I live in the mountains near the 7,000-foot level at Lake Tahoe. After fattening themselves on berries, grubs, garbage and other tasty treats, our bears used to hibernate all winter long, living on the fat they stored in spring, summer and fall. But nowadays our bears don’t hibernate much – there are too many human visitors coming up for a long ski weekend for whom it is just too much trouble to pack their party or dinner trash out when they leave, so they stick it in a plastic bag on the street. As a result, bear tracks are no longer uncommon in winter and bear sightings are only slightly less so.
I know it’s stretching the analogy a bit (!) but I wonder if the party-ers on Wall Street and the fat-cat whiners, winers and diners in Washington DC aren’t leaving one heck of a lot of trash strewn about that might, well, attract the bears -- or, worse, The Bear.
You don’t hear much about bear markets these days. In 2009, there was a whole cottage industry of fast-rising superstars writing articles on Seeking Alpha, each vying to out-predict each other in terms of the severity and duration of the next mega-crash, which was always going to happen “tomorrow.” As a wise man once said, “When all think alike, none are likely thinking.” (Okay, so it was me who said it, but it’s been quoted by others, so it counts…)
Judging by the “attaboy!” comments these writers received, and by the fact that equity mutual fund inflows only began to tick upward after 90% of last year’s gains were in, there were a lot of people thinking alike. The fact that these writers’ once-meteoric rise in followers has slowed to a trickle is probably a pretty good contrary indicator today. When no one thinks the bear is alive, and they’ve invested all their money accordingly, it shouldn’t come as a shock when the river of buyers becomes a trickle and sellers no longer find anxious buyers.
I don’t know if we are near that point now. And neither does your favorite technician, or hallowed guru, or idiot brother-in-law – but I repeat myself – either. We are all relying on our experience, our research and our own (hopefully) rigorous analysis to determine how to best protect our clients and increase their wealth. Touts abound, hawking this or that “story” stock. But only those who believe in both defense and offense are worthy of your time and attention. At our firm, we believe in simplifying first, protecting assets next, and then and only then moving to the third phase -- increasing client assets.
Keeping a watchful eye for bears looking for garbage comes during the second step, protecting assets. There’s plenty of garbage for a Bear to feast on:
- Either the government is vastly understating the true rate of inflation, or I’m buying all the wrong things. I buy things like food, clothing, shelter, continuing education, gasoline, and heat in winter. The government tells me I’m only paying about 1% more for all these things than I did last year. Hmmm. I sure wish they’d get that news out better, because my grocery store, university, gas station and electric utility clearly haven’t gotten the word. Neither, apparently, have a lot of landlords, retailers, travel vendors, or anyone else.
- One in seven American families is behind in their mortgage, NOT including those already in foreclosure. Got seven friends? Look closely – one of them is barely keeping their head above water.
- Wall Street is touting the fact that “the market” climbed 65% in its most recent rise. Well, duuuhhh, if you give Wall Street a dollar and they give you back 50 cents – as happened in 2008 – then they give you 33 cents this year and tell you, “You’re up 65%, you lucky devil!” – as happened in 2009 -- you’re still down 17%, they’re still richer by the amount the government ripped out of your pocket to give them, and the revolving door between The Administration and Wall Street just got gold-plating.
- Our national debt is still wildly out of control – as is consumer debt, corporate debt, and municipal, county and state debt. California’s solution to their problem of giving near-100%-of-working-salary pensions to workers who can retire for life at age 50? Borrow it from the national government! Of course, since the national government has no money, either, that means they need to take it from those who are fiscally responsible elsewhere. Sure hope you folks in Ames, Iowa, Helena, Montana, and Ft. Worth, Texas get your thank-you cards from your counterparts sipping mai-tais on the beach in California this year!
I could go on, but you get the picture. The underlying environment hasn’t changed much, so either it's about to change -- or investor sentiment has gotten ahead of reality. I don’t know when there will be a correction, but I’ll hazard a guess. It’s a guess based on years of experience, a good read of history, and an analysis of current events and investor sentiment, but it’s still just an honest guess:
We could bump along like we are right now for anywhere from this week to 3 months or so. In the short term, we could edge up or The Bear could visit any time. In the short-to-intermediate term, 3-6 months out, whatever happens in the interim, I definitely want to have taken our clients back to a solid cash, cash equivalent, and high-yielding boring equities position. If we haven’t started a slow decline before the summer, I expect we’ll get a nasty, vicious, steep, “surprising” (to some), shake-out of a Bear.
Then, when people start writing about the Dow going to 3,000 or the S&P to 300, that’s the time we’ll be buying with both hands, because I believe the mid-term elections of 2010 will hold some startling and wonderful surprises for the markets. The market does not like it when there is a majority in Congress; without checks and balances, too many bonehead ideas get air time. If things continue down the current path, I can “guess” with some certainty and conviction that majority will yield to gridlock. Gridlock in Congress means progress everywhere else; progress in Congress means gridlock everywhere else.
In the meantime, what’s an investor to do? Well, for our clients, subscribers or regular followers here at SA, you have some fine profits in bond funds and some really fine profits in two areas we are today beginning to lighten up on: bank preferreds and natural gas pipelines. Preferreds won’t go higher than par in this environment, and pipelines haven’t found a cure for cancer, though they are now beginning to be priced as if they have. Many of them have shot up another 15-20% just since I discussed them last week (here).
As much as I like their long-term prospects, I would never advise you to hold, when I am taking some unexpectedly-fast profits. (If I did that, I’d have to change my name to The Bond King…) For our clients, we are selling 100% of all bond funds and 50% of our positions in both the preferreds and the pipelines, taking our profits and owning what remains at a significantly lower cost basis. It’s always more fun to play with the house’s money than your own.
As for where we will place those profits, some is going into options on the VIX or into the iPath S&P 500 VIX ETF (VXX). Periods of complacency and range-bound trading like we are seeing today seldom continue for more than a few weeks. When it resolves, I figure there may just be an increase in volatility.
Much more will go / is going into the biggest slam-dunk I expect to see this year: as interest rates rise, bond prices drop. As bond prices drop, inverse bond ETFs rise. We are buying both the ProShares UltraShort 20+ Year Treasury ETF (TBT) and the Direxion Daily 30 YR Treasury Bear 3X (TMV) – with all the attendant caveats regarding leveraged ETFs. (Of course, these are leveraged on Treasuries, so I consider UN-leveraged instruments unworthy of consideration…) Still, more conservative investors may prefer the iShares TIPS Bond ETF (TIP.)
Do bears still hibernate in winter? I don’t know and neither does anyone else. But as long as my government is leaving garbage strewn all over the landscape, I can’t help but believe that at least one bear is sniffing around as we speak…
Author's Disclosure: We are beginning to take some profits in favored sectors. We and/or clients for whom it is appropriate are redeploying those assets into some health care stocks, precious metals royalty firms, and into the VXX, TBT, TMV, and TIP mentioned above.
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Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – for example, our Investors Edge ® Growth and Value Portfolio beat the S&P 500 for 10 years running but will not do so for 2009. We plan to be back on track on 2010 but then, “past performance is no guarantee of future results”!
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