Recognizing an Abnormal Market

Many segments of the market have been abby-normal of late and it is important to understand this.

This is not about bear market magnitudes or whether there will be recession, depression, famine, pestilence or anything else.

No matter whether you are a Roubinian or a Kudlowite it is important to realize that the current velocities of market action in certain segments is not what the market normally does, and any trades you might make (more specifically any big portfolio shifts) would be done so at a time of abnormality.

Going with the crowd during times like this, and right now the crowd is selling, is often a mistake. If you need to sacrifice one stock in order to sleep, then you probably should do that, but there are parts of the market that are trading like they are permanently broken (no one will ever need oil again, some emerging countries will be out of business by the end of the month, the NZ dollar is going to zero) which of course is not the case.

Periods of abnormality (fast declines) have happened before, will happen again and to be clear one is happening right now.

I am not 100% at all times guy. I'm a huge believer in defensive action (when SPX crosses below its 200 DMA as a trigger point), but not in the middle of what could be described as a panic 11 months after the peak.

Periods of abnormal trading often end with a reversal of some sort. If you think this time is different then maybe you should get out now, but if you were smart enough to have had a defensive strategy in place before things got this ugly you have a much better shot of facing this without emotion.

Comments

[phdinsuntan...:]

Roger,
too much yens in kiwiland,
and the obamacaine thing.
Waiting for the buck reversal,
here... fingers crossed...

2008 Sep 12 10:53 AM

[Larry House:]

Thanks, Roger. You have a more defensive tone in this post, and I think that is wise. I am still in energy stocks, China, and diversified large-caps, (in small quanities), and I wil stay there. I have no idea if it is wise to be in this market at all or totally out now, but I want some exposure to equities. I will probably add to energy stocks in the next few weeks. This is a good time to keep some cash for buying opportunities as they come along. Have a great weekend.

2008 Sep 12 11:10 AM

[CrossProfit:]

phdinsuntann,

"waiting for the buck reversal"
Well, vis a vis the Euro the Dollar is doing well, however Dollar/Yen is going the other way for the time being.

As for sector play, Roger is correct. Energy, in about three months time, will probably look like the best sector to rotate into now. Also, metals and mining (need to be a bit more selective here) will look good again in about three months time, though there are some stocks that haven't bottomed yet.

CrossProfit
Disclosure: Clients/associates going long both sectors and increasing new positions. Pure 'crack spread' plays, Solar and ADM excluded. Stocks 'in focus' appear on site's homepage (including IBM).

2008 Sep 12 11:17 AM

[MarvinMBA:]

Well we are in a difficult economic environment and its obvious the market is confused recession for sure, depression maybe and who is the next leader? The best strategy now is to have most of you capital sitting on the sidelines with a few specialized plays if you can find them. Outside of this sage advice, if you are unsure of even a few plays stay out of the market completely for awhile. At least you will have some bucks to play the game again or better yet pay for gas and milk....Marvin the Maven

2008 Sep 12 11:47 AM

[MarvinMBA:]

Incidently, I told some very well heeled friends to get out of the market and go into CD's over 12 months ago and they laughed their head off and said they were getting advice from "experts that were in the know and had insights that nobody else had" and paying 1 or 2 percent a year for this super advice. Well, I've been out completely for a long long time now and taken my own advice....Marvin the Maven

2008 Sep 12 11:52 AM

[Roger Nusbaum:]

one humorous line of thought that i enjoy is to say I am putting it all in shotgun shells, whiskey and beef jerky.

2008 Sep 12 12:22 PM

[steveballmer:]

Ya don't say!
MSFT should be three times higher than it is!

2008 Sep 12 12:35 PM

[Dame Daxx:]

Commodity stocks were Abnormal on the way Up, and are now Abnormal on the way Down. I wish I knew what Normal was.

2008 Sep 12 12:52 PM

[User 260805:]

Roger,
As a kiwi I am pleased that N.Z. dollar is is not going to zero!Maybe 40cents/U.S.$ as in 2001?

American tourists were real happy campers along with the tourism
industry!

Question-I have been a holder of FXI in the past & did really well but have been 40% in cash since June 2007.

I see you invested back in China last month.What is your opinion
presently with Shangai now down 65%??Am I getting too greedy
by waiting??

2008 Sep 12 01:28 PM

[Roger Nusbaum:]

I thought the low was $0.38. If we get close to that again I'd probably try to buy a house on the South Island.

There is plenty of uncertainty with China still. My logic was that at down 60%, where it was when I went in, much of the uncertainty was priced in. that it is down a little, as a market, doesn't concern me at all but I should disclose that my timing WRT to the stock selected was very poor.

2008 Sep 12 08:39 PM

[jafdc:]

Roger- This sure sounds like panic to me. So why not just go to cash? You can't win, but you can't lose either, and you live to fight another day. -JAFDC

2008 Sep 13 01:24 AM

[WAKEUP:]

Go cash. NOBODY knows what the hell is going to happen next, except for the people who are manipulating the market, even more than usual.

