Add Luminent Mortgage and Impac Mortgage to the list of mortgage calamities. Also the market breadth has not been too hot.
Companies getting pasted and poor market internals is what happened back in the Internet meltdown too. This is just a little factoid not an analysis or a prediction.
In terms of analyzing this the market does not cut in half twice in one decade. I suppose it is possible but in terms of realistic probabilities; I would say no. However these little under-the-market's-hood items could, like before, lead to a sizable but probably overdue decline.
This year we have had two mid single digit dips and people freaked out. If you look at market history, get yourself a Trader's Almanac, you will see that 20-30% declines happen often enough that they should be thought of as normal. A decline of that size will happen at some point in some market cycle which will then help put a 6% decline in much better perspective than was portrayed last week.
Whenever the next bear market starts we should expect a decline of more than 20%, 20%. I have no idea if the current mortgage/liquidity issue will be the tipping point or not but the yield curve has been in varying states of inversion for a long time which is an unhealthy condition for financial stocks and financial stocks are vital to the market and lubing the chassis for the economy.
Problems in the financial sector often come home to roost. This might be happening now or it might not. There are arguments on both sides of the debate and they sound plausible but I can't get away from the fact that inverted curves lead to trouble. Combine that with money that was too cheap and too abundant for too long and you have a recipe for recession and bear market, NORMAL recession and bear market not apocalypse.
I don't know, nor do I feel the need to predict the timing of the next recession. This merely pops us as a risk with a decent probability. For now stocks are flirting with rolling over but have not really done so yet.
Do what you want with this but I have been concerned about this for a while and continue to be so now.
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11 comments:
The comments that nothing is wrong with the economy go like this:
1. It's a global boom. Well Japan (the second largest economy) is slowing as well as ours. What happens with China reduces its building for the Olympics...that cannot be sustained.
2. There's a liquidity boom. Central banks are raising rates, credit spreads are widening, bond investors are leery of what is being sold to them. Sounds like it all adds up to liquidity ka-boom.
3. Corporate balance sheets are healthy. They are buying back stock; not investing in their businesses. They are also incurring debt (the price of which is increasing) to do this.
4. Corporate profits are healthy--well if they are not investing in their businesses, debt will cost more and the consumer is getting a wee bit weary, where will these come from. The Am. Consumer still fuels the world's economy.
5. The new global middle class will take over. Yes, only if we teach them to reverse their cultural values of saving to spend more than you earn.
At some point in time all of these items are going to conflate like a neutron star and way very heavily on the minds of investors.
Roger,
Great perspective IMO.
This is what I have been trying to say, the combination of over valuation and liquidity issue would be painful for equities.
The sky will not fall but I do not like a 15 to 35% hair cut on my assets. I view a 25% decline give or take as painful and now that we see the fed will not put fuel on an inflation fire just when it is coming under control, I think the decline is inevitable IMO.
Which is not to say we may not rally a little higher from here first.
We might not have had 50% declines twice in a decade but we haven't been far from it. For example:
1930: down 34%
1931: down 53%
1932: down 23%
1937: down 33%
If you are really superstitious, you would note that the 2000, 2001, and 2002 poor years aligned with the poor years in the '30's and that if that alignment continues...
Good thing market participants aren't superstitious, right? (knock on wood.)
Amazing how fast things can turn. RSO announced good earnings this morning and is up about 19%.
As of 10:15AM
IMH +41.80%
LUM +29.63%
IMH has been on the decline for a LONG time. Their huge yield caught my eye a year or 2 ago.
I dunno if I'd have called their collapse a calamity as much as a "you could see that coming" but I also didn't realize they had been a $1.5b company.
I hear that China Olympics thing a fair amount. I guess the idea is they're building all these Potemkin condos so they'll look cool on TV?
I think it's more likely they actually have 100s of millions of people want/need stuff like indoor plumbing, electricity, etc. In other words, it's real demand for commodities, infrastructure and the like.
A well disciplined "tactical" (relative strength) asset investor would be in one to three asset groups, rotating assets about 2-3x per yr, only having to by the computer one hr a day and mostly doing homework on the weekend. YTD that investor would be up for the past four years, this year included, over 20% per annum. Stop losses would prevent anything more than a 9% decline. All bets off, though, on a one day crash. Over the long run this is an approach that keeps it simple, uses numbers not emotions, clobbers the performance of most active or passive mgrs, and gathers enough profits to not ever feel badly about even a 10 percent drawdown. The punchline is that while I genuinely believe the data overwhelmingly supports the above assertions, I am going crazy trying to implement the strategy. One has to have an amazing discipline to shut out conflicting information which is so abundantly available.
The 1930s, especially the early 30s, are awfully different that today.
BUT, obviously, one can learn from history.
Here's a graph from a Merriman post; the far right column shows the biggest monthly S&P 500 drawback for that year.
Roger, how do we get just your ETF comments?
To display just the ETF category;
http://randomroger.blogspot.com/search/label/ETF
Anonymous 8:17,
I agree with your post. Momentum is indeed an exploitable, persistent anomaly and TAA rotation strategies continue to work. Even hardline random walkers like Fama and French admit the anomaly exists and can't explain why.
The hardest part of any mechanical strategy is to avoid market/economic news and resign yourself to the fact that knowing WHY markets behave the way they do isn't very important.
The exact strategy you sketched isn't for me but I wouldn't doubt it works (if you can stomach the drawdowns).
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