So it was a rough ride in the bus yesterday.The story with Sentinel and then late in the day it was Thornburg Mortgage (TMA) with some sort of problem with access to capital and a delay in the dividend. TMA dropped 46% during the regular session but rallied as much as 9% after hours.
It seems to me that the TMA CEO was on the network just last week saying that things were ok but maybe I am remembering incorrectly or maybe it was a different Thornburg Mortgage.
Giving TMA every single benefit of the doubt in this circumstance, I think this makes a great case for top down portfolio construction. For a while I have been expressing concern about excesses of all sorts in the financial sector and the inverted yield curve leading to some sort of problem. As of yet we don't know the full extent of the problem but I will stick with the idea that Kudlow is not worried enough and Roubini is too worried.
The way this has shaken out a problem of some sort has been visible for months. The act of just paying attention and knowing a little bit of history could have lead anyone to simply reduce domestic exposure to the financials. Some readers are fond of commenting what a jackass I am but still saw some sort of problem and wrote about it often.
Notice that this very simplistic process did not require the ability to quantify the problem, I still don't have any idea how serious this will be, or time this event. When the curve inverts just reduce some exposure and be a little more conservative in the sector; far from black box.
Occasionally a comment will be left saying how dumb it is to follow external events. Well I obviously I think it is quite important. Writing about this event before, during and after will hopefully give some context about one person's way to navigate this type of reoccurring market action.
If you cut back ahead of time, one way or another, great but if you didn't, remember this event because it will happen again at some point in the future. After fixing itself the curve will probably invert at the end of the next economic cycle, a lot of people will tell us it doesn't matter "this time" as was the case a few months ago because of some different detail and that will be wrong. Yes, the details will be a little different but betting the result will be different will not be smart.
Regardless of any of that, I write the same thing when the market is doing well as when people are getting worried. Maintain a diversified portfolio, have a trigger point to take some sort of defensive action, stick to your plan and know that declines of varying magnitudes are normal. While this decline is "different" it is the same.
7 comments:
Roger I wanted to thank you for keeping the archive up. I am going through them and enjoying every minute of them (ok, a few minutes lol).
Semi-interesting article in today's Globe and Mail on Iceland and taxation.
http://www.reportonbusiness.com/servlet/story/RTGAM.20070815.wreynolds0815/BNStory/robColumnsBlogs/home
Keep up the excellent blogging.
dnf
"Kudlow is not worried enough and Roubini is too worried."
I get Kudlow is a permabull, but you speak of inverted yield curve.
Inverted yield curve can sometimes lead to a recession. My understanding is Roubini is merely predicting a recession. Why does he have to be wrong as well?
Am I missing something? Is Roubini predicting a sky is falling recession or just your run of the mill real estate bubble recession :)
I haven't seen tomk around these parts. How much did you lose so far in this bear market?
my take on Roubini is closer to sjy is falling. If this is wrong i apologize.
I did not think Roubini was that bad, of course I am a bear.
He predicts a recession and a bankruptcy of one major company.
I thought almost all the airlines declared bankruptcy and I never heard anyone say the sky was falling then.
In fact wouldn't you expect somebody to have significant problems if we actually do get a recession?
Jo.
The current market is down 7-8% off it's very recent high. It is not even a true correction yet (10% drop), let alone a bear market.
That is not to say that we are not headed into a bear market, but no one knows for sure.
And I don't see why Tomk takes so much heat here for managing his own money with a diversified portfolio and then giving us his information for free. I also know that Tom is not afraid to use double short funds when necessary.
I would venture to guess that the M&A days are over now for a while.
Maybe these companies that were driving the market early this year through M&A's knew that the money tree was fast drying up.
I suppose that Alcan can rest easy for a while.
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