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Sy Harding founded Asset Management Research Corporation in 1988 for the purpose of providing stock market and economic research to institutions and serious investors. Harding’s engineering background, coupled with his experience in operating high-tech businesses through numerous economic... More
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  • Can Corrections Be Better Than Rallies? March 4, 2010.

    Can Corrections Be Better Than Rallies? March 4, 2010.

    Twenty years ago, just prior to the 1990 recession, I wrote a little booklet for my subscribers which I titled ‘Bear Markets Are Best’. Its premise was not that bear markets are really better than bull markets, but that they are not something to be feared, and do have some advantages over bull markets. The same goes for corrections within bull markets.

    For instance, if you position for them in a timely manner, not just by moving to cash to avoid losses, but to downside positions that go up when the market goes down, the profits can come faster than they do in rallies and bull markets.

    That’s because the market moves down much faster in corrections than it moves up in rallies.

    For instance, in the 1990 bear market the S&P 500 lost the gains of the previous 15 months in just four months of decline. An investor playing the downside could have made at least some portion of 15 months of gains in just four months, rather than giving back 15 months of gains. In the 1987 bear market the S&P 500 lost the gains of the previous 18 months in just three months. In the 2000-2002 bear market it lost the previous four years of gains in two and half years. In the recent 2007-2009 bear market it lost its previous five years of gains in just 17 months.

    It’s an important lesson not just for buy and hold investors, but for all investors. When market declines take place, if no action is taken, previous gains can be given back much quicker than they were made. Just avoiding at least some of the decline is advantageous to long-term investing performance. In fact if even partial downside positioning is taken in time, further gains can actually be made from the market decline.

    In the ‘old days’ prior to the introduction of bear-type mutual funds, and the more recent introduction of ‘inverse’ mutual funds and ‘inverse’ etf’s, investors could only stand aside in cash during market corrections, and then re-enter at lower prices to make some of the profits all over again.

    Even that strategy produced significant market-beating performances.

    In 1986 Norman Fosbach included a study in his book Market Logic covering the period from 1964-1984, in which he found that an investor starting with $100,000 in 1964 would have produced a gain of $775,000 over the 20-year period on a buy and hold basis, using the S&P 500 as the proxy. That’s a substantial gain.

    However, his study found that if an investor could have timed only the major market swings over the period he would have turned the $100,000 into $13,810,000 over the same period. And timing only successfully enough to avoid the three worst downturns of that 20-year period would have turned $100,000 into $4,797,000, almost six times as much as the market made on a buy and hold basis.

    In fact, Fosbach’s study found that any degree of success at all in avoiding even a portion of downdrafts had a tremendous effect on long-term accumulation of wealth.  His study showed that if one was perceptive enough to sell short for only one-fourth of each of the three worst corrections during the twenty-year period, and remained invested through all the rest of the downturns, he or she still would have tripled the return of a buy and hold strategy.

    I haven’t run the numbers, but given the market’s quick give-back of previous gains in the corrections and bear markets of the last twenty years, which I noted at the top of the column, I suspect it has been the same situation for the last 20 years that Fosbach discovered for the 1964-1984 period. Avoiding even a portion of the big losses, or even better, to make additional gains from downside positions during at least portions of big declines, can be a major influence on long-term investing success.

    It might be something investors would do well to study up on now, to be prepared in advance, rather than wait until the next panic strikes.



    Sy Harding is editor of, and the free daily market blog,

    Disclosure: No positions
    Mar 04 2:23 PM | Link | Comment!
  • Where Have Investors Gone? March 4, 2010.

    Where Have Investors Gone? March 4, 2010.

    As Pete Seeger might have written it and the Kingston Trio might have sung it in the sixties, ‘Where have stock investors gone, long time passing? Gone to bond funds every one, long time ago.’

    Will the last lines to that great folk song also become part of the picture? “When will they ever learn? When will they ever learn?”

