No video today.
If you were having a rough week emotionally then maybe the Geithner rally will allow you to have a better weekend. If you were freaked 24 hours ago and now you're feeling better I would say a couple things. One, stop freaking out. Markets go down sometimes. Two, now that you are feeling better maybe you should sort through a few things and lay out a plan of action in case either a huge rally or another big leg down.
Embedded in those comments is an assumption that if you were freaking out you did no real pre-planning and you had the wrong asset allocation. From the something has got to give department if your numbers require 80% in equities but your stomach can only tolerate 50% something will have to give somewhere.
On Friday Joellyn and I drove over to Kona which is about two hours so we were talking on the way and I told her how many comments had been coming into the blog this week and noting the stress from some folks and I told her that I think people make this stuff much tougher than it needs to be.
Long before this bear market started I would write posts about when the next bear starts or normal stock market cycles include and back then commenters acted like they realized well of course there will be bear markets and yes the market can be very volatile but when the rubber hit the road this time it seems like a lot of people forgot.
So to repeat from the past, this bear will end, there will be a recovery of some magnitude and then another bear. That next bear probably won't go down as much as this one and the last one but it might. This is a certainty (do not read anything into that comment about bull market magnitude or prediction of when) and I am not telling you anything you don't already know. In fact you knew this before this bear market started--the market goes down sometimes and sometimes when it goes down it goes down a lot.
You can count on one or two of these per decade. If you are 50 you can probably figure out how many more there will be in your lifetime. If you are 50 and figure on seven or eight more of these and you freaked out this time are you going to freak in the seven or eight more you know are coming? Hopefully not.
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26 comments:
I read in The Intelligent Investor that a bear market occurs about once every 5 years. The bull market we saw in the 90s was an anomaly. The more things change, the more they stay the same.
Either you believe in our economic system or you don't. Until this week many simply did not know if whacked out lefties would be running the government. Looks like we're basically in for more of the same with seasoned Washingtonites. I believe to a large extent the new administration's hands are tied with respect to any new radical agenda. The most radical thing I think we are likely to see is some judicial appointments.
The large problem is the huge debt load the United States is carrying. When S&P (any credibilty left) downgrades USA's debt, what then? How are you preparing for that Roger?
there was something kicking around a while ago about a US downgrade maybe coming well into the next decade. Since that chatter I have not seen any more discussion on this but much has changed.
i doubt i would go unscathed but more foreign (as I have been saying) and high cash balance. I'd think that a downgrade could cause foreign equity markets to go down but it would not be them, collectively that would be getting the downgrade so they might come back faster (long running theme).
The market is slowly modifying its focus: a "downgrade" is now recognized as a lagging indicator - more akin to the TV weatherman standing in a drenching downpour and advising an "80% chance of rain"...
For more current expressions of creditworthiness, the place to look is the default swap market.
And the news there is not good for the ol' US of A. Cost of default protection is meaningfully higher than 3 months ago.
Still, in relative terms, I'd say we're still ahead of the pack. (Check out the continued strength of the dollar...)
R in NY
Roger, if we stipulate that the economic decline we are in is going to be longer and/or deeper than the one in the first part of this decade, can we then assume that stock prices probably should be no higher than at that time? I'm looking at the energy sector and the emerging markets particularly and wondering if it doesn't make since to hold off investing until these sectors drop back down to their 2002 levels.
BB
you could of course turn out out be correct. i'm not a fan of zero weight and I would add that I think most emerging markets are only dealing with a cyclical downturn not secular/structural as with the US. Having no exposure means youhave more riding on being right about a real turn. maybe that is suitable for you but I believe that is the difference between underweight and zero weight
"Geithner rally"? Are you drinking the liberal media kool aid too?
That late session rally was the direct result of short covering by investors who didn't want to hold their positions over the weekend after a 15% down week in equities they took profits. Of course Obama had his timing down just right for the announcement.
Look at the charts for SRS and SKF and check the run up on those during the week. They had to cover going into the weekend with talks ongoing to bail out both Citi and the auto industry. Maybe 50 DOW points could be attributed to the Geithner choice if that.
