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25 comments:
Good points about the '87 crash, Roger. I just wanted to add some more historical context. The stock market actually peaked in late August '87. A 9% correction followed that bottomed in September. The rally to the Oct. 5 high you mentioned was a lower high than the August peak. The market then went into a relentless slide that culminated on Oct. 19 "Black Monday". Total elapsed time from peak to crash was over 1.5 months. A similar pattern occurred in 1929.
Of course, it could be different this time, and the market crashes almost immediately from a multi-year high. But there is no historical precedence for that type of pattern.
I've never been a big fan of the concept that the stock market forecasts the economy or much of anything really -- it's more a price discovery mechanism than anything else as far as I can tell -- but, absolutely, yes: Have a plan for bad times and, if history is any guide, understand there will probably be sufficient time to execute it if/when it becomes clear the trend is down.
Mike over at Interest Rate Roundup sees a number of similarities to 1998 (http://tinyurl.com/226rbo) in what is happening now but of course that unraveled more slowly than 1987; i.e., despite earlier damage to the bond market, the destruction of LTCM and widespread carnage among secondary stock names, it was nearly two years before the tech high-fliers imploded and the S&P 500 gave up the ghost; i.e., there were a lot of people losing a lot of money before the 2000 break.
Regardless I agree that liquidity, which vitally includes credit availability, is probably key and credit availability is the thing that has been on my mind of late as various sources of easy credit from the Bank of Japan to subprime mortgage and HELOC lenders continue to show signs of tightening up. In the case of the latter, one of the ugliest SEC filings I've ever seen can be found at http://tinyurl.com/2u3qpz -- it's from the #5 subprime lender, Fremont -- jump to Section III and ponder the wages of greed.
But not Fremont's greed and stupidity alone. My crystal ball is notoriously cloudy but I have little doubt the mortgage mess will be spun as a few 'bad apples' and some 'ignorant' borrowers who didn't 'understand' what they were signing, etc. even though the increasing scale of this unfolding event makes it rather obvious that everyone from home builders and real estate brokerages w/ their regulatory friends in state capitals to the big investment and money center banks w/ their regulatory friends in Washington DC were probably wallowing in this trough.
Roger, good info. Since you are fond of Iceland in many posts, I thought you may find this interesting...he learned the Iceland language (very difficult) in one week.....
http:// 60minutes.yahoo.com/segment/44/brain_man
Roger, when you discuss the "V" - you mention it's not a good time to sell at the bottom of the first leg of the "V" as the market bounces back.
In my mind - and I don't know the answer other than I know what happened in the '70s, and have read about the '20-30s - a crash and actual portfolio damage occur when the market doesn't recover within a 1-2 time period.
Many scenarios could cause this to occur (I respect Marc Faber, although I'm not that bearish!), but a market can stay down for long periods of time. Reacting to a scenario where a multi-year bear market is something that has not occurred in 30-some years.
Buffett, Munger types have lived through those times. They have talked about the liquidity of putting in stink bids and getting filled because buyers simply didn't exist.
Fash Money commentators talked about the '87 crash and SP500 contracts not getting filled for 2-days. For a trader, 87 was tough. But since 81 or so, all investors/traders have really known is a bull market in bonds and the stock market.
I believe other types of scenarios can & will occur. The # of people living who know how to react is very small.
If I had a ton of money to put to work, I had the flexbility of a hedge fund, I needed to make option trading produce, and I was stuck in a low volatility advancing enivronment...I would do whatever I could do to get volatility back. It's a game of wealth distribution. Someone else has to loose. I have no ethics except win at all cost. Then again, the only way to win, for me the lowly retailer, is to play. So, I let a little parnanoia become part of my analysis. Larry Kudlow can not tolerate anything other than hysterical optimism. He's a run away train. If he was a cocaine addict, I can see how it would be his safe place of choice. Rodge, I challenge you to not listen to cnbc for 1 week, just stick to hard data and a few low correlation (to cnbc) blogs, and the routine you use for global country economics. I think it's interesting that on 2/26 reserve requirements in China were increased.Was that ever reported in main news channels? And, the yen, you have been perfectly right about that as a primary driver. Hold your own counsel, the heck with others. Time for my starbucks 12 step meeting.
I'm with RW in that I have no confidence that the stock market can predict a darn thing other than ill-timed headaches and euphoria (and I have even less confidence in Larry Kudlow's opinion to possess even the slightest brush reality.) The market has been erroneously forecasting the drop in treasury rates for over a year, and I believe that the burgeoning bourses have mis-priced risk over the past year. Not a track record in which I take confidence!
