Not Just Another Bear Cycle

The Financials (XLF) dropped another -6.02% last week, which means that in the ten weeks since May 3, the average WEEKLY loss in XLF is -4.05%. If you have been long financials over this period, your portfolio has been whipped. If you have been 100 percent invested on the long side, your portfolio has suffered greatly.

Interesting that Financial Entertainment TV is only just now getting around to talking about a Bear Market, as in ‘maybe it is; maybe it isn’t’. But then, long-time members of this community know how to handle the sell-side shills of FETV. For the most part we ignore them and focus on prices plus our extensive and growing discourse.

Over 52 weeks, by the way, the XLF loss is -47.77%, which means that to make back this capital loss requires a gain of +192%. As I wrote a week ago, that’s going to take some time, which is the principle behind why I have been predominantly negative in this blog for the past couple years.

I even got tired of pointing to the cause, which is the run-up in debt into which Humongous Bank & Broker pushed clients. But I can’t seem to let it go that Mr. Moral Hazard, who runs the US Treasury, is largely to blame for promoting the market’s excesses and now coming up blank-faced and blink-eyed when asked by Rep. Dr. Ron Paul to testify as to whether or not the Treasury has a strong USD policy in place.

As long as the Talking Head anchors keep their collective yap shut and let the testimony run, FETV can teach the independent trader a lot about these so-called leaders. It is a tough job, even for such a practiced artist like Henry Paulson, to suck and blow simultaneously.

In any case, some of those commercial and investment banks that supported Paulson’s Folly are no longer in business. They are now bank-rupt. Actually, if it’s ethics we’re looking at, some of them were bankrupt a long time ago.

I have read where commentators opine that this is just a normal Bear cycle. I say not! Never has there been such intense pressure by banks to expand credit and then to suffer the effects of capital destruction when borrowers failed to use that credit to build offsetting economic wealth.

To hide the problems, the Fed dropped the publishing of the M3 calculation, although I have yet to hear anyone in Congress ask if the Fed still calculates it and to testify what that number might be. Alas, as most of us knew at the time it was abandoned, M3 would have focused the market on credit expansion and the increasing gap with wealth expansion.

Then, to worsen matters, the Fed replaced liquid currency reserves on its balance sheet with illiquid investment holdings of failing banks. To an honest banker, that too makes no sense other than to serve as a facility to hide the problems and prolong the suffering of shareholders of these failing banks.

I suppose that these scoundrels in the leadership will ensure their legacy is protected by the typical rewriting of history that goes on in America by people in powerful positions.

All of this commentary is proof positive why I trade like I do: (i) focus first on risk, (ii) then focus on quality companies, and finally (iii) focus on price of the stocks and use trend and cycle studies to determine one’s Accumulation/Distribution mindset, and Buy/Sell tactical decisions.

At the end of the day, as long as you remain independent, objective, clear-headed, and use common sense, your portfolio will perform in the top quartile or higher of all investors, including those of the market insiders, like bankers and corporate officers and directors.

While you might not have avoided the full -21% decline in market prices since the cycle peak last October, many of you have.

Moreover, based on what I have read on my blog, many of you were short the shares of companies like Countrywide (CFC), Bear Stearns (BSC), Wachovia (WB), Merrill Lynch (MER), Lehman (LEH), Fannie (FNM) and Freddie (FRE). You profited from the falling market. And, when done legally, you never considered your shorting practices to be un-American.

In addition, many of you here have learned to appreciate the importance of trading prices, which is what investors in capital markets do. And for that, now your life has changed for the better. Moreover, from the commentary in the Discourse last weekend, I can see that many of you are helping others, which was my objective from the beginning.

I cannot thank you enough for your helping me, and for informing me. When you think of it; one hundred thousand sets of eyes is always going to see more than one set.

We all can contribute something to a better society, you know. A word here or an observation there; you would be surprised how it could suddenly turn on the lights for people who had never thought about such things.

