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The Great American Liquidation Sale

By Tom Dyson, publisher, The Palm Beach Letter
Tuesday, February 2, 2010

I look out my window and see a large bank, built of sandstone. They've carefully landscaped the forecourt and there's a big blue awning over the front door. This bank is four years old, but it looks newer. 

Inside, there's a neat row of teller stations set up behind glass windows that reach the ceiling. They have a flat-screen television on the wall, tuned to the Bloomberg channel. There's space for 20 cars in the parking lot. If you don't feel like getting out of your car, there's a four-lane "drive-thru" on one side.

This bank must have cost $10 million to build and probably costs $1 million a year to operate, but it appears to serve fewer than 50 customers a day. No one lives in the area. An airfield and three golf courses surround it. Plus, there's another bank a few hundred yards away. 

The problem was, the bank was built when credit was easy and house prices were rising every month. The owners must have made assumptions based on those favorable conditions, but conditions changed and their assumptions turned out to be wrong. Now the bank is costing the owners money every day... and needs to be closed.

All over America, I see the same problem. Billions of dollars worth of bad investments litter the country. These investments aren't generating returns for their owners, and they need to be liquidated.

The liquidation process began in 2008, and it would have been near completion by now. Unfortunately, the government intervened and propped up these bad investments by making even more bad investments and encouraging everyone else to do the same.

So here I sit, watching the bank out of my window, wondering when the great American liquidation sale will resume. It could have already started...

The market is overvalued in every metric I follow. The S&P 500 has fallen six of the last eight sessions and is down 7% since January 19. The major European bourses are all forming downtrends, too. Check out this chart of the Chinese stock market. It looks like a burned out firework returning to Earth...

If a new stage of liquidation is starting – and that's a big "if" – the companies that benefited most from the boom in consumer credit and consumer spending have the most to lose... like the owners of that bank.

These companies based their business models on optimistic assumptions of the future. Conditions have changed, and now these businesses are basically giant portfolios of dud investments. They're going to have to liquidate these investments and slash the scale of their businesses. 

I've advised my 12% Lettersubscribers to hold a large cash position, and I've recommended they limit their stock-market exposure to only the safest income stocks and bonds. In the latest issue of his newsletter True Wealth, my DailyWealth coeditor, Steve Sjuggerud, recommended an investment that profits from a declining stock market. 

But the most aggressive traders should consider short positions in companies like motorcycle maker Harley Davidson, upscale grocer Whole Foods, casino company Wynn Resorts, or mall operator Simon Properties. If this is truly the start of the liquidation sale, the market is going to slaughter these stocks. 

Good investing, 


Market Notes


A bearish development for the broad market: The great "lead dog" Apple is stumbling...

Every market phase has its "lead dogs." These are the companies that dominate their industry, like Google, Goldman Sachs, and Apple. Since it's so easy to make the case for owning these shares, most people do.

Apple is one of the world's "easiest" stocks to own right now. Its products are fantastic and selling like crazy. No Wall Street analyst is going to get fired for calling the stock a "strong buy"... No pension fund manager is going to get funny looks from his colleagues for holding it... Tell folks at the cocktail party that you own Apple and you'll get nods of approval. The stock is one of the recent rally's "lead dogs," having climbed as much as 144% from its March low.

Apple's popularity among investors has allowed it to hold steady during the recent market decline. Not many stocks have displayed this sort of strength. But as you can see from today's chart, Apple is dangerously close to violating its December low of $189. A downside breakout below this level is an ugly sign for the overall market. If the "lead dogs" can't keep running, the whole team is in trouble. 

In The Daily Crux

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