Now, as a barometer of liquidity (real or perceived) the market is quite accurate. Therefore, a drop in the barometric reading (again, real or perceived) portends a financial storm. Accordingly, I think it is safe to say that loss of liquidity causes recessions.
THEREFORE, I believe that the market is a casualty of a liquidity contraction and causality of recessions. I suppose one could philosophically nit-pick that one cannot parse the two apart, and I'll concede your winning that argument prior to engaging in it.
But I offer this up as my delineation between casualty v. causalty (with an embarrassed admittance that I might be overthinking this): If reduction in liquidity causes the market to fall, then scanning the horizon for the financial shocks that can cause this loss in liquidity gives one more of a forward look of potential systemic liquidity risk. It's not the GDP and inflation numbers but the financial cracks that should sound the alarms.
I don't mean to sound emphatic or even arrogant, but this mental model makes sense to me and I think mirrors the reality that we are experiencing. AND it gives one some foundation to all of the talking heads (not you, Roger) that claim that because inflation (in all of its computational incarnations) is in check and GDP (multiply revised)is good and job creation (multiply discredited)is terrific so stop hand wringing about the credit situation.
If any of this sounds obnoxious, I apologize in advance.
Definitely good to have a plan just in case. I have a big Short on US housing and real estate. Why? Because when you have loose lending in residential, you also have it in commercial. Aggressive in one area, aggressive in all. It's human nature. Watch for some shaking in the banking system too, on account of MBS used as bank capital. Issued for 20 years as long term debt, they were mostly "structured" to terminate in 5-7 years. But they were counted as core capital (Tier One Capital) by issuing banks.
A bunch of MBS issued by national and regional banks were sold abroad, but bulk sold to small banks and pension funds, qualified investors and the like, who were happy to have something paying 10% in their portfolios. With slow-pays and defaults mounting throughout 2007, as ARM's reset -think about it. No money back, sorry, you bought it, you own it. Tremors in banking system very likely indeed.
Was it a crazy week?
I would say that these last weeks (and months and ...) have been crazy. The market has been going up and up and up ... that is not rational at all. I think that it has long time been far out of phase with economic reality. And with all realistic possiblities for profit gains by the companies that the stocks represent.
It is less crazy that the market comes thumping down like this, although it may well shoot back up again. WHo knows?
It seems to me that we have come to look at the bull market as the norm. I think this is a false idea.
I'd like you to explain the reasoning behinds your statements that the market is an advance image of the economy. Taken as is, I strongly disagree. I think that the market embodies all the irrationality of our increasingly speculative economy.
Oh yes, about selling at the bottom of the V.
How do you know where you are in the V? In September 87, selling on the rebound of the V would have saved a lot of heartache come october.
There's no reason to think that the market will go a lot further down. Or that if it does go down that it will not rebound back up like after 87. Or that it will remain down down down for years or decades.
But still, it might.
I don't think that your perspective is wrong. Also, I have seen that you are prudent. You are not a beater of the bull market wardrum. Still, I remember back in June, you seemed to be more alarmed that today.
I would hope that you and your clients don't depend on the money that you have invested, that you can afford to lose a big chunk of it, if things go that way.
I'm a little surprised by the quick change in market sentiment over the past week. Usually eurphoria is followed by denial... but it seems we went straight to fear.
I went back to The Big Picture archives to read what folks were posting earlier in the month. Unlike the pundits and other forums, I found most readers here are very prudent and thoughtful. I did find a few gems though (I won't post the names to protect the innocent).
---------------
"I'll take the ugly sentiment as a contrarian buy signal. Same with the curve, since EVERYONE's SURE that means we'll "plumment"."
----------------
"Stock prices have reached what looks like a permanently high plateau."
-- Irving Fischer, 1929
“Buy the plateau(s)”
----------------------
"I hope y'all enjoy waiting in high cash percentages and bear fund allocations for the "inevitable" correction, discussing market internals, momentum divergences, and how "amazing" the market has been.
Meanwhile, the sun is shining, and I will be out making hay. And I will stay in the fields as long as the sun is shining. Should the sun remain shining for any appreciable length of time, y'all may find your 2007 returns drifting well below that of the major indices. But don't worry, your money will be "safe."
Good day!"
-----------------------
"The bears always seem so much more literate than the bulls. They express themselves so well. Compare Hussman, Ritzholtz, Maudlin, Faber, Abelson, with say, Cramer and Kudlow.
Although personally, I prefer gross materialism to genteel poverty."
