The Nuttiness of This Market

There was a great riff in the Four at Four Marketbeat post yesterday. The money quote was from Kenny Landgraf of Kenjol Capital Management: “The nuttiness of this market makes your head spin.”

In case you have not surmised by now, the market action in the last few weeks has been abnormal. A lot of market leaders and popular segments have gotten crushed. Oil was down $60 yesterday (a slight exaggeration). Currencies have been whacked very hard in the last few weeks. Other commodities have been thoroughly pistol-whipped.

The nature of these markets is such that the fundamentals do not change so quickly as to justify these sorts of price moves. Don't take that as me saying the market is "wrong" or that these moves cannot happen, because the last few weeks shows us it can happen... but it is abnormal.

This summer is not the first time you have encountered abnormal price action in certain markets, and obviously this will not be the last.

The important thing here, I think, is the ability to recognize when things do get cattywhompus as they are now, and take a step back (if you are one to get too focused on the shorter term) and try to realize that things are disjointed and if you have a properly diversified portfolio you should be able to weather things just fine.

In all likelihood you will quickly forget this bit of turmoil quickly enough.

On April 12, 2003 iShares MSCI Emerging Market Fund (EEM) closed at $20.20, adjusted for splits. On May 17 it closed at $15.88. That works out to 21% in 36 calendar days. Does anyone remember what happened? I do not, but how much fear do you think there was then? How many segments on TV or written commentary proclaiming the end of emerging markets do you think there were?

On May 12, 2006 StreetTracks Gold (GLD), which is a client holding, closed at $71.12. On June 14 it closed at $55.62 which coincidentally was also a 21% decline. You might remember there was a decline during Q2 2006 but does anyone remember what the catalyst was? How many commodity corrections have there been in the last five years and how quickly are people ready to give up on diversification altogether when the drops do come?

Those were rapid dislocations that eventually stopped dislocating. The current dislocation will also stop dislocating.

Comments

[DougM:]

More and more of the market is likely being treated like a gambling casino by hedge funds. Eventually their well-heeled investors will wise up to the fact that the only ones really making money are the managers, who have every incentive to take big gambles to juice the returns, and no skin in the game if the bets go wrong. The fact that they can do all this and still pay the "long term capital gains" tax rate is an outrage.

2008 Sep 03 02:27 PM

[Larry House:]

To take license with a truism, the market can stay abnormal longer than I can stay solvent. I am telling my older offspring, both in their 30s, to keep investing in their 401Ks, etc. As a working retiree, I am quite defensive, underweight in stocks of all varieties and overweight in short-term corporate bonds. I also hold silver and gold bullion. As the bonds mature, I will decide between stocks and bonds or cash. The right investment advice is totally dependent upon the time frame and not just whether or not one is diversified. Has diversification in stocks really protected over the past 10 months? Small, mid, and large caps are all down, and foreign stocks are too. I know the "dislocation" will end, Roger, but who knows when? It may end much too late for some hoping to retire this year, next, or 2010. It is more than a dislocation for millions of Baby Boomers. History shows that the stock market has had several 10-year-plus periods of being "abnormal." Depending on at what point one is in life, that is more than a "dislocation." Our U.S. economy is contracting, squeezing out the excesses of decades of family and corporate debt. It is as of yet unknown what kind of earning power companies will have for some years to come as all budgets downsize and reduce debt. It is just too simplistic to say stocks are going bounce right back, and very soon the "dislocation" will be gone. I also take exception to calling the stock market "normal" or "abnormal." These are meaningless terms when it comes to describing the action of the markets. I have followed the markets for 5 decades. I challenge anyone to attempt to identify which periods were "normal" and which were "abnormal." The market has to be taken as it is, not as we think it should be. Thanks, Roger. I always read your posts. I just think your seemingly simplistic optimism can be dangerous advice when such huge U.S. and global economic forces are currently shifting around. Good life to all.

