Recipe for a Bull Market

The Crash of 1907

Recipe for a Bull Market

A Hot Stock

Remember the crash of 1907?

Probably not.

Everyone talks about the Crash of 1929, but no one talks about the Crashes of 1937, or 1907, or 1873, or 1857 … or others.

And why not?

Because we like our lessons familiar and simple.  And the lesson of the Crash of 1929, in simplified form, was that the Roaring ’20s had fostered a time of excess wealth and market speculation–much of it on margin; and that as buying dried up and sellers took control, the domino effect brought a big long crash, the eventual evaporation of billions of dollars in equity, and the closing of over 4,000 banks.

But today I want to talk briefly about the Panic of 1907.

According to Humphrey B. Neill, in The History of the Stock Exchange:

“It was a clear-cut case of too much Bigness: too many big trusts thrown hurriedly together, which required time for earnings to catch up to over-capitalization.

“Too many thousands of people speculating in stocks they knew little about.

“Too many buying land they did not intend to live on.”

(The recent 2007 top, epitomized by speculators buying houses they intended to flip rather than live in, is a perfect example of history not repeating but rhyming.)

As the 1906-1907 boom matured, wise men stepped back from the market, letting others–many of them inexperienced newcomers trading in bucket shops–do the final work of pushing prices to extreme heights.  There were even public warnings by pundits that prices were at unsustainable heights, and that ruin was just around the corner.

But did people listen? No.

Then money got tight.  The San Francisco earthquake struck.  A deep recession grew.  And the straw that broke the camel’s back was the attempted corner on the stock of United States Copper by Wall Street Banker Charles S. Morse, in collaboration with F. Augustus and Otto Heinze, who believed they controlled a majority of the stock.

But they didn’t.

And when the corner failed, the repercussions affected everything the three had stakes in, including six national banks, 10 state banks, five trust companies and four insurance firms.

Many businesses–banks included–went bankrupt. And the stock market fell nearly 50% from peak to trough until finally, J.P. Morgan stepped in, pledging large amounts of his own money (and getting others to do the same) to shore up the banking system.

What followed was years of discussion by the wisest minds of the time, all in an effort to prevent such market collapses in the future.

And what did they come up with? The Federal Reserve System.

But the Federal Reserve didn’t prevent the Crash of 1929.  Think about that.

The Glass-Steagall Act, instituted after the Crash of 1929, didn’t prevent the Crash of 1987.

The circuit-breakers installed after the Crash of 1987 didn’t prevent the Crash of 2000-2002.

And the odds are extremely good that the various corrective measures instituted after the Crash of 2007-2008 will not be effective in stopping the next crash, whenever it comes.

That’s the way the market works.

And it will always work that way–as long as men and women are allowed to trade freely with their capital (and others’)–because we are human; and humans are susceptible to their environments, to crowd sentiment, and to the mirror emotions of fear and greed.

So what should you do?

Above all, don’t make the mistake of fighting the last battle. To me, that’s like driving by looking in the rear-view mirror.

Trying to prevent a repeat of the mistakes of the past is a natural occupation for politicians who are working to satisfy (get the votes of) their constituents.

But it’s a waste of time for you, as an investor.

Instead, you should be looking at what the market is telling you today, and then calculating what is likely to happen tomorrow.

So here’s what I see. We’ve had a great five-week bounce off the October low, which has triggered green lights from numerous trend-following indicators.  Yet sentiment on the street remains poor, thanks to persistent economic challenges, both here and abroad.

And that’s a recipe for a bull market.  Always has been, and always will be.

Worry about Greece–and other things–if you like, but if those worries prevent you from investing in the early stages of this new bull market, well, you can only take comfort in the fact you’ll have plenty of company.

So what should you buy?

One of my favorites today–for aggressive investors only–is Silicon Laboratories (SLAB), a key player in the highly cyclical semiconductor industry.  The stocks in this industry act like rockets; they zoom to the sky, and then they fall to the ground, and if you don’t know what you’re doing, you can get hurt.  But if you do know, you can make big money fast in this group, especially if you know when to walk away.

Silicon Laboratories has been recommended in Cabot Top Ten Trader in 2003 and 2006 and 2009, and investors who stayed on their toes made money each time.  But between each of those periods, the stock fell to the ground like a dead asteroid, as investors exited en masse.

But now SLAB is back in favor, and I think investors who get on here will do very well.

Here’s what editor Mike Cintolo wrote about the company in last week’s issue of Cabot Top Ten Trader:

“With sales of electronic gadgets on the rise, here Silicon Labs is again, with its huge assortment of microcontrollers, wireless transmitters and receivers, touch-sense controllers, sensor, modems, clocks and oscillators and other devices. The company is an innovator, plowing more than a quarter of earnings into R&D, and a wave of new products is helping to lure market share away from the competition. Silicon Labs is a fabless designer (meaning that it partners with world class manufacturers rather than owning its own factories), and sells to China (28% of 2010 revenue), Taiwan (16%), the U.S. (14%) and Korea (13%), with the other 29% scattered around the world. The company’s Q3 results last week beat analysts’ estimates handily, and guidance for the next quarter was solid, putting Silicon Labs near the head of the microchip sector.”

As for the stock, “SLAB got slammed three months ago when management’s overly cautious guidance (plus the early August downtrend in the market) keyed a drop from 42 to 31. The stock hung in there, making small gains in volatile trading, then blasted off last week to its highest level since May. SLAB will likely need some time to consolidate gains at this level, so a dip to 42 or so is likely. That’s an advantageous place to get in.”

Since then the stock has traded as low as 41, and I think you can buy it now, taking care, as with any high-volatility stock, to use protective measures like stop-losses.

For more details on SLAB and other top stocks featured in Cabot Top Ten Trader, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts
Cabot Wealth Advisory


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