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We're right back down at another make-or-break moment. They come frequently these days. Will the Oct. 10 bottom hold or is another waterfall crash dead ahead?
The Nasdaq already failed its Oct. 10 and Oct. 27 lows and is officially in new, cheaper territory. The S&P 500 is a whisper away from that ignominy. Same with the Midcap 400. Same with the Russell 2000.
It's been all crap all the time for so long now that people are finally just backing away. The tone of notes here at Kelly HQ has been abysmal. I'm hearing about retirement plans up in smoke, famous investors who've done poorly this year, even a suggestion that all stock markets just be closed for good. "To hell with the whole con," one man wrote.
From my publisher came interesting anecdotal evidence. When the crash began in early September all the way up until about three weeks ago, sales of stock books and other investment books went through the roof. My own stock book sold five times the volume at Amazon.com in October than it sold in average months. People sensed a bargain basement on Wall Street and wanted strategies to take advantage of it.
Those sales volumes have now gone the way of Detroit auto sales. Investment titles are selling at a pace below average. In their place, sales of poetry, love stories, and picture books have quickened. The idea of making a killing in stocks has vanished. People just want to escape.
That's supposedly when bear markets end. Once everybody has cashed out and no longer gives a rip what happens on "Fall Street", a stealth bull market begins. I'd love to call for one here but can't because I don't have any new evidence to cite.
None of our tools is working. The most honest analysts have admitted that. The others are tossing out calls for up or down and then claiming victory when the coin toss goes their way. What we know, though, is that the VIX has never before stayed this high for this long without some kind of reprieve from the downside. Breadth isn't supposed to stay this bad for this long. Oversold isn't supposed to get more, and more, and more, and more oversold and then stay there.
What we're hearing now is the same set of excuses we hear whenever markets jump the rails and keep going across the field. We dust off the old "the market can stay irrational longer than you can stay solvent" canard from Keynes, the old "it works until it doesn't" quip now seemingly in reference to the very idea of stock investing, and the old description of "hundred-year flood" and the new "black swan" to denote how odd a set of measurements faces us. It's the same kind of stuff Long-Term Capital Management said when its bulletproof model was shot to death.
I like what University of Chicago finance professor John Cochrane wrote in Wednesday's Wall Street Journal:
We are in, or headed for, a recession. Anyone whose job or business will be impacted can't take stock-market risks, and should be selling despite low prices. We are seeing lots of "deleveraging," "disintermediation" and "forced selling." As losses mount, investors or institutions that have borrowed money must sell to avoid bankruptcy. Others, such as some university endowments or defined-benefit pension funds, have backstop commitments that must be honored, and they too must "capitulate" at some point. Still others may just be less willing to take risks after suffering a huge loss, a sensible "once burned, twice shy" mentality.
All of these actors become more averse to holding risks as the market declines, so they sell. This increasing risk aversion amplifies an initial price decline -- coming from bad earnings news or the huge rise in credit spreads -- into a rout.
If this is indeed what's going on, it also means that unleveraged, long-term investors should be buying, since prospective returns are better. They must be able to suffer through further mark-to-market losses, and not have recession-sensitive jobs or businesses. They must still have some money left to invest, so they can exchange some of their valuable Treasurys for assets that the suddenly risk-averse are trying to unload. The more these investors can understand and digest slightly exotic securities being dumped by leveraged intermediaries, the better. Warren Buffett is in the news, and he should be.
But this line of thought still does not justify wild optimism. The dividend yield and S&P 500 P/E are barely back to long-term averages, and dividends and earnings will surely fall next year, justifying some of the recent price decline.
[In conclusion...] If you're less leveraged, less affected by recessions, and have a longer horizon than the average, it makes sense to buy. If you're more leveraged, more affected by recession or have a shorter horizon, it might be the time to sell, even though you might be cashing out at the bottom. If you're about the same as everyone else, do nothing and relax. If you're wrong, at least you will have excellent company.