2008 Sep 03 03:15 PM

[BrunoT:]

I can't understand the crazy market in the short term, but hopefully the long term macro picture that I DO understand will show out in the long run. I think that commodity markets have become yet another new "fad" like dot.com stocks and RE, except that this time it's the big boys and traders playing the game, not neophytes off the street. But you can only fool people so long. When those non-financial people DO figure it out that their currency is losing real value, that the govn't statistics are phoney, and that you can't make money owning stocks that don't make profits, there is great potential for a TSUNAMI of cash to flow into commodities as people search for something tangible in an ocean of fiat currency.

2008 Sep 03 03:17 PM

[foobah:]

Why is it when I read others who believe like I do that paper currencies are heading for problems and commodities are probably underpriced that it feels like something I might see in a brochure for a religious revival meeting that's coming to town?

2008 Sep 03 03:26 PM

[inthemoney:]

I agree with DougM. The market becane a casiono. Today it is one game, tomorrow is next. There is no way commodities can go up and down 50% without ovewr-leveraged hedge funds piling up on the same trade. Today's game is retailers, regional banks and dollar. May I ask who is buying retailers in a consumer recession?
There is no regard for fundamentals. None. It is all a trade. Take your money and run as soon as you see a profit.
The game will not stop until enough hedge funds fail.

2008 Sep 03 04:31 PM

[JasonC:]

Foobah - because you are simply caught up in the latest idiotic bubble and fad. Commodities are not protection against financial shenanigans, they are a financial shenanigan of their own.

Fiat money stuffed in a mattress does not hold real value. Fiat money lent out at interest to your average corporation (or muni for high bracket people) holds its real value but doesn't earn anything else, real.

Capitalism isn't a ponzi scheme and it isn't broken. There are any number of bubbles in history and we've seen several, the one currently unwinding is called "commodities" and was led by oil running up 25% per year for 5-6 years. Real estate slightly led it, but wasn't any different in principle. In both cases, the inflationary brainstorm that just piling into something "hard" or "real" would effortlessly make money at the expense of everyone else, proves decidedly unsound as soon as too many people have that same brainstorm, and send prices to barking moonbat levels.

2008 Sep 03 05:00 PM

[MarvinMBA:]

Crazy markets mean crazy investors....its easy to act crazy in this market where commodities seem to be the driver of equity pricing. What we need is low price energy to get this market to start acting traditional whatever that could possibly mean...good luck but staying out of stocks at this junction could be your best iinvestment...at least you will not lose.

2008 Sep 03 05:47 PM

[CLH:]

What is a normal market? If you think the market is abnormal maybe you should leave. Jason has the right idea. Capitalism is a tough game but its rewarding for the smart. I say hang in there and you will be glad you did.

2008 Sep 03 06:29 PM

[Jimmy Lathrop:]

As long as you stay chained to your terminal scanning Bloomberg every second waiting to jump in on a trading wave of stock no matter how preposterous the impetuous is, everything will be FINE. Just remember to set in your stop order for an incremental gain if things violently whipsaw into the other direction. Remember, one false move and you are sleeping in your kids basement like Arthur in the King of Queens. Oh, and that sizzling sound? It is your stomach acid eating its way through your body cavity and into the floorboards. Forget about doing your work during the day and your fantasy football trades.

2008 Sep 03 08:59 PM

[Burticus:]

Thank you to the manipulators for pushing the paper prices of precious metals low again, while M3 and related inflation of fiat currencies soar. This has enabled me to continue filling my gun cabinet with real money - physical silver and gold.

2008 Sep 03 10:32 PM

[notsosmart:]

a society that makes a living pushing monopoly money & other funny paper can only exist so long.if you cant produce a usable product you will fail eventually.when? i dont know.

2008 Sep 04 01:41 PM

[inthemoney:]

CLH, would you update us on your view of the market after 3% sell off today? I say, finallly the market did something that made sense.

2008 Sep 04 04:36 PM

[Kunst:]

CLH, so sad.

2008 Sep 08 02:11 AM

[Kunst:]

"More and more of the market is likely being treated like a gambling casino by hedge funds."

A true market assumes many independent bettors (yes, it's still betting). When large concentrations of money can move the markets, they become the market. However, they seem to be doing such a poor job that they will soon solve the problem by ceasing to exist.

2008 Sep 08 02:13 AM