Throwing in the Towel on This Market? 10 comments
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Yesterday's decline felt like the market just gave up, it grew weary of fighting. There's no way to substantiate that of course - it's just a feeling I had in seeing it unfold. Early in the day I wrote about a slow capitulation in the market in my greenfaucet post, and coincidentally the close played into that.
This leads to some meaty theoretical stuff and I certainly don't have all the answers. By now you should have figured out whether you think 40-50% down from the peak will be about it, or more like 80% (just picking two extremes - you can think of it however you want).
I said weeks ago that if you really thought this was the Great Depression coming at us again, you should sell. That probably still stands up now. If you do not think down 80% is in the cards, then selling now would simply be selling low, very low.
Anyone reading this site for a while knows I do not think this will be a Depression. I think the bottom is about in, in terms of price, but that we will have several more months of running up and down in roughly the same range we have been in recently.
If that pans out as I think, then it will be a long time before we start to feel good about stocks. Individual issues could continue to get pasted even if the market doesn't do anything very different for a while.
That brings up a useful distinction regarding what investors should be doing now. Any buying someone might be inclined to do now can try to do one of two things (I'm talking about long term investors not traders): either buy stocks that you think will work now, or buy stocks that you think reposition for whenever the turn up finally occurs.
Buying the stocks that should work now is likely not the way to go, because really what is working now? (This gets at the heart of top-down investing.) Pretty much nothing is working now. Buying something now as a place to hide out is the wrong strategy.
When the market turns, just about everything still standing will work - as was the case in 2003. In that light, it makes more sense to point any buying you are inclined to do toward the recovery, even if that is a couple of years from now.
This is not a call to buy them with both hands. I am not doing that. I disclosed having done a little buying and having plenty of cash still. The names I've bought are places I expect to lead a recovery or otherwise snap back quickly.
This idea concedes that a recovery could still be a long way off, but going overweight health, telecom and staples now seems late in the game. I've been overweight those areas for awhile and generally it has been right, relatively, but now that we are down 45% from the peak, I'd say it's too late to overweight those areas.
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This article has 10 comments:
You could always write a call or buy a put to protect the downside.
Is that you?
October 10th was when investors threw in the towel.
That seems like a very general statement....
Why writers like this one think they have to make guesses on where the market is right now.....e.g., the bottom, the peak, when it's safe to buy, sell, etc. is beyond me. I guess that's the thing they think they have to do for us, whatever. Guys, please don't do it...you know nothing and it just adds to the confusion about this problem that few experts even know much about.
I am 90% in cash, and 10% in formerly hot but now bottom feeders with buy prices about 1/20 of estimated growth, or around .05 PEG!!!. Even though these too are falling along with the rest, they sure have great potential and not much more to fall, I hope. (he says, without much enthusiasm.) Good luck all, you will need it.
I've concluded that simple chart-reading/trend-fo... is the very essence of good technical analysis, and that many technical traders have become way too prone to pre-mature bottom-picking, i.e. wise guy trades, based on their formerly successful indicators, which apparently aren't working right now. Stupid and dangerous IMO. I'd compare them to a bunch of blind men standing in a torrential downpour and trying to predict exactly when the showers will stop.
Good luck with that. The market internals are horrendous, period, and there is NO sign of institutional buying here. Until that changes going long is a fools game--unless it's long SKF, SRS, or EEV/FXP.
Bottom line: Wait for a CONFIRMED bottom, AND for clear signs the big boys are returning to the market. That's not happening now, and I think we're in for a hellish December as mutual and hedge redemptions snowball with tax-loss selling, etc. Dow 5000-6000 would not surprise me.
Isn't is true that the "deleveraging" still has a long way to go? Credit card debt, unsecured lines of credit, car loans, business loans, "prime" mortgages, margin calls, and so on, all still have to endure the tsunami of selling that is accompanied by "stopping the music" in the game of musical chairs.
There is nothing in it for institutions and investment banks to truly disclose their exposure all at once, because of course that would give all investors "perfect information" with which to value their stocks properly (which in turn would give most people a heart attack).
Therefore, my conclusion (sadly) is that we will see more bad news, at the maximum rate at which the pros who still hold anything, think we all in the public arena can stand it. Yikes.
Best of luck and good wishes to all and may the force be with you :-).
kurt - BBB corporates hit 11% in the summer of 1932, with AAAs at 5.4%. T-Bills were basically at zero, the discount rate was 2.5%.
Mostly the AAAs held up in the 4.5% area throughout, expect for the final spike down. There just weren't many AAAs left in 1932. Most corporates sold off extensively. Spreads widening dramatically is a characteristic result of deflation --- it makes any company that stays solvent a gold mine (it pays very well and the money buys a lot more to boot). But falling prices and earnings uncover some credits, cause defaults, leave some bondholders with the equity instead, etc.
It pays to do fundamental credit analysis in a deflation.
You can also just average back into stocks using the coupons - it will build an equity position at excellent average prices over the right time scale for one of these things. I mean, you buy a basket of bonds yielding 10%, and invest the coupons in stock exclusively. 5 years later if the market is still depressed, you will still be over 50% in the bonds. If it is up instead, you will be overweight the stocks. Either way, on a return to normalcy the bonds get their yield-drop increase and the stocks pop.
It is shooting fish in a barrel right now. Some companies can go bust, but they are not all going to go bust.
You can also buy rate insurance cheap using discounted floaters with floors. E.g. Goldman Preferred A (assuming it doesn't go bankrupt) pays 75 over LIBOR or 3.75 floor, on a $25 liquidation preference. It is under $9, to yield 10.25% on the lowest floor rate. If short rates ever rise again, it'll pay 3 times the floating rate, just from the discount.
Similarly, you can buy 10 year TIPS for the cost of straight treasuries, or 20 year ones for 1% more a year. Short the straight side with a future in proportion to the ratio of the coupons, and you have a straight inflation payment for which you will pay next to nothing.
Those are just hedges to add to a basic bond position, while doing the "coupons buy stocks" approach above.