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This article has 15 comments:
Buy now. But start by buying bonds (corporates, not treasuries bid to infinity) and other income producing asset types already smashed to heck, with only 10-20% in equities. Concentrate the equity holding in the most smashed sectors - finance, materials, retail. Then collect your coupons, and as each one comes in, by a tiny bit more stock.
You won't care a lick when it ends, with this strategy. You will get a better than average price on all the stock and will build back up to a 50-50 position over several years. That is the right time scale and risk level. In 5-10 years you will be doing well, when others around you will have been first smashed, then turned off investing entirely, and then sitting in cash yielding zero as recovery occurs.
If you have neither...what were ya doing in the stock market to begin with?
cyclingscholar
I am in the Consumer Healthcare sector and serve big pharma. Looks very ripe for five year buy and hold strategy but will Henry Waxman finally have his vengeance? By the end of Q1 I'll have a good idea of that and buy pharma or leave it alone.
I'll say one thing, there are solutions to make money already. In the marketing sector it's called going back to fundamentals and a cost-per-sale model. We're in a deflation, some sectors deflating faster then others. So, buying the beat up banners and only pay them when conversions happens for clients and facilitating the technology to show all returns transparently. The numbers work for our company, the advertiser and the vendor. This is an illustration that one does not necessarily have to lay down and die because the economy is shedding 20% off and going back to Save and Invest for a good long time. I didn't need liquidity and or investment to do it either. The numbers told me when to shed the pounds and go lean and mean. The numbers tell me what to as a manager to make the business work in this new economic reality. The only advantage I may have had is simply that I do not avoid the reality of the downside and therefore ignored the pundits that were bullish for far too long.
On Nov 13 10:05 AM JasonC wrote:
> Personally I prefer a measured greed.
>
> Buy now. But start by buying bonds (corporates, not treasuries bid
> to infinity) and other income producing asset types already smashed
> to heck, with only 10-20% in equities. Concentrate the equity holding
> in the most smashed sectors - finance, materials, retail. Then collect
> your coupons, and as each one comes in, by a tiny bit more stock.
>
>
> You won't care a lick when it ends, with this strategy. You will
> get a better than average price on all the stock and will build back
> up to a 50-50 position over several years. That is the right time
> scale and risk level. In 5-10 years you will be doing well, when
> others around you will have been first smashed, then turned off investing
> entirely, and then sitting in cash yielding zero as recovery occurs.
"I am not a market timer, but I dont think we should be buying now"
or
"I know that it is dangerous to think it is different this time, but I think it really is different this time"
or one of my favorites
"it is so obvious that the market is going to break through the lows and collapse"
Naturally, everyone was unable to predict markets earlier in the year, but now, with 500 point swings being a regular thing, everyone knows exactly what is going to happen. Suddenly, everyone is throwing statistics and any previous form of market analysis out the window because it didnt work in the last 2 months. I even read an article with someone denouncing Modern Portfolio Theory, claiming diversification doesn't work. It makes me wonder how some people find the mental capacity to breath while thinking at the same time.
As this article mentions, the most important thing is that people understand the risks in the equity markets and what risks they can afford when reviewing their financial situation. There is less risk in equities today than there were in January, believe it or not. The market has taken out 45% of the risk in the S&P 500 from last year's high, which is a pretty large amount of risk reduction. Of course, the same person that was buying then is much more concerned about the risk in the markets now that the picture seems more dire.
People are obsessed with the concept of being right in this market. For some reason, staying invested right now seems like the stupid thing to do, so everyone wants to sell today and buy back when the market is at 5 or 6 thousand(because they know for sure it is going there). In my opinion, instead of trying to win, or beat the market, people should just sit back and focus on what they can control; their own finances.
People who attempted to become real estate tycoons through flipping condos and trading "gurus" trying to time every ebb and flow in the market with a margined portfolio should never be invested. They seek risk when the expected gain from the investment is low, and avoid risk when the expected gain from the investment is high. Not someone I want on my team, and I suggest they give up on investing all together for their own sake and sanity. For anyone who makes a habit out of thinking rationally, then you may very well have some disposable cash sitting around that you don't have earmarked for some other commitment that you are unsure of what to do with. If history is any teacher, then it may be rational to commit some of that money to the market.
