The bull is official

The bull is official... Gross sells Treasuries, buys MBS... Icahn long Lions Gate... Buffett's obsession... Argentina "helps" pensioners... Ken Lewis speaks...

We're officially in a bull market. Inside Strategist editor Brian Heyliger pointed out yesterday the S&P rallied from 839.80 to 1,044.31 between October 10 and October 14 – a 24% climb, beating the 20% that technically signals a "bull market."

And bullish moves among professional investors continue to come to light...

Bill Gross' PIMCO Total Return Fund, the world's largest bond fund, raised its holdings of mortgage-backed securities to 79% – the highest since June 2000. Meanwhile, the company has reduced its position in government debt for the past nine months. Steve Rodosky, head of Treasury and derivatives trading for PIMCO, said he favors agency mortgage-backed securities – the securities sold and guaranteed by Fannie Mae and Freddie Mac (which were nationalized last month). The government guarantee reduces credit risk.

And PIMCO may soon have much more agency debt to choose from. The U.S. Mortgage Bankers Association plans to ask the Federal Housing Finance Agency to increase the limit for Fannie and Freddie purchases or guarantees to $625,000 to increase liquidity. The previous limit was $417,000.

Billionaire investor Carl Icahn took advantage of the beaten-up market to load up on Lions Gate Entertainment – the film production company responsible for Crash and Saw. Icahn increased his stake to 9.2% from 3.7%.

I'm about halfway through Alice Schroeder's masterpiece, The Snowball: Warren Buffett and the Business of Life. I'm not done yet, but it's going to have to take a major wrong turn from here not to be one of the best books I've ever read.

One of the great insights I've gotten from Buffett's life story is just how obsessed you need to be to become truly great at anything. Buffett has worked constantly to learn how to allocate capital, since the age of about four or five. He was a successful businessman in his teens. Being able to virtually memorize an 800-page book like Ben Graham's Security Analysis doesn't hurt either.

It makes me wonder... Why don't more people learn to be obsessed with some productive activity?

We've been emphasizing the bullish side of things lately because so many great businesses are selling for ridiculous prices. But I don't want you to think it's all rosy from here. It isn't. For example, governments aren't nearly done "helping out," and that's never good.

The Argentine government is going to give investors some help from which many may never recover. Argentinean President, Cristina Fernandez de Kirchner, wants to take control of $29 billion in privately run Argentine pensions. The Argentine stock market didn't like the news at all. The country's MERVAL stock index fell to a four-year low yesterday, right after the government published reports saying it will take over 10 privately run pension funds – even though other Latin American markets went up.

Though I find plenty of great stocks selling cheap, I also realize, and have said a couple of times already, bottoms don't feel this good. Is it so hard to imagine the big stock indexes dropping another 10% from here? Manage your expectations accordingly and be careful what you buy.

That's why I've been telling Extreme Value subscribers to buy the very best stocks and have recommended names like ExxonMobil (XOM), Microsoft (MSFT), and Berkshire Hathaway (BRK). It's hard to go wrong over the long term buying great franchises at attractive prices, as long as you intend to hold them for at least a few years.

One problem I see is there's simply still too much leverage out there. So it's rational to expect liquidations, hedge-fund failures, and the like to continue. That'll cause more panicked selling... creating more pain... and opportunity. Wonderful how it all fits together, isn't it?

Another problem area is commodities. They aren't the wonderful businesses everyone now believes they are. They're terrible businesses. The owner of a commodity producer has no pricing power. He's totally at the whim of the market. Last year, when Lakshmi Mittal said steel demand had reached a new plateau, it was a perfect sign of the top, as Goldsmith pointed out recently. Even though hedge funds doing the short-dollar/long-commodities trade have shut down, I'm sure there are plenty left to liquidate.

The credit markets are a little calmer today. The London interbank offered rate, or LIBOR, that banks charge each other for loans, fell three basis points to 4.96% today, its lowest level since September 12, the Friday before Lehman failed. The overnight dollar rate slid 23 basis points to 1.28%, below the Federal Reserve's target for the first time since October 3.

"The initiatives that governments have taken are beginning to work," said Laurence Mutkin, the London-based head of European fixed-income strategy at Morgan Stanley. "We're seeing a lot of improvement."

Well, Mr. Mutkin, I promise you, it's not this easy and the "improvements" you're seeing will prove fleeting. Governments think they're bigger than markets, and most of the sheep they tend believe them. But that's absolutely not true. Governments aren't bigger than markets. Governments, too, are subject to the relentless push of the invisible hand.

Never mind politics. LIBOR could easily fall farther from here. Testifying before the House Budget Committee, Fed Chairman Ben Bernanke said another stimulus from Congress "seems appropriate" to stem a potential slowdown in the economy. Democrats are considering injecting at least another $150 billion into the market.

Bank of America CEO Ken Lewis recently did a great interview with 60 Minutes. He talked about the government forcing him to accept its money, how his bank largely avoided the subprime crisis, and how his Charlotte-based bank overtook Wall Street. You can watch the video here.

New high: Market Vectors Double Short Euro ETN (DRR).

Porter, Goldsmith, and I are all in New York attending Grant's Interest Rate Observer conference... But we still have plenty of time for your e-mails... Send 'em here: feedback@stansberryresearch.com.

"Hi guys, I confess that sometimes I watch CNBC even though from what I've learned from you guys, and life, I would concur with your general assessment as 'cheerleaders.' However, watching Kudlow and his guests this evening all laud the money being pumped into the system, all of them universally said no inflation from it. They talk a lot about the M1 supply increasing, the Fed's balance sheet increasing (I would think with much more liabilities than assets to counterbalance), even recognizing the possibility of a trillion dollar deficit, and yet universally 'not inflationary' and not a single comment about the strength of the dollar. How can that be? What is it that is so obvious as to offset all that fabrication and debt and loss that is not, indeed, hyperinflationary??? What is it that I don't know? Don't grasp?" – Paid-up subscriber John Allen

Ferris comment: Remember, our money is brought into this world as debt. Money = credit. So when credit is destroyed, the money supply literally shrinks. This is the essence of deflation. But the definition of deflation is a decrease in the money supply. And our money supply is created by the Federal Reserve. The Fed has the money spigot wide open. As I covered in Extreme Value, the Fed's balance sheet has expanded rapidly very recently. Ultimately, I believe this will lead to inflation and a mania in gold and gold stocks.

Regards,

Dan Ferris

New York, New York

October 21, 2008

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