Yesterday fear/concern/whatever else kicked up a big notch based unscientifically on many conversations I had with all sorts of people I know (I heard from more people phone and email than I typically do). Also regular visitors may have noticed the that the number comments left on the blog have gone way up, a phenomena that both Barry and Dr. Brett have commented on before.The US stock market is down in the mid teens in just a few days. That is a crash. Although we may be still be crashing for a few days more (don't know, more like bracing for the possibility), taking drastic portfolio action in a market crash is a dangerous thing to do.
If you have been reading this site for a while you may be thinking easy for him to say which is a fair criticism but panic is not the answer. Violent selling always exhausts and reverses for at least a short amount of time. Lightening up into that sort of move is likely to be the better way to go. Notice I am saying lightening up not jumping out.
A couple of weeks ago I sold a couple of positions (disclosed in a video) in the interest of, no shock, a little more defense.
One stock was an energy name that is down 28% in a couple of weeks (less actually) since that sale. Mature energy stocks don't drop that much in so little time. The other name is a healthcare name down 22% since the sale.
This is not a comment on my skills, the declines listed above are very typical of many stocks from the last two weeks. That magnitude in a couple of weeks is a crash (intentionally repeated from above). In addition to a crash in stocks every part of the fixed income market is grossly distorted and or ceased up from normal functioning.
There are a lot of moving parts to the crisis, many initiatives fully or partially implemented and other ideas still on the drawing board. These will either help bring a faster end to this or they will impede progress to an end but I do believe it will end and as silly as that comment may sound to you it is an open ended issue for many people.
I wish I knew how long this will last but I don't. Someone I spoke to commented on the extent to which I have been even keel about all of this. Two things; I took my own advice about laying out a plan that would help and stuck to it and I realize that the movements of the market is beyond my control. There is zero value in getting worked up over things beyond your control.
Additionally no plan can be perfect it can only put the odds in your favor, my plan for defense is no exception.
The picture is the way in and out of the Waipi'o Valley on the big island. There are driving restrictions, we have hiked it twice. It isn't even a mile but it is very steep.
42 comments:
I'm hearing a lot of comments from people about how their 401k will be worth nothing by the time they retire and the stock markets are only going down from here. Sentiment from the public is very low so it's probably soon time to start buying again.
I'm beginning to think 401(k), IRA, Roth's, Education Savings Accounts, etc are a scam devised by Wall Street and Congress to sucker ordinary Americans to throw their good cash at bad investments. Worse yet, the money is trapped due to early withdrawal penalties and taxes. 401(k)'s by far the worst since investment options aren't sufficient in crisis like this. Until further notice, I've decided to cease future contributions into these ponzi schemes.
Still a normal bear market, eh?
for now normal bear looks wrong but the middle of the panic is a tough time to put something in historical perspective.
I'm still failing to see valid reasons why this bear would be considered abnormal. The Naz was down over 60% in 00-03, Dow down 70% in the 30's, S&P down 50% in 00-03. So we're not even close to unprecedented levels.
I'm not saying that it's impossible to see something like that, but to call it that now is ridiculous.
In the long run, academic studies have conclusively shown that a buy and hold strategy is superior to market timing or any other strategy.
Emphasis on the long run.
Due to the nature of this blog and your job, I'm assuming you disagree. Why?
It seems to me these "academic studies" claiming 8%+ returns as long as you "buy and hold" rest completely on the gains we saw in the 90's. It would be interested to see what these studies tell us without that decade.
i don't necessarily disagree i simply prefer to try to avoid feeling every bit of the downward moves when they come.
i have used the term buy and hope to hold many times
401(k), IRA, Roth's a scam? We need more scams.
My timing model made a small move in the bullish direction last night. Hopefully we're turning the corner. Despite all the turmoil and volatility, hand-sitting can be pretty boring.
Predicting the duration and depth of a bear market is near impossible and not necessary. Who cares if it's a normal bear, a more severe than normal bear, a severe bear, etc.? I'll rather measure the risk/reward oppportunities daily and invest accordingly.
Re: for now normal bear looks wrong. Welcome to the "not normal" train Roger. Lets hope it doesn't completely run off a cliff. I am feeling more and more that it is going too as things seem to be so F***ed that it is beyond their control to come up with a solution. And it is worldwide. Isn't the 21st century wonderful.
please don't take for now normal bear looks wrong to mean that global stock markets are permanently broken and the idea of roths and other qualified acccounts are a scam makes no sense to me.