I AM AMAZED THAT YOU GUY ARE STILL YELLING BUY BUY BUY.
Don't you get it this is going to be a f-in depression! The market may not recover in real terms for 15 years. P/E ratios mean nothing when no one will be able to buy your product in the future. The SEC is the bitch for the hedge funds and naked shorting is going on in a massive scale not seen since 1929. Those shares will never be covered since the SEC will see no evil.
This is the greatest rip off of the typical American EVER. Their 401k/IRAs will be wiped out and their SS has been stolen with huge tax breaks for the wealthy.
Those 5k charting packages are worth nothing. The manipulators know how they work and are paying with the suckers who follow.
We have NOT seen the bottom and when we do it will be a very long time until stock/economy recovers. I see at least 7-10 years for the economy to recover and even then it will depend upon things being handled correctly by the FED. FAT CHANCE given their history
Stop thinking with a 1-2 year horizon that will not be long enough.
I get such a kick out of all these guys that say that we should take a long term approach, buy now, and hold through thick and thin. I think we refer to that in the business as trying to catch the falling knife. That's a fine way to get bloodied badly! Just because prices have fallen far doesn't mean they won't fall a lat farther!
Besides, by tieing up funds now in a plunging stock market, investors incur the opportunity cost that those same funds might have been placed during the intervening period in something that might have MADE money. Instead, they lock away those funds for 3-5 years where they probably won't even break even, and will likely lose even more money.
Most of the people who advocate this long-term, buy-and-hold approach are just talking their book. They're hoping that if they can persuade enough people to start buying, it will drive prices higher and bail out their losses. Misery loves company, and they are miserable because they are in a badly losing position in a market that is only getting worse, and they now want the rest of us to join them!
No thanks! I'll stay short the market until real indicators tell me it's safe to go long. I'll keep making money by taking money from those who try to catch the proverbial falling knife and end up with their own financial blood on their hands.
On the day that indicator arrives, you will be squeezed out of your shorts and your options investments will be worth zero. Unless you get tomorrow's news today, good news will be reflected in stock prices. Since you know that day is coming, and you don't know when, isn't this strategy suicidal at some point?
Bottom line is:
Investing in this volatile, uncertain environment is dangerous in the SHORT TERM, and the author is right to suggest you consider your life situation before diving in with a plan of cashing out within a year. It could go lower - but that was always the case!
However, buying at low prices, even during periods of uncertainty and volatility, is safer in the LONG TERM because you are paying less for future earnings. Unless you think we will all be subsistence farmers in 10 years and have no use for products and services, those earnings will be higher.
Ironically, it is when short term risk is highest that long term risk is lowest. If that gap shakes out all the institutions, day traders, hedge funds, and naive news-followers, then perhaps it is time for buy and hold.
The author did a good job of pointing out both sides of the argument leaving the readers to make up their own minds. Not much more you can do in an environment where the daily range exceeds 10%.
One point the author did not cover however is the risk that any purchase now is exposed to straw-grasping policy changes at the FED or USTreasury which may render your investment worthless before it has a chance to 'recover' in the long term.
For my views, both fundamentally and technically the market says 'bear' for the foreseeable future. Until that changes I am unlikely to do much more than implement short term positions. A near term rally is possible, but not likely sustainable.
For those whose view differ from mine, good luck to you. May your investments produce a good return.
I am not a buy-and-hold investor. I use my own timers and they saved my skin this year by advising me to get out of the market mid-June.
FJP
1) Those like this author: calm, rational, thinking (some optimistic, some pessimistic on long and short term outlook - but all calm and rational).
2) People scared shitless, angry, and willing to yell at anyone with a different outlook or investment philosophy.
Unfortunately, the Type 2s seem to outnumber the Type 1s by an easy 10:1 ratio.
Your reply, Type 2...