Lessons from a Market 'En Fuego' 59 comments
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The stock market has clearly been en fuego for an awfully long time. As has been the the case the whole way up from March, people can spin all information available any way they want to conclude what they want - but the market has gone up regardless of anyone's conclusion.
The other day Laszlo Byrini made a comment that I have made many times before (not sure who originated it) which is that the bear case is always more compelling and more articulate. I can't make a convincing bull argument. Ages ago (the end of 2008), I made the case for a big snapback rally based on the simple fact that no matter how bad things are (were), after hideous declines the market retraces a noticeable portion fairly quickly.
At some point the current snapback rally went from ordinary (in magnitude) to out of the ordinary. One reader noted that the only thing the market has going for it is sentiment. I don't know if that is the only thing, but I remain quite skeptical. In weighing out the positives (there are positives) and the negatives, I think the balance favors the negative by a wide margin. The worst economic event in 80 years resolves itself like a (almost) normal recession? That just doesn't make sense to me.
That being said, a point I made countless times about why 100% cash is a bad idea is that you end up missing huge rallies. Lagging a huge rally is different than missing a huge rally. At one point, our cash level was in the ballpark of 30% plus the double short ETF and a market neutral fund or two. Through the course of the year I have added slowly to clients' equity exposure with a discretionary ETF, a purchase of Caterpillar, an increase in the tech ETF we use and recently adding Suncor (SU).
Year to date, I am a little behind the market but still have a fair bit of dry powder, so it is possible my risk adjusted stats look decent. Our clients did not drop anywhere near what the market dropped, and despite lagging this rally clients are now down high single digits from the quarterly high water mark from 2007.
I mention this to create a proper (in my opinion) long term context. I talk often about viewing this over the course of the entire stock market cycle (a bit of process perhaps gleaned from John Hussman). People all too often focus on absurdly short periods of time. Quick, did you beat or lag the market in Q2 2004 - and by how much? You don't know from memory, because it doesn't matter. We've had a horrible, but not unprecedented, decade for equity returns. What matters is whether you avoided some of that decline. Actually, what probably matters more than that is how much you saved over the last decade.
Anyone of at least mediocre investing ability will have periods where they are ahead of the market and periods where they are behind. That just goes with the territory. If you know ahead of time there will be periods where you "beat" the market, then there is no reason to get cocky about it. Likewise if you know there will be periods that you will lag the market there is no reason to get despondent about it.
The way I view things, there are times to smooth out the ride (not pull off the road) and times to take every bump as it comes. You cannot be right all the time but you can reduce the consequence of being wrong.
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The consumer for years used their homes as a method to extract money and buy things... Vacations, Home Goods, Cars, etc... That is gone.
People were making money at their jobs as unemployment was very low.... That is gone.
The shadow banking system that allowed the purchases of homes over the FNM max of 417k is destroyed... That is gone.
Wealth has been destroyed that will take at least a decade to be replaced... That is gone (for a while at least)
People that wanted to retire, but can no longer afford it will continue to be a drain on both SS and the level of employment (or unemployment)... Gone are the days of retirement.
This market never was historically cheap even in march (look at the historical levels)... That 'cheapness is gone'
There is little innovation that would lead us out of this (no PCs, No internet, it will come but when?)
The financial systems have been recapitalized through taxpayer generosity and secondaries, but we haven't corrected the systemic problems that led us down that road... What new regs have been implemented. Accounting rule changes, change the rules not the underlying assets. You cannot make gold out of lead.
I remember that it was different the last time in the early part of this decade... Uhhhhhh, is it different this time?
On the other side, the world Govts. are coordinating liquidity. But with ships sitting idle in the oceans, the dollar declining in value, how long can that go on.... Indefinitely is a very long time. We have created unintended consequences with not altering the fundamental problems.
Oh, as for that not being able to articulate a bullish argument... That is sheer crap. You could do it in the 90s. I know I did it then. I could even do it it the dot com days. Now, all I could say is liquidity because it isn't coming from imports, exports, labor, utilization, innovation, rail traffic, ship traffic, low commodity prices, a strong dollar policy. Oh, but that's just me being a bear (sarcasm) those facts have no place in our new reality of bullishness.