2008 Sep 13 01:54 PM

[swaps:]

Wish I had just stopped buyng on New Year's Day. And cashed in some positions, but now some holdings are way down - think BDN, which I thought was a wiped out safe buy at 19, and AIB (what was I thinking. Even European banks with supposedly little exposure have been taken out with the ebb tide. I boguht because several experts said it was a good buy. And they are still saying that now, but I am down and now a long term holderl. But I am beginning to wonder if the banking financial sector has truly suicided itself and it will be declared as dead as some bankrupt railroad bonds from the 1800s.).

How can a usury system go on forever anyway? No tree grows to the sky, and no compounded debt instrument can suck up all the money without killing its host. But that is off topic.

Steve Ballmer's lament for MSFT reflects how irrational it all is. In a non-IRA account last spring I was looking at buying into Disney, which I already owned, or MSFT, both around 31 at the time time. My rational mind said buy MSFT but my gut said Disney, which I bought. Disney went up to 33, 34 and is now 32 still in this horrible market, while Microsoft is down to 27.

What a stock should be can far from what is can be in this panic environment.

2008 Sep 13 02:18 PM

[bearfund:]

jafdc, the problem is that too many people (like you, it seems) keep score in dollars, but what actually matters is purchasing power in the goods and services you want and need. With that in mind, you absolutely can lose in cash, regardless of what government printed it or where you intend to live. Nominal returns can make you look good as a manager, but as an investor or saver they don't matter a whit. Right now the market is placing an absurd bet on fiat deflation, a phenomenon which has never occurred in all of history (but "this time is different," they must believe) and will not occur now.

Your cash has appreciated nicely the last couple of months; consider this a good time to sell at least some of it for a good price. If you simply can't imagine selling your speculative paper for money (gold) because dollar-centric thinking is ingrained in your methodology, I suggest selling in for tangible goods that will serve you well for a long time. Perhaps the furniture in your home is well-worn and due for replacement; this would be a good time to do so. Perhaps you've had your eye on a farm in Alberta or a ranch in Argentina; why not make a serious inquiry? And if all else fails, buy toilet paper. Humourous rhetoric aside, dollar bills are too small and too glossy to function well as a substitute.

The building of wealth has a purpose; that purpose is not to die with the largest possible number of notional dollars. If you are so dissatisfied with the available investment opportunities the market offers you that you would rather sit it out, then do so. But if you seriously expect to get more goods and services for your cash in a year or five years, you are kidding yourself. If you're holding it for later investment and do expect to get more stocks or bonds or warrants for it then, so be it. But since you would eventually have spent the income from those on goods and services anyway, you might as well save yourself some of the inflationary loss your cash will suffer while you wait by spending some of it now.

And a challenge to you: the prices of the kinds of things I have suggested you buy will track the price of gold over time, not the price of dollars, proving that if you denominate your wealth in ounces of gold rather than dollars, you will be able to better understand the behaviour of markets and more clearly grasp the price and value to be had from any investment opportunity. And when you examine those opportunities and find them overpriced, "retreating to cash" can be done without the frustrating experience of watching it lose its value in terms of the things that actually matter to you. Watch these relationships closely. Pick some common or large purchases you make, a property you would like to own, or an experience you'd like to have. Track their prices in gold and dollars over the last few decades, and over the next few. Then when you find yourself wanting out of the market, pull out these records and ask yourself what kind of cash you want to be in: the kind that represents the goods and services you hope to buy with the proceeds of your investments, or the kind that makes you feel safer and wealthier even as you become poorer?

2008 Sep 13 02:29 PM

[Roger Nusbaum:]

jafdc, bearfund points out one risk (maybe more, sorry, didn't read the whole thing) of all cash which is purchasing power risk but i'm not sure that is a huge risk if you are talking in terms of months.

the other risk that i w/b concerned about is missing a huge rally. if we have another 2003 when this bear ends it will be missed by many people who are sitting on too much cash and won't believe the rally is real.

i am positioned with a fair but of cash and some double short which leaves me underweight. with this positioning i don't have to worry about missing another 2003. i might lag it which is far better than missing it--big difference.

further for most people, even retirees, the time horizon needs to be thought of in terms of decades not 11 months. if you have taken no defensive action before now and you want to go 100% cash i think the risk of compounding your troubles of the last 11 months is astronomically high. but that's just me.

swaps, your comment about financials is instructive. taken benignly, the people you saw on TV saying good things are in a way correct, the vast majority of banks will not go out of business and in fact will come to be just fine in time. If they gave the impression that it was a good time to buy they clearly did not understand how bear markets work did not realize what was going on but were part of the consensus. there is safety in numbers. that will not change in the future unfortunately.

2008 Sep 13 03:30 PM