Bear markets came more frequently before the "great moderation" of the past twenty five years so, if we are returning to a more typical pattern, we could expect more of them but, one would hope, not so deep.
As to the incipient Obama administration, evidence is mounting that he is indeed a pragmatist, somewhat conservative fiscally but more liberal socially, and also a meritocrat: His cabinet and staff choices favor competent, experienced and/or skilled individuals including those who disagree with him. That's what we need after eight years of incompetence, mendacity, cupidity and ideological blindness. It remains to be seen if attempts to saddle the Obama administration and the country with conflicting policy and right-wing moles on top of the growing debt mountain will succeed in forestalling any meaningful change; we shall see what we shall see as always.
In the meantime financial damage is mounting daily so all that is moot. Credit markets in particular appear to be under severe duress again and that's frankly more worrisome than the equity markets: On top of swaps, spreads between treasuries and virtually everything else are becoming huge as are treasury price increases themselves; if folks keep fleeing to safety like this we'll see a negative interest rate on anything shorter than a three-year note by the end of the year (only a little hyperbole there).
US dollar strength doesn't make me feel too great either; not just because it creates a headwind for our shrinking exports, one of the few positive economic notes we had left, but because there is some evidence that a portion of the demand for dollars could be due to the closing of Eurodollar accounts, decreasing rather than increasing confidence; e.g., http://tinyurl.com/4mxed4
Oddly enough though the stock market rally could have a leg or two left as prices seem to have outrun falling valuations (oversold condition). Wouldn't mind seeing some improvement in my strategic equity accounts but I don't plan any significant adjustments; I reduced hedges too early, had to put a couple back and paid a price, but other things are working, the game has a long way to go, and trying to "win it back" after a few hands go bad is strictly a sucker play.
Kool-aid, my favorite flavor is green, lol.
RW i have to think we are in for a whopper of a feel good rally that lasts for a month that move in 50-150 basis point increments not 700 basis point moves. this wold draw people in only to get hurt again.
The South American markets remain strong in spite of the global trends.
http://www.incainvest.com/index.php?option=com_content&view=article&id=322:bbva-says-latin-america-will-escape-recession&catid=1:latest-news&Itemid=56
A rally, if we are to get one, should start about now to boost spirits and salvage the retailers holiday sales.
I hope we have a short rally here as I went long with a small bet Friday morning expecting the short covering and options expiration.
I don't like having to play the moves in the market, especially both ways, but I see no other choice to make money here. I would rather buy and hold, but I believe that those days are over for a long time IMO.
Although I may want to buy some energy stocks and ETF's like WHX, ENY, IXC & COP and hold then until the Middle East decides to flare up again. December is usually the low point in prices for energy stocks.
With the recession in full bloom I will only buy good dividend holdings though. It's the only sector that I'll be willing to buy and hold right now. The rest is in cash to play short ETF's like SKF and SRS, etc.
PS, green is my favorite too :-> Of course that would figure from an investment adviser.
Just seen,
"This market crash is like a sale at Nordstrom. Everything is 50% off and it's still overpriced."
All the major bear markets thus far have certainly had their share of significant rallies that ultimately led to even deeper declines including a rally near the end as a bull trap to ravage the last remaining hopeful souls. Not hard to believe we'll see that again but the shear velocity of this market has frankly put all other bears to shame so, if we get any rally that lasts a month, I will be somewhat surprised.
And in the meantime there is that balancing act of leaving enough skin in the game to participate adequately in a post-bear liftoff but not so much that shear loss of hide makes the point moot. Over a number of bear markets I've learned that, when in doubt, less skin is usually better than more but when valuations become acceptable it is necessary to begin scaling in to your stronger positions and resolving the problem of strategic re-entry is important enough to accept the risk that entails. But I've never learned to like it.
[WARNING - DEPRESSIVE RANT FOLLOWS...]
"Objects in the mirror are closer than they appear..."
I fear we have been too tightly focused on daily stock movements.
I too, as a trader, and with some deference to technicals, greeted this week-ending rally as a sign of hope that maybe some of the terrifying uncertainty was being addressed and that we might begin to find a way out of this mess...