The world may be growing smaller, but it’s still a big and daunting place when it comes to protecting and growing our wealth. For the past year, it’s been a dangerous place.

Consider how far the global stock market has fallen since mid-October. This chart of the Dow Jones Global Index shows the cycle peak at 320.33 in October and 255.86 presently, which is a loss of -20.13% worldwide in nine months. For example, for the S&P 1200 index of global large cap stocks, the total loss in equity is an astounding $6.5 trillion.

By helping any and all of you avoid those losses, at no cost except for your time, just think what this community is doing for social equity.

Comments

[punk_ash:]

bill,

having trouble with getting a thought process work for you. In one sentence you talk about equities and portfolio and the next you talk about equitable society. I am all for equitable society, but it is irritating to read when the author can't seem to present his ideas in a clear manner.

2008 Jul 14 02:33 AM

[Vox Rationalis:]

"Over 52 weeks, by the way, the XLF loss is -47.77%, which means that to make back this capital loss requires a gain of +192%."

Little math problem here.

2008 Jul 14 03:23 AM

[ericinNE:]

The math is correct. Take a dollar, lose 47.77%. That leaves you with .5223. Times it by 1.915 (192% close enough.) Now you have your dollar back.

2008 Jul 14 03:40 AM

[Alan von Al...:]

Bill Cara's voice speaks for me, loud and clear. Us old guys care about transparency, community and fairness.

2008 Jul 14 04:01 AM

[Bengal Tigger:]

People like Bill and Eric shouldn't be investing given their horrible math skills. Try subtracting out the "1" before the decimal point, you guys. That's called parity. What's left is 91.5 percent which is the gain on .5223 needed to get it back to a dollar.

Let's make the math simpler for you. A ten dollar stock loses fifty percent (half) of its value. Now it's a five dollar stock. To get back to ten dollars, it needs to double, or in other words, grow by one hundred percent. Bingo.

The whole discussion is a moot point anyway, because it's predicated on a false premise. It's actually not hard for a stock to gain twice the percentage it lost when it dropped. Stocks do in fact go up as fast as they drop on many occasions. When the outlook and financial condition of a company changes, it doesn't need to adhere to articficial rules about percentages of gain or drop. It just needs to hew to the new fundamentals, whatever they may be. And that's what happens, driving the price back up. This simple concept is not properly understood by many financial writers and analysts.

2008 Jul 14 04:10 AM

[ericinNE:]

Maybe you were confusing return with gain. An understandable mistake. If Bill had said "96% return" it would have been clearer.

2008 Jul 14 04:34 AM

[ericinNE:]

Opps, make that 92%. Bengal, you need to learn the difference between the terms "precentage return" and "gain" in math, before criticizing others math skills. Gain is the multiplier, and removing the 1 before the decimal would make the multiplier less than 100%, resulting in a net amount of .4805; less than what you started with.

2008 Jul 14 04:51 AM

[Allen Fuller:]

You guys are bickering about different ways to look at a math problem.
We all understand the underlying concept.

While you bicker, the bear market (no, I don't think it's just a "cycle" this time) will continue to destroy people's "wealth." The REAL currency powering the world's economy is crude oil, and the cheap, easy oil is fast disappearing. The bubble of easy credit in the monetary system was backed by the assumption of unlimited economic growth, powered by unlimited cheap oil. And now that oil is becoming more scarce, the monetary system is going through the first throes of its destruction. Not to mention our economy.

Oil may dip again to around $100... AFTER our economy is in shambles and demand is so totally destroyed that the price can fall. But oil will never again drop as low as, say $50 per barrel. Production of the cheap, easy oil that our economy is addicted to is already in decline around the world. The costs to fill the gap with new oil discoveries is skyrocketing... assuming we can even fill the gap. Again, if demand is sufficiently destroyed then the gap may not need filling, but the costs associated with extracting new oil will not go down, so the price will not drop too far. All the cheap oil is used up.

Google for "The End of Cheap Oil"... an article in the Scientific American from 1998. They predicted a peak in oil production in "about 10 years"...

