Please, Let October Be the Worst of It

If October 2008 wasn't the worst month on record for the capital and commodity markets, we'd hate to find out what is.

Indeed, September was an awful month, but October was a disaster. September's across-the-board losses for all the major asset classes suffered a repeat performance in October, only more so. The declines last month were in all cases bigger than September's, in some cases a lot bigger.

REITs suffered the biggest blow in October, falling a shocking 32%. But no other asset class was spared, including U.S. stocks, which tumbled nearly 18%, as per the Russell 3000. It was, to summarize the obvious, the worst month in memory, perhaps the worst in modern times. If you want to see what hell looks like in the investment game, October 2008 looks set to stand as a benchmark of the abyss for generations to come.

No wonder, then, that our measure of the global market portfolio index slumped 15.7% last month--the fifth straight month of losses, and the biggest one yet.

Diversification, to put it simply, did not work in October -- the second month running that the global markets repriced risk downward via a broad wave of selling. The lesson is that the pool you're swimming in will dictate how -- or if -- you swim. One can't extract blood from a stone, or positive returns from risk of any kind in a financial calamity. Clearly, the pool has been battered by gale force winds for two months running and the effect has taken a hefty toll on the various components. When risk begins to pay off, the waters will turn calm, but for now investors are knee-deep in the act of wound licking. Perhaps one can be thankful at having any assets left to mourn over.

As for the global markets index, the best we can say is that compared with the defaults, bankruptcies and the complete evaporation of assets in some corners of finance, the red ink afflicting GMPI looks mild. But by any reasonable measure of absolute standards, there's no way to downplay the fact that risk of any type has inflicted sharp losses on investors. Other than cash, there's been no place to hide. When a generational storm of unwinding and correction hits, the usual rules take a holiday.

Will this sorry state of affairs continue for a third month running? No one knows, although it's hard to imagine that everything keeps tumbling. The extraordinary liquidity-injecting efforts of governments around the world--with yet more coming--is starting to show signs of success in at least stabilizing markets. Or so it appears. Outright panic seems to have, temporarily at least, ceased. That's progress in this environment: stop the massive bleeding. The panic has been replaced with a sober wariness about the future, including the recognition that repairing the financial system and managing the economic contraction will take time and money. Perhaps that keeps asset prices from another month of sharp losses, perhaps not.

Meantime, we've all received a lesson in humility, starting with the now-painfully clear lesson that risk can inflict much, much more pain on investors than many thought possible. So it goes after living through a generation of relatively easy and smooth gains.

Comments

[Smarty_Pants:]

An expected lament from one whose view toward the market is that "diversification ... reigns supreme". Buy and shuffle for the long term without any truly significant thought for excessive risks.

Back in November Mr. Piscerno was willing to admit that being 'overweight' in cash might be worth the lost opportunity, but that one shouldn't give up on one's diversified portfolio. Simply massage the proportions a bit at the edges.

Well, if that's your approach then you have to take the lumps that follow. My cash/short positions since that time have rewarded me quite nicely.

To me "speculate" means being willing to go entirely to cash when it looks like a huge haircut is coming my way, and it doesn't mean moving 2% out of stocks and into cash while holding for the "long term".

If you're going to profess 'nibbling at the edges' as a stragegy, then you shouldn't be complaining about sustaining a disastrous month or two as a result of your neglect to safeguard from large losses.

Sometimes markets go down. That's why true speculators are willing to sell everything and go to cash.

Those who 'trimmed' neatly last year and are down 40% since then now have to make a 66% gain to get back to even. Those who saw great risk and sold everything can afford to wait for a clear bottom, miss the first 20% of the upmove, and still come out ahead.

Buy and hold is great for a bull market, but the last bull ended in November 2007. The successful rules for bear markets aren't the same.

2008 Nov 03 04:09 PM

[bricki:]

We are in a secular bear market. The last secular bull market ended in 2001. Buy and hold is a successful strategy in a secular bull market but will earn you nothing in a secular bear market. To be successful in this type of market you have to move in and out of stock. I moved out a bit early - May last year, but am not regretting it one bit. I started buying a bit in August, maybe too early but still I am only down a couple of percent this year.

Defensive investing is going to be the way to make money for the next decade. Buy and hold? Maybe in 2020 that will start working again.

2008 Nov 03 05:04 PM

[phdinsuntan...:]

"Lenin is said to have declared that the best way to destroy the
capitalist system was to debauch the currency. By a continuing process
of inflation, governments can confiscate, secretly and unobserved, an
important part of the wealth of their citizens. By this method, they
not only confiscate, but they confiscate arbitrarily, and, while the
process impoverishes many, it actually enriches some," John Maynard
Keynes, "The Economic Consequences of the Peace," 1919.

2008 Nov 03 05:19 PM

[Steven Hansen:]

Well smarty_pants hit the nail on the head. but i guess it is easy to agree with people who have reacted the same way to this market.

for me, the financial system is opaque. many people out there are pumping equities and commodities. they have no basis to make any claim that it is time to buy. so a reasonable person must wait to see fundamentals (not somebody's opinion) showing you that conditions will allow you to invest.

2008 Nov 03 08:23 PM

[MarketLost:]

October marked one of the few market capitulations we've seen. That doesn't mean that we won't go lower - I think we will make a several new lows. It means that we've entered a bottoming phase that will mark the beginning of a new bull leg within a few months. Whether this is a true bull market remains to be seen, but it is the end of the current bear leg.

2008 Nov 03 09:57 PM