    I bring that up given that investors are still largely missing from the bull market. And as I wrote in my daily blog a few weeks ago, statistics show that most investors who lose money over the long-term do so because they become fearful after suffering big losses in a bear market, swear off “the damned market for good”, and don’t become interested again until the next bull market has been underway for a long time. They then pile in with abandon in an effort to catch up after the bull market has just about run its course, and the next bear market is due. The cycle then repeats.

    We seem to be at a point now where investors have sworn off “the damned market for good”. As one participant in a website discussion put it this week, “Most people I know in their 50s and 60s are done with the market – period. It could go up another 300%. They don’t care. With bonds at least we can sleep at night.”

    Will they be right this time?

    In the past they have stuck with that thought for quite some time, often several years, until they learn how much their friends and neighbors have been making in the stock market again.

    Investors continued to pull money out of the stock market well after the 1973-74 bear market had ended, after the 1987 crash, after the 1990 bear market, and certainly after the 2000-2002 bear market. As money-flow research firm Trim Tabs reported, “After the 1987 crash investors pulled $20 billion out of equity mutual funds, and then made the opposite mistake of putting $22 billion back into the stock market only a year before the 1990 bear market.”

    The pattern was never more clear than in the recent bear market, and new bull market.

    Most investors, believing themselves to be buy and hold investors, also held on most of the way down in the latest bear market of 2007-2009. A record amount of money flowed out of equity mutual funds and into bond funds not near the top in 2007, but between November, 2008 and the end of the bear market in early March, 2009. In fact, the panic to get out of stocks and into bonds during the final four months of the long bear market created an unusual spike-up bubble in bond prices in late 2008 (which then burst, with bond prices tumbling 19% last spring, and still not recovered).

    The exit from the stock market continued even as the stock market rally off the March, 2009  low turned into a new bull market.

    As Dan Sullivan of The Chartist newsletter noted in a recent issue, “Between July 31 and November 30, 2009 investors pulled $36 billion out of domestic stock funds, and pumped $142 billion into taxable bond funds. From November 30 through the end of the year they pulled another $10 billion out of domestic stock funds while putting $35 billion into bonds.”

    As Sullivan continues, “Obviously the public is still not aboard this bull market. Investors on the sidelines view the continuing rally with great suspicion, wondering when the next shoe will drop, when the bear market will reassert itself. However, they will come back, as they always have.”

    The absence of public investors has not prevented a strong bull market, but rising on very low volume, as financial publications have been noting. On average not much more than one billion shares have been trading daily on the NYSE for several months, compared to close to two billion in previous years, and as many as three billion daily in some periods when investors decide it’s time to really pile in.

    So the beneficiaries of the new bull market have primarily been professional traders, and professional investors at hedge funds, banks and other institutions. In fact, banks have been reporting large profits due primarily to their trading and investments, even as their loan losses pile up.

    There is a ton of money pulled out of the market, on the sidelines in money market funds and bonds. It was hoped that the new year would see volume pick up, with some of that sideline money coming in. But so far it hasn’t happened.

    Meanwhile the bull market has continued in its stealth mode of slowly creeping higher on very low volume, just enough negative days to keep wary investors wary, participants still slowly making gains even as sideline money doesn’t budge.

    Already the S&P 500 has gained a whopping 65% since its bear market low last year. Will it be another example for history of investors missing out on the biggest portion of a bull market, not entering until it’s almost time for the next bear market?

    They say that history does not repeat but it certainly seems to be doing so again.