Models this Week
Timing Model = .5
60% long, 40% cash
Global Allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%
Top U.S. Sectors
Mid Cap Value 5.0
U.S. Real Estate 5.0
U.S. Basic Materials 4.0
U.S. Telecommunications 3.5
U.S. Utilities 3.0
U.S. Leisure Goods 2.5
Top Intl. ETFs
MSCI Malaysia Index Fund 3
MSCI Mexico Index Fund 3
MSCI Sweden Index Fund 3
MSCI Australia Index Fund 3
MSCI Singapore Index Fund 2
FTSE/Xinhua China 25 Index Fund 2
MSCI Germany Index Fund 2
MSCI Spain Index Fund 2
MSCI Pacific ex-Japan Index Fund 2
Top Asset Classes, Styles, Regions
MSCI Pacific Free ex-Japan Index 3.0
FTSE/Xinhua China 25 Index 3.0
Silver 3.0
S&P Latin America 40 Index 2.0
MSCI European Monetary Union Index 2.0
I would have expected a lot more evidence of sector rotation after the events of this week but I haven't seen much.. The Mobile Telecom sector shot up in my rankings but still didn't make a top spot. Also, after all the hand-wringing about how poorly the Emerging Markets and Europe performed relative to the U.S. market this week, they're still smokin the U.S. market if you step back and look at the longer term relative strength/trends. Take a look at these charts:
http://tinyurl.com/37glvq
http://tinyurl.com/2jnw9j
http://tinyurl.com/3e4gzh
Or look at the relative strength comparisons over the past 90 to 250 days:
http://stockcharts.com/charts/performance/perf.html?$RUA,$IEE,$MSEMF
My timing model is pretty much the same as I described yesterday. The sentiment indicators are cycling down and the trend indicators have begun to signal a possible change. I expect some gyrations in my timing model as the yin/yan of sentiment vs. trend indicators do battle.
If I had to guess I'd say we haven't seen the bottom of the cycle yet. But that is just a guess.
Greg, thanks for filling in the gaps. I was reading from just the month of October so I could have it all in one page w/o having to scroll.
RW I agree that price discovery plays a role but the market is, IMO, trying to price in future events. One thing though is that some times it simply prices things incorrectly.
Tobot, I would suggest you look closer at past bear markets. They go down slowly for months b4 down a lot happens. This creates an environment where fear does NOT prevail creating greater complacency for a time. Anything can happen going forward but I don;t agree with your assessment of the past.
Leisa, while I suppose whether the stock market can or cannot predict things is debatable I tend to think it can a fair bit of the time but clearly sometimes it is wrong but I tend to want to heed what I think are warnings from the market.
Tristaina, I was better prepared for this decline than the one in june so I may be less alarmed this go around. while you may want to disagree that the stock market is a leading indicator there is history to back it up and further it is kind of a widely accepted thing, perhaps not universally but widely nonetheless, I am not breaking new ground by any means with that one.
As far a the bull market being the norm, well, the US stock market has an up year 72% of the time. You may be able to make an articulate case that it is irrational the numbers are what they are.
TomK, a lot depth there and stuff to chew on for a spell. Nice work!
I might have thought the SPX knifing thru its 50 DMA might have had a bigger impact but perhaps I don;t understand the model.
Thanks for all the comments.
You are better than 80 to 90 % of the talking heads on TV. You have the potential to be excellent and well known.
So GET RID OF THE
T-SHIRTS!!!
I may disagree with you from time to time, but wear a suit. George Carlin once did a bit about how no one ever would put their money in a place like mom and dads bank (or something like that). Banks always had to have names like Great Northern Bank etc. etc.
I know this is your blog and you can do what ever you want, but you have the potential to be much much better.
Get a more professional picture for the front page of the blog as well. You will not only make a lot more money, but you will save a lot of money for average Joe's and Jane's out there currently listening to idiots in suits.
BTW I do conference calls with customers barely dressed, but I show up at their offices properly dressed.
A Loyal Fan
KL
A "leading indicator" is not at all the same as "forward looking.
The idea that the market predicts things seems to me a boy scout point of view.
When you see steel stocks for example, double then redouble then re-redouble in 36 months, and then keep going up. ATI went from 2.10 to over 100 in 4 years. Better than GOOG, better than AAPL.
The guys who bought in at 2.10 and held on, they were forward looking. They foresaw or perhaps engineered the redynamisation of the industry.
But when you buy it at 20 or 30 or 40 or 50 times that price, what can you be looking forward to? No, there you are looking back, looking at past performance, not at future performance.
A belief that there will be an evolution in the company over the next period of years that will assure a continued increase in profits that justify a continued augmentation in the price is pure delire! Or that will even justify the current price!
In this atmosphere -- and that is the general situation of the markets today -- the market is not forward looking at all. All possible real growth has been factored into price a long time ago, yet price has continued to mount.
This pullback is as irrational as had been the surge of the last months. The news has had, at best, a precipatative importance.