BTW, Roger.... You are screwed (IMVHO) facts don't matter.. Though you're intellectually right, your clients are likely thirsting for blood with the battle cry of, "This is sooooo easy all you have to do is close your eyes and have zero intelligence, and you too can watch Gold, Oil, Bonds, and Stocks go up in value. Why didn't you do that? Are you stupid?"
To which you respond with a quizzical look, and say, "This makes no sense. I did everything I should have..."
I agree with you, it is actually quite funny how frustrated people express their anger for having missed the mother of all rallies.
I guess insulting those who captured it is a way to try to feel better about it.
Quite pathetic actually....
This kind of people has little chance of ever becoming successful over the long run since they do not have the minimum qualities required, such as humility and ability to simply admit when they are wrong.
On Sep 17 10:16 AM Themoose wrote:
> A sucker's rally.. I guess your a sucker if your up 50% ?
>
> come on people..stop listening to people with lame excuses for missing
> one of the greatest rallies ever...
>
> these are the people you DO NOT want to invest with..
On Sep 17 09:34 AM davidbdc wrote:
> Actually, what probably matters more than that is how much you saved
> over the last decade.
> ----------------------
>
> And if that is what really matters then none of your clients actually
> need your advice!! Which is true for a vast majority of people who
> should take ownership and responsibility for their own money. <br/>
>
> The rally has been out of the ordinary because the market was priced
> for a world-wide depression lasting several years. Now we are debating
> whether or not there will be a secondary recession. There is a big
> gap between those two scenarios. If we didn't price for a depression
> then the market would have ended up somewhere around say 8500 and
> this move from 8500 to 9800 wouldn't look so out of the ordinary.
> From here it is just up to every individual's belief of how strong
> the recovery will be. If its strong then we can go another 20%......decent
> another 10%.....and if there will be another moderate recession in
> 2011 then stocks will eventually go back down.
>
> The last two paragraphs sounds like someone trying to explain to
> his clients why they missed a huge move.
On Sep 17 11:29 AM Larry House wrote:
> There are certainly times traders should be 100% cash, but investors--probably
> not. This is a good time to reevaluate a portfolio and make necessary
> adjustments. I agree, Roger, that this rally just seems to much
> too soon and too fast for the economic problems we have. I am looking
> at high-quality, good-yielding stocks which are more defensive in
> nature. I am not going to chase the current flavors of the month.
More likely that asset managers who missed current rally, are justifying purchases at current levels by claiming different risk profile today vs April.
-Technicals are strong
-Fundamentals (long-term) are weak. The Bears have it right. The market is pricing in a recovery (return to prior growth rates). The last recovery was fueled by government, bank, & household debt.
We didn't get in at the bottom. We started nibbling the end of March & weren't fully in until May. Despite that we are not only ahead of the market year-to-date, our clients are at all-time highs due to our focus on technicals and not fundamentals.
I like the reader that said "I need to make tons of cash now because of how bad the future will be."
My take is that as long as the Fed continues to flood the market with cash, the rally will continue whether or not the fundamentals are bad or if the market was overbought.
The analogy I use is that we are at the party having a great time, but we've started to make our way towards the emergency exit in case things get ugly.
Companies usually go into business in a capitalist society to produce needed goods and services at a profit or near-profit. That's all. They are not here to add points to the market indexes, appeal to market sentiment, or trace a positive curve on some quant's 3-toed sentimental journey index chart (3-color version).
Sentiment is important because most are hangers-on who follow the talking-heads and carry blackberries so they can trade on the latest rumor. Cash is important because you can't spend allocation %s, index trend numbers.
My broker and I follow an approach very similar to Roger Nussbaum. We think he makes good sense. We have been slowly staying ahead of the game and gaining steadily for a very long time, with the occasional dip. We think the birth rate is more important to P&G and Kimberly-Clark than the rate of twisted knickers on Wall Street.
Get a grip.
The first part is a very good point. The second part points out its weakness since Byrini has been shilling the market and publishing bad PE data since late 2008, when the Dow was at about the same level as it is now. hmmm...