Bill B is right. On a magnitude level, there is nothing unprecedented about this. Sure, the drop has been swift and dramatic. How much of that drama, though, has been because there is an election in 30 days? An election that will see the ushering out of a president that has been despised since the day the election was stolen in 2000; an election with arguably huge consequences for both sides.
Compare financials to the tech bubble. How many tech stocks soared to insane multiples and then were sliced in half? Or crashed completely without a bailout. Much talk is made of the $2 trillion lost in 401ks, etc. during this bear market. How much was lost in the tech bubble?
While financials do run to the bedrock of our economy and the consequences could be larger than a few lost dot coms, perspective is desperately needed. Not hype drummed up by the impending election. I remember clearly standing with a group of friends in early 2001 as the market had 5% down days. The consensus was that we were finished. You’d never be able to make money again in the US stock market. Decade to nowhere aside, didn’t we recover from that? Roger, you do a great job of the big picture. Keep it up.
Tim - Even Benjamin Graham said a 50/50 allocation is superior for defensive investors. Seems we're all on the defensive here right? Don't think he was around for the 90s
Roger - You're right. Hope to hold is key. Its taking nerves of steel to not only hold, but to buy into a falling market. History is on my side. My time horizon, God willing, is long.
Roger was wrong about the magnitude of the decline it has been and will be greater than normal, but do not let this one mistake make you stop engaging your brain. Roger provides lots of useful comments and other times he talks about buying fish stocks :) (sorry I thought some levity was needed)
Personally, I do not think this will be over until we are down 40 to 55%. Unfortunately we need to see some capitulation first and to many people seem to be looking for buying opportunities including me.
But I sold after the 1987 crash lost 25% of my investments (probably only $2000 or so) and learned a very important lesson when I was younger. You can't stop people from panic selling but let it be the other guy who sells in a panic.
seg
Regarding the hopeful. How about 54Trillion in Credit Default Swaps. Trillions more in derivatives and massive sub-prime lending. Are people still saying "We've seen this before" don't worry. Really, have we seen this before?
tim (at 6:21),
the roughly 8% per year probably uses stock returns from 1926 through 2007 as measured by ibbotson. going back even further but with far less accuracy suggests decent stock returns over long time intervals. the 90s were just one of the higher return periods over that interval, but the 50s, early 60s, and 80s also generated very good returns from stocks.
my two cents on whether it is different this time: i've experienced stock decimation in 1973-1974, 1979-1980, 1987, 1990-1991, and 2000-2003. the stock market does not look a whole lot different than usual so far. but the turmoil in credit markets have caused several largely-sleepless nights in the past couple of weeks. the worldwide banking system is on life support (and europe looks a lot worse than the us in this regard). if the banking system collapses, civilization collapses. one post i saw this morning that claimed that credit default swaps on 10 yr us bonds currently cost close to 0.5% of the face value of the bond per year--that is expensive insurance (and i don't quite understand why i would buy it because in the event that the us defaults, i don't know how i could have any faith at all that any other counterparty will cover the insurance, but it is what it is). nevertheless, money is flowing out of money market funds, money market fund managers probably became much more risk averse, etc so credit markets have frozen. this sure seems like the great de-leveraging or unwind and the stock market just started to get a whiff of this in the past couple of weeks.
i sincerely hope that i am wrong, but my inclination is to fasten my seat belt really securely.
last but not least, my wife has usually heavily discounted my anxiety about financial crises (in 1973-1974, 1979-1980, etc.). this time, however, her anxiety level seems far greater than mine.
--gjg49
You can't stop people from panic selling but let it be the other guy who sells in a panic.
Awesome. I'd like to borrow that with your permission :)
roger, a year and a half ago you took your cue very appropriately from the inverted yield curve--a very reliable indicator.
the TED spread (3-month libor compared to 3-month us t-bills) also offers a very reliable record as a risk indicator. the ted spread indicates the relative risk that banks see in lending to each other. it has been and continues to flash a humongous warning signal that risk in the financial system remains very very high. the ted spread flashed the signal well before the money market breakdown.
--gjg49
i perceive the TED spread to be more coincident than the yield curve which first inverted long before trouble actually manifested--hence all the people telling us this time was different.
i am wrong about less lead time with TED?
Funny thing. My Ipod just randomly played: REM - "It's the end of the world as we know it". I'm taking it as a sign and selling everything.
I think people are confusing a "correction" with a "bear market". This IS a bear, not a correction. So far, it's a normal bear, hasn't even hit the extemes yet. But some of the comments here do sound like we are reaching a bottom.
I think we are seeing the old adage proved again: "The market will do whatever necessary to prove the most people wrong." The "can't lose" stocks have taken a beating. The "prices will keep going to the sky" stocks are falling back to earth.