All that being said, I must add that I find your blog very interesting. AT a practical level, your approach seems to be serious.
How many recall the excitement of the media in 1987, the day of and shortly after the event? They appeared thrilled to report bad news. A few called it the "Reagan Crash". That didn't stick.
I think we are in a modest correction. The China syndrome is an emerging market in flux. We have experienced that before. The sub-prime credit problem in the US is but a small portion of the economy. Frankly, lending money to deadbeats is no way to fuel an economy anyway. Mortgage lenders I have talked to do not foresee any big issue here. In fact, most are happy to be rid of defacto affirmative action loans. They like their books clean, too.The large banks and hedge funds stuck with this junk debt? They need to purge and not let it happen again.
Longer term, geo-political events could dramatically impact the markets beginning in mid- 2008.
Our military analysts are concerned with high probability political and military de-stabilizing events in Africa (China enters the room), the Middle East (if we withdraw, chaos and regional hostilities), China (huge offensive military preparations and laser systems that are already impacting our spy satellities) and South and Central America (huge amounts of refugees trying to enter our country all along the southern border and coast from the entire region as the misery of "Chastro"-style socialism destroys the middle class). And that is only some of the international stress the political party in charge will have to deal with in 2008 and beyond.
But not now. Let's continue to enjoy the party, intelligently.
"...lending money to deadbeats is no way to fuel an economy anyway. Mortgage lenders I have talked to do not foresee any big issue here. In fact, most are happy to be rid of defacto affirmative action loans."
(LOL) C'mon 'T', those lenders didn't mind collecting the fees from those putative 'deadbeats' did they? Mildly disgusting to say nothing of hypocritical to wallow in the mud, stick your snout in the trough, and then declare the devil made you do it, eh?
"...refugees trying to enter our country all along the southern border and coast from the entire region as the misery of "Chastro [sic]"-style socialism destroys the middle class).
You mean there was actually a middle-class left to destroy in that "the entire region" after we got through with it? Fascinating, who would have thunk it?
But by all means let's enjoy the party while it lasts anyway; the devil will collect his due when it is due, no sooner and no later.
rw-
I am making a direct observation with my points. When mortgage bankers who are good at their trade tell me things in a professional setting, I listen. And learn.
Then, you make a quasi- political statement and lob a few bombs my way which are not necessary in any series of running commentary on Roger's site.
Military analysts who are trying their utmost to protect your posterior and mine against future threats with informed strategic opinions should not be dissed with flippant remarks.
Perhaps having five children (two via marriage) serving as active duty military officers gives me a little different perspective on that topic then others posting.
lob a few bombs! Goodness gracious! RW is suspected of links to Al-qaeda
Roger, as opposed to wearing a suit, you could just do the "naked stock market news!".
I think that Roger's informality encourages accessibility. I like the folksy-ness of it, and frankly, feel more comfortable commenting because of it. I say this as being one with a closet full of business formal wear and understanding well the power of dress).
When I see Roger's informality, I'm reminded that he has a full-time job and a family and is a community volunteer; he is fitting this blog and his video in on his personal time. I appreciate that, and have no concerns about his state of dress. I'd rather have an informal video, than no video at all.
T: No one in my family is active duty any longer but my last comment was rather flip and since it bothered you I will apologize for it.
OTOH, "lending to deadbeats" implies something very different than what the evidence suggests actually happened and is happening in the subprime and alt-A mortgage markets.
T, you need to talk to some new mortgage bankers who'll tell you the truth. "We're all going to be struggling, struggling more than we are today. We're headed halfway down the mountain, and we've got a ways to go." Robert A. Camerota, Sr., GMAC Mortgage Group senior vice president, March 3, 2007
rw-
Thank you for your response. We can always agree to disagree on issues.
anony-
If I was head of GMAC mortgage, I would be worried too. That lender is one of the worst originators of sub-prime entities. I see GMAC on many, many foreclosure situations.
Shame on them.
a CNBC report said 70% of GMAC's mortgages are sub-prime. I have no idea if it is true or not.
A good Sunday to all. No NASCAR to watch so I was thinking about my bear/crash plans. I had done some looking for simple strategies and found (I think) that exiting when (SP500 this case) it closes when it is below its 300d MA average at month end and entering when it is above its 300d MA at month end whould catch a lot of drops and hardly any whipsaws. Any one up for sharing plans in generic?
TIA
Roger,
I like the T-shirt. What does it say? Looks like traffic is picking up for your weekend video blog. I respect your readers right to say anything and will defend their right to do so. The list of countries where that right is restricted is growing. Funny how your readers were debating issues other than the process (have a plan) that you were advocating. Kind of makes you wonder... Tom in Indy
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