The bear case was right. THAT IS A FACT. The stock market is off 35% from its high and we are still in a primary bear market, according to the foremost experts on Dow theory and are in a classic bear market rally. All you are doing right now is setting yourself up to look like a complete and total fool when the primary trend continues.
I suggest you listen and learn as you go through life rather than spending the majority of your time an effort in justifying your bad decisions. Look up "The Greatest Bull Market in History" and actually see how people made excuses and continued to lose their wealth because they couldn't see that the 1920's were over. Check out the period after the crash of '29 and see how similar that is to now. Note that we have much larger problems now than then.
Study historic valuations and you'll see that we have much farther to go on the downside - or many more years to go - before the market achieves those great valuations that mark the bottom of a SECULAR BEAR MARKET.
Perma bears ARE wrong but what do you say to someone like me or Gene Inger or Richard Russell or the many others who have always been bullish and only turned bearish recently and have good reason and still have good reason? It seems to me you make excuses and the same mistakes that the perma bears make.
It is Govt. Supported and Totally Manipulated Market Rally driven by an OCEAN OF CASH LIQUIDTY....so no analysis will work....simply watch the Trend....DON'T BUY ANY STOCKS...OR CURRENCY DEBT.....and wait patiently on the side line to SHORT THE MARKET ANY TIME DURING THE FIRST QTR. OF 2010...upon First Solid Technical Confirmation......DON'T FORGET TO USE APPROPRIATE STOP-LOSS FOR YOUR TRADES....Because you are dealing with a Market dominated by Crooks and Criminals.....
ONLY GOD CAN SAVE ALL OF US !!!
warm regards to all,
Ajay Brahmbhatt
INDIA
Time to take Your Profits , and relax while the PIGS start falling all over themselves running for the exits very soon . Just Before Dow 14,000 Dropped like a Rock , the Gurus were calling for Dow 16 17 and even 18,000 , Look s like were in that place again , this rally is built on little more then HOPE and Happy Talk that things will get bettter , Would You buy a stock in acompany that SOLD HOPE and Happy Talk ?
On Sep 18 03:29 PM Deepv wrote:
> THe S&P 500 was 1056 on October 6, 2008, in middle of panic selloff.
> Anyone who bought that day is FLAT or earning a negative rel rate
> of return. You are all hyper day trader and should wear anchors around
> your neck with the note "March 9, 2009." IT is an irrelvant date
> unless you were a precog. Do some bottom up analysis jokers.
For investment purposes; I would rather lose 10 to 30 percent on a lesser risk of the markets going down than risk losing thousands of percent over the course of the next decades.
We may never see 667 again for SnP500 in our lifetimes.
are successful at timing on a consistent basis. Many of those who
were perceptive enough (or lucky enough) to get out of the market
before the sharp drop have failed to get back in to take advantage of
the sharp increase since March.
For my part, I stayed in the market throughout the post-September drop and now have totally recouped my losses.
Then those investors who bought the massive downturns in the 70's and early 80's will not see those levels below Indu 1,000 ever again in their lifetimes.
This is the 3rd chance within less than 100 years that an unprecedented major global crisis has erupted.
This type of crisis don't happen so often in one's lifetime and for most investors and most likely will not happen again in his/her lifetime.
This is the lifetime buying opportunity of present day investors.
There is still some good opportunities for investors who missed the March 2009 bottom; SnP was only able to recover 45% of the total loss from Oct 2007 to Mar 2009. 55% more to recover with higher probability SnP will be back to 1576 on or before March 2014.
This 9 years of secular bear market starting year 2000 have gone long enough and deep enough for most people all over the world to learn their lessons and yearn for better times ahead not only by wishing but by actually taking actions to prevent such suicidal dot.com and housing bubbles to ever forming again in their lifetimes.
It will require another 20 to 30 years before the new breed of investors and corporate managers to become too greedy again and push their greed to the maximum not unlike past bubbles.
That would be the right time to sell equities bought during this downturn depending on how old we are today and when will we need the money for our twilight years.