conciously_naive

Big Risks, Big Opportunities

I think people are not fully grasping the concept of inflation here. The point Bill Gross is making is that the money printing going on today is just replacing the money being lost. That does not spur inflation. On the other hand, it does lead to the potential devaluation of our dollar, which would lead to higher prices of any imports, which would cause inflation. Inflation is usually a supply demand game, and right now there is no demand and enough supply.

As far as the quest to time it, I dont think we need to know exactly when deflation stops and inflation reignites, which is inevitable, unless you think the world is coming to an end. It is more important to just watch the expectations. This can be measured to some degree in commodity prices, but more so in TIPS versus their Treasury counterpart. Right now, there are 5 year TIPS yielding less than a 5yr Treasury, implying negative inflation for 5 years. The only thing to own during inflation is cash/equivalents, so if you think that we will have deflation for 5 years, then sit on your hands.

If you think, on the other hand, that the markets will be back to operation in five years, than buy the TIPS. I dont think this is a "fatal" move, as the author suggests. TIPS are issued from the government, so there is limited default risk(once again, we go back to the world ending).

Hedge Fund Redemptions May Crash Q1 Markets

It seems reasonable to assume that the largest brunt of hedge fund redemptions would have already been felt, although future redemptions certainly seem reasonable, as they always do, and even future inflows will occur as many investors decide that buy and hold is a "ponzi scheme", as I have seem some people comment.

However, on the flip side of this argument, many endowments and pensions have a set mandate of how much equity exposure they have to hold. usually, these pensions will rebalance quarterly, semi annually, or annually. Many of these pensions and endowments have held off on rebalancing due to extreme market conditions. Also, they have been unable to rebalance due to a high weighting in non liquid alternatives. With 2009 coming in, there is the potential that many of these funds, who are some of the participants in the redemptions that we are discussing, will take that money and invest in equities or fixed income, depending on where their allocation currently is underweight.

While they impact of the pension rebalancing can be argued for hours, a large amount of this money is coming out of the hedge fund universe, and since there is a 30 to 45 day(in some cases, 120 day) redemption notice, that does give an argument to why there are such high cash levels.

So while this upcoming redemption period for quarter 1 may lead to massive waves of selling, it could just as easily lead to massive waves of buying. Nothing is certain. It is also important to note that even when you get in your notice to your hedge fund for a redemption, say 45 days in advance, of December 31st, you still may not get a check for your money until January 15th to January 30th. So the old trader's almanac for a January rally may end up being a February rally. Only way to find out is to stay tuned.

The Stock Market Is Not the U.S. Economy

I find it funny that people still think anyone with a bullish tone is an ostrich with its head in the ground. On a daily basis, I must hear about 10 people say:

"what about all the delinquencies? The CDO's? The hedge funds are cooked. Unemployment is going to spike!!!!"

Congradulations, you read the July edition of the Wall Street Journal. Anyone bothering to pay attention to the market over the past 12 months has know that we were in for hell over this housing bubble burst. By the way, a distinction should be made between the housing bubble and a stock market bubble. The S&P was trading at an average of 18 times earnings before the sell off, which is hardly a bubble.

The point the article is making is that the market knows that the economy is in for a very rough ride. People keep posting negative sentiment stuff, and then 20 more people post negative comments, and then everyone thinks they are the only ones with a clue. Do people really think that everyone is a cheerleader still? I struggle to find any optimism these days.

Back at the Bottom

good commentary, touching on some great points. I cant even begin to say how many times I have heard quotes such as:

"I am not a market timer, but I dont think we should be buying now"
or
"I know that it is dangerous to think it is different this time, but I think it really is different this time"
or one of my favorites
"it is so obvious that the market is going to break through the lows and collapse"

Naturally, everyone was unable to predict markets earlier in the year, but now, with 500 point swings being a regular thing, everyone knows exactly what is going to happen. Suddenly, everyone is throwing statistics and any previous form of market analysis out the window because it didnt work in the last 2 months. I even read an article with someone denouncing Modern Portfolio Theory, claiming diversification doesn't work. It makes me wonder how some people find the mental capacity to breath while thinking at the same time.

As this article mentions, the most important thing is that people understand the risks in the equity markets and what risks they can afford when reviewing their financial situation. There is less risk in equities today than there were in January, believe it or not. The market has taken out 45% of the risk in the S&P 500 from last year's high, which is a pretty large amount of risk reduction. Of course, the same person that was buying then is much more concerned about the risk in the markets now that the picture seems more dire.

People are obsessed with the concept of being right in this market. For some reason, staying invested right now seems like the stupid thing to do, so everyone wants to sell today and buy back when the market is at 5 or 6 thousand(because they know for sure it is going there). In my opinion, instead of trying to win, or beat the market, people should just sit back and focus on what they can control; their own finances.

People who attempted to become real estate tycoons through flipping condos and trading "gurus" trying to time every ebb and flow in the market with a margined portfolio should never be invested. They seek risk when the expected gain from the investment is low, and avoid risk when the expected gain from the investment is high. Not someone I want on my team, and I suggest they give up on investing all together for their own sake and sanity. For anyone who makes a habit out of thinking rationally, then you may very well have some disposable cash sitting around that you don't have earmarked for some other commitment that you are unsure of what to do with. If history is any teacher, then it may be rational to commit some of that money to the market.