But on further reflection, I'm increasingly uncomfortable with the significant second order effects that are NOT being fully appreciated amidst the daily review of "are we up or down today?"
Alt-A loans, for one. Can you say "bigger (worse) than subprime"?
CMBS, for another. All those shopping center loans supported by ... oops, consumer activity. If not shopping centers, how about... hotels? (Nope, travel budgets being slashed.) New construction loans? (Not when their business plan incorporated $/sf as a straight-line extrapolation of 15 years of growth.)
Well, what about good ol' fashion business working capital financing?
Er, no. Anyone notice that Bank of America is trading at a 30% discount from ... MONDAY's OPEN!!!! (Bad week, you say? Ok, it's at a 45% discount from LAST Monday's open.) Tier One Capital Ratios, anyone?
Finally, the interconnectedness of all financial counterparties via the CDS market (and the contamination of even solid balance sheets via their indirect exposure to heavily levered entities (hedge funds)).
These are not just "companies", folks. The financial system is more akin to the heart and circulatory system of the economic body. We can get by without a left arm, or right leg (GM, e.g.). But when that heart stops beating...
Roger, I've appreciated your sanity and perspective... to date. I'm now worried that with anything like a lessening of windspeed (to wit: Geithner rally) we're all mistaking the eye of the hurricane for a time to buy a sailboat.
This "structural" problem is not confined to the US; China has that "little demographic issue" to deal with. The other BRICs are levered off of oil and cheap labor. But there is that "pushing on a string" problem that has undone them. No, all solutions are going to be slow and expensive.
But most importantly, the continued uncertainty (and unknowability) (Geithner/Summers notwithstanding) may mean that only the sidelines are safe. (Think of it: even the one "favored son" in the banking system was JPM - down 33% in five days.)
Day traders who get flat every day might have the best shot at survival.
For those with exposure: Sell the rallies. Build a stash of dry powder. Spend it on the far side of teeth-gnashing. This time IS different, and we are still to see what the new paradigm will be.
The logic I find compelling: What is your expected loss if we are more akin to 1931 than 1938? (And please save the "this ain't no Depression" argument - 2008 is a fair contender to be the worst year in the market, percentage wise, EVER.)
And finally, consider Roger's basic advice: what's the health of the yield curve? With the long end being hammered, and zero being what it is, show me the rationale that DOESN'T lead to deflation?
Equity prices may seem "extreme" right now. Imagine what we'll be saying with a further 30% discount.
There. Rant finished. I hope I'm dead wrong.
R in NY
Fine.
"Spend it on the far side of teeth-gnashing."
Dates please.
Roger, your right, most folks do make almost everything much harder, especially when it comes to money and finances. I have found, there is nothing wrong with going to cash in uncertain times. The Bear will pass and when it does I will have plenty of dry powder to put to work. In the meantime, the old saying that you can't fight the tape has never been more true.
Dave
Good rant and true enough, depression always lived in the tail and the tail has grown fatter, but there is some evidence Alt-A mortgage resets may not play a significant role although recasts still might; e.g., http://tinyurl.com/5gv3em
And there is some evidence too that the destructive psychology of economic depression could be ameliorated if we could get some appropriate stimulus going and citizens in the US retain or regain some level of confidence. A number of countries including China have already started their own stimulus programs but most are not well coordinated or, as is the case in China, are accompanied by conflicting policies to the point that a better candidate for a depression epicenter could be China (and some other places) rather than us; e.g., http://tinyurl.com/5d2ttd
I am reasonably convinced things are going to get worse before they get better but also believe that, despite the central role the US played in the worldwide credit and solvency debacle, the heaviest blows will probably fall elsewhere and our markets will recover sooner than most; that is the way I am currently positioned in any case (naturally reserving the right to change my mind as evidence warrants).
This is primarily relevant to my strategic longer-term accounts, not my tactical accounts where I typically swing trade; I'm market neutral in the latter now but will probably make a long seasonality play before Monday's close.
JMO & YMMD
SD, if I had a date, I'd be selling it, not ranting pointlessly on another blogsite!
