion the downside severity
2500
2000
250
200
through the extraordinary actions it took
1500 150 in concert with the Treasury Department
1000
500
100
50
and government fiscal stimulus efforts.
0 0
Unfortunately, this is likely to result in a
3/4/1929

3/4/1930

3/4/1931

3/1/1932

3/1/1933

3/12/1934

3/13/1935

3/11/1936

3/10/1937

3/8/1938

period of sub-par growth.

Similarly, a secondary slowdown

There are also economic similarities developed during the Depression in
with the Depression and the recession of 1938/9 and is sometimes referred to as
the early 2000s. Fed action however the “depression with in the Depression”.
prevented a repeat of the depression at This is also the time period when the
CMD Advisors Inc.
14 Thornhill Avenue, Toronto, Ontario M6S 4C4
cmdwight@gmail.com

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 CMD Advisors
MARKET COMMENTARY
11/30/2009
___________________________________________
term “recession” was coined. The gap
between the slowdowns in these two There has continued to be a remarkable
periods (1928-1938 and 1999-2009) was similarity during these two periods and
almost identical as was the market the decline of the S&P 500 (2009)
response, as is clear from Chart I. compared to the DJIA (1938) were
Interestingly, while the lack of an within 1% of each other when measured
adequate policy response resulted in a from their respective highs in August of
more severe downturn in the first three the previous year. In 1938, the market
years of the depression than occurred fell by 47.74% versus a fall of 48.17% in
from 2000 to 2003 the reverse was the 2009. Looking at the rebound from the
case in the second slowdown (1937/8 low, the 1938 market peaked on
versus 2008/9). Although the economic November 11th following a rebound of
activity of the US was significantly 60% from the bottom in March. It then
different in the two periods, market trended sideways for the remainder of
reaction was virtually identical again as the year. In 2009, the Dow has
shown in Chart I. rebounded by the 60% while the S&P
500 has rebounded by 64%.
…And the Correlation Continues
Where Does it Go From Here?
The similarity of the mid-1930s and the
last two years in terms of market action The natural question now is what is in
has continued. The following chart store in the future. The chart below
shows the markets’ performance in overlays the Dow (August 1937 to
1937/8 and 2008/9 with the market December 1945) with the S&P 500
bottoms in March of each year lined up. (August 2008 to the present).
In actuality, the market bottomed about
three weeks earlier in 2009 than in 1938 Chart III
(March 9th vs. March 31st) based on
closing prices. 1315 SPX-1938/45 190
1215 SPX-2008/9
170
1115
Chart II 1015 150

915 130
1315 SPX-2008/9 190
SPX-1938/45 815
1215 110
170
715
1115 615 90
1 2 /2 9 /1 9 3 7

1 2 /2 8 /1 9 3 8

1 2 /2 8 /1 9 3 9

1 2 /2 7 /1 9 4 0

1 2 /2 9 /1 9 4 1

1 2 /2 8 /1 9 4 2

1 2 /2 8 /1 9 4 3

1 2 /2 2 /1 9 4 4

1 2 /3 1 /1 9 4 5

1015 150

915
130
815
110
715

615 90
9 /3 /1 9 3 7

1 0 /1 9 /1 9 3 7

1 2 /3 /1 9 3 7

1 /1 4 /1 9 3 8

2 /2 8 /1 9 3 8

4 /1 1 /1 9 3 8

5 /2 4 /1 9 3 8

7 /7 /1 9 3 8

8 /1 8 /1 9 3 8

9 /3 0 /1 9 3 8

1 1 /1 6 /1 9 3 8

1 2 /3 0 /1 9 3 8

CMD Advisors Inc.

14 Thornhill Avenue, Toronto, Ontario M6S 4C4
cmdwight@gmail.com

3
 CMD Advisors
MARKET COMMENTARY
11/30/2009
___________________________________________
As you can see, if the correlation that
has been exhibited over the last year and
in fact back to 1999 continues to hold,
the picture for market returns is not very
good over the next few years. The
bottom of the market in April 1942
would correspond to a market bottom in
the spring of 2013. The low in 1942 was
below the low experienced in March of
1938. All this suggests a lot of pain
remains in store for investors as the
market rolls over and grinds lower.
During the current market cycle we have
not gotten to levels that usually signal a
final capitulation by investors,
particularly in terms of the market P/E
(6-8 times earnings). By 2013 however
it is likely that valuations will have
fallen significantly further and that many
more investors will have thrown in the
towel, setting the stage for a new
prolonged bull market such as the one
experienced from the early 1980s until
2000.
This weak market outlook looks to be
supported by the fundamentals as the
current huge government deficits and
expansion of the Fed’s balance sheet will
have to be reversed at some point. This
badly need fiscal prudence is likely to
suppress growth for an extended period.
So far leverage has not really been rung
out of the system as private borrowing
has been shifted to public borrowing.
Leverage will have to fall considerably
throughout the system before the stage
will be set for long term sustainable
growth.

CMD Advisors Inc.

14 Thornhill Avenue, Toronto, Ontario M6S 4C4
cmdwight@gmail.com