I won’t say “I told you so” because I did not predict that there would be a day when the Dow would be down 920 points at its worst. What I have done, however, is pay particularly close attention when I see areas of particularly egregious over-valuation or under-valuation and report those to you -- and my most recent admonitions were to raise cash and seek the safety of bonds.
I’m on record, back on March 3rd, 2009, as believing that the teeth-gnashing and hair-pulling was overdone, with my article, Can You Hear the Bell Signaling a Bottom?.
I want to be clear that I wasn’t “predicting” the great rally we enjoyed – merely pointing out that AAA-quality companies were then selling at single-digit PEs and 6% and 7% yields. It was only mass hysteria that was keeping prices down. It was time to distinguish between price and value. (By the way, for my review of the two best books ever written on mass hysteria, check them out here and here.)
Fast-forward to March of 2010. I’m on record, this time in a whole series of articles, best exemplified by Strategy for the Current Market? Time to Cut Back the Limbs and Feed the Roots advising that you might want to raise some cash and research some companies I like for difficult markets.
Make no mistake, the floating rate bond funds I have been recommending for your research were taken down in the 1000-point swing, as well. They float with rates on US Treasuries and when the world is rushing for the safety of Treasuries, they will decline some. As did our TBT and TMV, for the same reason. The natural resource MLPs and other high-yield securities declined, as did our telecom high-yielders. As a matter of fact, the only positions I wrote about in that last article that were up nicely were our precious metals and the VXX and VXZ I’ve been pounding the table about for a couple months.
The reason VXX and VXZ were up is because they are a measure of volatility. As I’ve written frequently, periods of such low volatility as we’ve seen the past couple months are rare as hens' teeth. I don’t have to “predict” anything here -- I was hardly going out on a limb! The market is all about reverting to the mean of the primary trend. And the mean for volatility is so much higher than it has been of late that, if you are a professional in this business, you’d have to be deaf and blind not to have seen it. It took no particular brilliance on my part to see that it was mass hysteria that was keeping prices up. It was once again time to distinguish between price and value.
Okay, that’s water over the dam. I can make my clients, subscribers or readers more money in the future by studying what worked for us and what didn’t, but I can’t make my clients, subscribers or readers any more money by dwelling there. So, where do we go from here?
I have a slightly different take on bear markets and bull markets than most, I suppose. America is basically a center-right nation inhabited by people with a strong work ethic and a healthy dollop of common sense. Every now and then, we get a wild hair to allow Wall Street to run amok because we think we may benefit from so doing. In the short run, we might; in the long run, we never do.
Every now and again, a mass hysteria compels us to decide we need a big change and we Hope the Change will make us a better nation. Leaving our center-right roots for a seriously right-wing or left-wing Big Answer never pays off. Fortunately, we get to correct those mistakes in November of every even-numbered year. I see US markets on that same continuum, with the pendulum swinging, but always reverting to the mean.
The trendline for this nation is that we regain our senses in time to remember that the strength of this nation has always been in legal immigrants, entrepreneurs, and small businesses, working hard in the secure environment provided by a strong military, in a relatively low-tax, low-regulation, low-debt environment where we mind our own business and expect others to do the same. When that happens, after a couple years of hesitant disbelief that we are returning to our senses, we enjoy 10-, 15, or 20-year bull markets. For examples, check out the periods 1918-1929 on a long-term chart of the Dow Jones Industrials, or 1943-1969, or 1982-2000.
Then look at the periods in between. We think of them as “bear” markets, but a bear is not necessarily a horrific decline, but is rather more like the absence of a bull. The markets from 1900-1918, or 1930-1942, 1970-1981, or 2000-to-the-present were not marked by straight down declines, or even ratcheting-down declines, but rather by sideways action that enjoyed some soaring markets as well as some devastating ones. The highest point the Dow ever reached was reached during this most recent “bear-market” phase – and that is not at all unusual! Bear markets are the periods where we mark time before making another sustained thrust upward. The advisors who tell you to buy and hold through thick and thin probably grew up in the business from the late 1970s on – their entire recollection until recently was of markets that “always come back.”
My perspective goes back a little farther. (Why else would I recommend “investment classics” written in the 1800s??!!) I’ve personally experienced both kinds of market and studied many more in great detail. This time, like all times, is a good one in which to invest if you know what you are doing. I make no “predictions.” However…
Its time to once again distinguish between price and value. I imagine we will continue to see action that looks terrifying on down days and exhilarating on good days. When we are standing next to the “tree” that day, it’s easy to panic in the first instance or to bet the farm in the second instance. I suggest you don’t do either. If you view these days on a 30-year or longer chart, you won’t even see them. What you will see, looking at the forest rather than the trees, is that the the next period (from a year to as long as 5 years, with much depending upon the two national elections in that time frame) will be ratcheting up, down, and sideways. When we are in the midst of it, every downtrend will feel like a bear market and every uptrend will feel like either a rally within the bear or the start of a new bull market. In fact, there is excellent money to be made in markets like these by playing the cyclical trends, both up and down.
That is precisely what I plan to do. We will continue to seek value rather than price. When we find pockets of value that we see as under-priced, we’ll buy them. When we see high prices disconnected from real value, we’ll go to cash or, for some clients, short the overpriced high-flyers. Answering the question I posed in the headline, “How low can it go?” -- I haven’t a clue. And neither does anyone else who is honest. But that won’t stop the direct mailers, spammers, and talking heads that attract advertising dollars on CNBC from giving you the exact number. After all, if they guess wrong, no one will remember, but if they guess right – and it will only be a guess – they will be feted and hailed as a guru.
What I will say, instead, is that at the lowest point the Dow reached, at 9870, I was quite willing to buy some of the exact same companies and sectors I’ve advised you to research most recently. I placed buy orders but, anticipating a possible whipsaw, I placed them as limit orders at the then-current ask price, and none were filled. C’est la vie. For what it’s worth, I expect to see value creeping in somewhere below 10,000 and, depending on events in the country this year, I may go 100% long somewhere below 8500-9500. It all depends on the value I see and the prices they want to charge me to buy that value.
One more thing I can do – I promise that for next week’s article I’ll provide a long-term chart that shows exactly what I mean when I talk about “buy-and-hold” bull markets and sideways “trading” markets... Until then, as Phil used to say on "Hill Street Blues," "Hey! Be careful out there..."
Author's Disclosure: This is the disclosure from my March 11, 2010 article I alluded to above: "We and / or clients for whom these investments are appropriate, are long NRP, PVR, ATLIF.PK, NZT, FTE, TBT, TIP, NSL, PFL, VXX, GG, KGC, FNNVF.PK, RGLD and SLW – and a very large cash cushion." We are bloodied by the rush to US Treasuries short-term, but believe that long-term rates can only rise. We’ll stick with them – and for now, with that very large cash cushion!
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