Back eight or ten years ago, I commented in our retiree conference that if we had a "reversion to the mean" for the 1990-2010 period, there would be zero gains for the first decade in the new century. I am in no way a professional, but I do seem to have right on that call. Now if I can just figure out the next couple of years...or even months...or maybe just weeks!
Ken
I can publicly say that over use of CEF's are weapons of financial destruction. I am fearful as to whether a few of them will be going to zero.
CEF's are for those reaching for yield. They are a disaster for a bear market, but what isn't? Probobly only consumer staples, lke MO, PM, PEP etc. And cash!
my javalina futures have been skyrocketing.
footnote Adam Warner
I have heard that javelinas can be good eating, but they are quite stinky.
Re: REM, that's easy listening. May I suggest Herbert Stanley LittleJohn: 17th & 18th Century Music for Funerary Violin.
"supposedly performed by Herbert Stanley Littlejohn in 1956, were taken from a book of music discovered in a dusty corner of a church in 1954, dating back to the late 1600's. In the process of recording, Littlejohn tripped on an elderly cat and fell down a flight of stairs, breaking his neck and dying instantly before he was able to complete the suites."
Jim
Do you think they will at least learn that it was not the short sellers? Actually I have little faith. Instead of acknowledging the real problems I am sure they will now blame "speculators"
REM? that is a band that i wonder why i listened to them.
Herbert Stanley LittleJohn? what's with the highbrow stuff?
"we have both kinds of music, country and western!"
movie quote, does not reflect my taste in music.
short sellers??
get a rope!
i've never been in the short sellers are to blame mob.
i was actually on cnbc about this topic, i said it may have contributed to the velocity at the end. short selling provides liquidity, among other things. restricting short selling thus impedes liquidity.
is impeding liquidity what we need right here? probably not.
Long term, how do you think this "situation" will be viewed?
1. Normal, these types of financial issues come up over time
2. International accounting standards don't address derivatives, and the standards must be stricter. Reporting must be more transparent.
3. Good lord the U.S. is out of control. Why would we lend money to those idiots?
roger,
on the TED spread--i don't recall seeing any studies on whether it is a good leading indicator (i have seen studies on the inverted yield curve and it has an outstanding record.) anecdotally, i was in the investment biz for 26 years (retired in 2006) and i recall one guy talking about the negative TED spread signals 1) two weeks before the 1987 stock market crash, 2) a week or two before the 1989 (i think that was the year) correction when an united airlines merger went kaput when financing dried up, and 3) a couple of weeks before the LTCM crisis in 1998. i think that the stock market had already weakened before each of those events by the time i heard about the TED spread (although i may have been late to notice).
--gjg49
p.s. the TED spread is way way wider than in any of those events--the magnitude of the spread is the anxiety-producing characteristic this time around.
i know about the TED as a measure of what is happening but not, as mentioned, as a leading indicator.
i seem to remember some sort of reasoning about why the creation of the euro made TED less importnat.
not of firm ground on that one, just something i recall reading quite a while ago.
I am supporting the phenomena with this post.
Roger - maybe it was THIS reasoning!
http://randomroger.blogspot.com/2004/10/new-ted-spread.htmlair.
stephen drone,
when i try to link to your reference, i get "page not found".
please check that link if you would and report if possible.
thanks,
--gjg49
p.s. roger runs a very worthwhile site. the regulars (like stephen and a few others) add a lot to the discussion. thanks to you "regulars" as well.
sorry,
that was supposed to be "repost", not "report"
--gjg49
Sorry, the issue was the "air." on the end.
It's a link to a previous post from 2004 on this blog.
Last December I converted everything I had to laddered gov't bonds until a month ago when I took 5% to buy some good deals now worth 1/2 of what I paid. Markets & financing are getting worse & it could take a long time before I get my money back. My bond gambit looks better every day even if it does not pay that much.
Willy
Last December I converted everything I had to laddered gov't bonds until a month ago when I took 5% to buy some good deals now worth 1/2 of what I paid. Markets & financing are getting worse & it could take a long time before I get my money back. My bond gambit looks better every day even if it does not pay that much.
Willy
Volker saved us in the '70s
maybe he can do it again...
watched CSPAN last night.
http://bigpicture.typepad.com/comments/2008/04/former-us-feder.html
He also gave us inflation and 22% interest rates. Pick your poison.
I am also hearing from folks at work that they are worried about their falling 401K balances.Folks closer to retirement are scared.
Very appropriate illustration. As for me i could say that we are standing before a deep water fall ahead us.
Andrew Abraham
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