I'm not sure what to rely on as an indicator that "the storm is passed/passing".
I do think that everyone (self included) that toe-dipped long after the downdrafts following the House rejection of the (initial) Paulson Plan (mid-Sept) are smarting.
As is anyone that thought Citi at sub-$10 was a "once in a lifetime" opportunity. (It may have been... we may never see Citi, in its current form, again trade at $10/share.)
I think the 10,000 foot (or higher) view is critical: can equity (think: first loss, unsecured) be attractive (even at 6 and 8% dividend rates), when credit markets are frozen (i.e., secured and cushioned creditors are unwilling to punt)? Or here's another: does it still mean what it used to mean "Safe as houses"? Does the rush to treasuries/gold suggest that we are nearer the end than the beginning? (I honestly don't know - haven't done the homework.)
I think one of the problems is finding and appreciating the right historical perspective. Banking crises in the past (those of which I'm aware, and that is only a reflection of my ignorance) have been blamed on structural failures that have since been remedied.
The danger, imho, of relying on historical references is their inevitable failure to deal with "first impression" processes. Thus, even if this current unpleasantness shares any number of common characteristics with "bear markets of the past", concluding that this "is another one" is to risk not noticing that the damage from this one will in part BY DEFINITION hurt in ways we cannot contemplate.
To the extent that our current (vulnerable) posture has resulted from the accumulation of incremental adjustments and reactions to previous mistakes/problems may mean that it is now well and truly "too late" to fix what has precipitated the sound of supports snapping beneath us.
The big question for me is "how much of this is purely a function of confidence/sentiment"?
To my mind, if am to hope, that is the only reason: if fear and paralysis can be replaced with confidence and action, it may be possible to lift the perigee.
Cash, for now, and maybe until the idea of $25 billion rescue packages again sounds shocking (instead of de rigeur), is king.
R in NY
If President Elect Obama has any balls, he would start now getting a stimulas package done NOW, whatever it takes. Damn waiting till Jan 20th. Its time for him to show us where the buck stops.
Roger! I found the answer to who is running the Stock Market!!
See:
http://www.youtube.com/watch?v=uztU1rBEiqc
I have the solution for those fretting about current market events ruining their retirement...
2 words: REVERSE MORTGAGE
check it out.
Happy Thanksgiving !
Liked the post on green faucet Nov.21. Live in the present.
Namiste,
Sam
OT 1: Obama showing some balls by seizing power as POTUS before he's sworn in ...a coup in other words? That might put him one up on the fellow he's replacing since it has the advantage of violating the constitution before taking an oath to defend it but it still probably wouldn't play in middle America, particularly since they're already in full siege-mode, stocking up on beer, guns and ammo to repel the hordes of crypto-Islamist colored folk they just know are coming now.
OT 2: Reverse mortgage, how's that supposed to work for those who are under water, who have no equity in their home?
We certainly are seeing some interesting riddles lately: Is it the stock market that does this, is it something in the air, has Melissa discovered the secret? Oooooh ...my head hurts, time for some hair of the dog.
Namiste.
While I certainly admit that emerging markets have been on a heckuva run, my "WTF" meter starts going off when someone suggests that, having dropped 50% YTD (and I don't know what, a little more from the peak) that emerging markets are gonna drop more than 75% to get back to 2002 levels.
Could be right. Maybe I'm too much of an emerging markets bull.
All you NEED is shelter, food,
clothing. Yes, I know love also.
NEED is the new word...no longer
want and gotta have it.
I have recovered my losses in my longs by day trading...bought
some long term CDs that pay
monthly. Still have some dry
powder for next year or whenever.
Does anyone think there will be
an end of the year rally?
The 30 somethings haven't realized
as yet that they have lost their
inheritance.
Re: the comment BO needs to release a stimulus package immediately, rather than waiting until the inauguration, its my understanding (butteressed by his speech Saturday) that his advisors are hard at work crafting regulation in order that the first "doses of medicine" can be given as early as late January. That sounds like "warp speed", in terms of government action.
Wouldn't want that man's job for all the tea in China, though.
Jan
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