2008 Jul 14 08:46 AM

[finmah@yaho...:]

There is a little hypebole about bubbles - financial institutions in many countries have been caught overlending while the economy shrinks but we are going through a global expansion and hopefully when can start to reach the point where countries decouple.

I agree with Mr. Fuller - the choke point with all the global expansion is oil - don't believe look at all the other commodities as well.


There is a group in Congress that has lasted for thirty years and has consistently voted for massive infrastructure expansion in the name of big houses in which the cheap money and financials are tied to, massive interstate construction, big dig project 18 billion to expand traffic through a major city, bailed out autos etc.

The very same individuals at the same time voted against replenishing the source of fuels for these projects - Oil, natural gas terminals, nuclear, and new mining incentives. And when the finger points to this travesty of politicalization of our natural wealth they point to polar bear models right before an election. Only in America could you get such double talk and incompetance forget the dollar - we need to get around the country with going broke - the dollar will then take care of itself.

2008 Jul 14 10:40 AM

[Larry House:]

Right on, Bill. I continue to say there is nothing textbook about this cycle. There are many forces at work this time that we have NEVER seen in our lifetimes. We are in unchartered waters. Make sure your boat doesn't leak!

2008 Jul 14 10:41 AM

[Thomas Smic...:]

This time it's different. OK. LOL

2008 Jul 14 12:25 PM

[hypratt:]

These certainly are troubling times financially. Who can tell how long it will last. Then look at our two top choices for President. Twiddle Dee says that we should stay the course and keep paying thru the nose in IRAQ while Twiddle Dum wants to get out and use the money to pay for health care. This is of course with borrowed money anyway. Why are they our choices? Because most of us are too stupid to vote for someone who thinks that we should have a balanced budget and no deficit. The savings on the interest could be used in a lot of beneficial ways one of which would be to shore up Social Security. I was hoping that someone like Bloomberg would throw his hat in the ring. He certainly did not get to be a billionaire by spending more money than he made. Some of my friends say that he would not look out for the little guy because he is rich. So rich that he would not have gotten us into Iraq just to make billions of dollars for his cronies in charge of all of the no bid contracts that were issued. (Halliburton comes to mind).

2008 Jul 14 06:02 PM

[alajac:]

the NDX 1999-2008 looks just like the DJ30 1929-1937 shifted right about 9 months. the housing collapse in 2005 had articles and charts explaining how the sp500 always followed 9 months later. Any idiot could have called this. I know that to be the case, because I did. Anyone that missed it shouldn't be trusted with a checkbook.

2008 Jul 14 08:02 PM

[Ray Yorgensen:]

A comment on the math problem:

Eric and Bill Cara you are wrong. Bengal you are correct.

Take $52.23 and what PERCENTAGE increase or gain do you need to get to $100.00? That would be 91.46%.

Bill Cara's point is a good one nevertheless.

2008 Jul 14 08:39 PM

[Shareholder...:]

Alan von Altdorf writes: ["Bill Cara's voice speaks for me, loud and clear. Us old guys care about transparency, community and fairness"] However, he commented on a story we did on InterOil, promising a "formal assessment" over the weekend (now more than a month ago..), and (ab)using the opportunity for some acerbic comments.
We're still waiting for that "formal assessment", and in the meantime, we're not so sure whether this Altdorf character is really so interested in "transparency and community", and certainly not "fairness"...

2008 Jul 14 11:31 PM

[PhillyD:]

To Hypratt:

I hate to break your 'bubble' (pun intended) but a balanced budget will NOT reduce our interest costs by $1! We still owe the money and we still have to pay the interest costs (at least) of that debt. ONLY if we begin to have budget SURPLUSES and we spend those SURPLUSES on paying down the principle will the interest payments go down on a yearly basis.

I would love to see this happen but am not counting on it and that's depressing. Ron Paul or his younger 'twin' can run for President next cycle and have a chance at winning.

2008 Jul 15 03:52 PM