    Sy Harding is editor of, and the free daily market blog,

    Disclosure: No positions
    Mar 04 2:22 PM | Link | Comment!
  • Why Talk of Re-Regulating Wall Street is Just Talk. March 2, 2010.
    Congress continues to promise tough regulation of the financial industry. Another version of a reform bill is expected to reach the Senate for debate next week.
    It’s all window-dressing! More months will pass, during which investors and consumers will hear assurances that tough reforms will take place. But nothing meaningful will be forthcoming.
    It’s been the same after every financial implosion and Wall Street scandal in recent decades.
    Only after the shock of the 1929-32 crash, when the stock market lost 90% of its value and pushed the country into the devastating Great Depression did Congress take meaningful action.
    In the 1930’s, after similar investigations revealed similar problems to those of today, Congress passed the Truth in Securities Act, which required corporations to provide more honest information about their operations, sales, and earnings; the Securities Exchange Act, which was aimed at ending fraudulent trading, by regulating stock exchanges, banks, and brokerage firms; and the Glass-Steagall Act that prevented commercial banks from being involved in stock brokerage and trading activities. Congress also created the Securities & Exchange Commission to police the newly regulated securities industry.  Among the SEC’s quick actions, it imposed the ‘uptick rule’ that prevented firms from driving a stock, or the entire market down with relentless short-selling (they had to wait for ‘upticks’ before they could execute a short-sale).
    Congressman Sam Rayburn said at the time that the president of the New York Stock Exchange mounted “the most powerful lobbying effort ever organized against a piece of legislation.”
    Wall Street did manage to get the bills watered down, but even with that the reforms were meaningful, and did take place.
    Most investors are probably unaware, or forgetful of the many scandals that have taken place in recent decades, in which criminal charges by the SEC and Justice Department have periodically accused major financial firms of fraud and scams of public investors. In almost every case the evidence was overwhelming enough that the firms settled out of court, agreed to pay sometimes $billions in fines and restitution, but were allowed to sign settlements in which they “neither admit nor deny guilt”.
    The public was usually too happy that a bull market was underway to be bothered by such details. So with no pressure on Congress there were no regulatory changes to halt such activities.
    There was not even any public outcry when many of the previous regulations, including the Glass-Steagall Act, the ‘Uptick Rule’, and the curbs on ‘program-trading’ were repealed.
    But here we are, after the bursting of two serious bubbles, in stocks and in real estate, and two severe bear markets, the combination of which has resulted in investors and homeowners losing $trillions in the value of their assets.
    As in the 1930’s, now the public is mad and demanding that financial firms, particularly the major banks, be punished and reformed.
    Congress has responded to the anger of its constituents with investigations, in which it has, as in the 1930’s, identified the big financial firms as the major players that created the bubbles and their aftermath, and is again promising reforms that will prevent another recurrence.
    (They don’t acknowledge that they aided and abetted by repealing the previous regulations for their friends on Wall Street).
    Politicians will respond to their constituents. So as long as people remain mad and demanding reform, that’s what Congress will promise.
    However, as usual the financial industry has begun to fight back, working to convince the public that reforms are not needed and would actually do more harm than good.
    When they have convinced the public of that, and the furor for reform dies down, Congress will also back down, leaving it pretty much business as usual for Wall Street.
    How can the public become convinced that reforms would do more harm than good? By clever propaganda.
    For instance, a number of bailed-out banks have formed a group they call the Coalition for Business Finance Reform. Sure sounds like a group whose public statements will provide unbiased information on reforms. But its purpose is to educate against reform of ‘over the counter derivatives”, the customized contracts the big firms trade in private arrangements away from the public exchanges.
    In a similar education of the people effort, JP Morgan released a research paper last week, which The Financial Times headlined as “Doomsday Regulation Scenario Laid Out”. The JP Morgan paper predicts that proposed reforms would result in banks having to raise $221 billion, which they would have to pass along to the public in much higher prices for bank services.
    Meanwhile, financial firm executives and their lobbyists are out in full force with interviews and articles explaining that proprietary trading, derivatives risk, etc., did not really contribute to the collapse of the financial system, and need not be regulated.
    Congress has incentives of its own for arriving at the same conclusion.
    During the 2008 elections Wall Street provided candidates with $155 million in campaign funds, roughly $88 million to Democrats, and $67 million to Republicans. In the year after the election Wall Street firms and executives handed out $42 million to lawmakers, most of it to the members of House and Senate banking committees, and House and Senate leaders.
    This is the mid-term election year when their re-election looms larger than any other consideration. So expect Congress to continue to talk the tough talk that voters want to hear, but by stalling until the anger dies down, to eventually be able to walk the walk the financial industry is paying for, meaningless but noble-sounding regulatory changes.
    Sy Harding is editor of, and the free daily market blog,

    Disclosure: No positions
    Mar 03 3:40 PM | Link | Comment!
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