Many segments of the market have been abby-normal of late and it is important to understand this.This is not about bear market magnitudes or whether there will be recession, depression, famine, pestilence or anything else.
No matter whether you are a Roubinian or a Kudlowite it is important to realize that the current velocities of market action in certain segments is not what the market normally does and any trades you might make (more specifically any big portfolio shifts) would be done so at a time of abnormality.
Going with the crowd during times like this, and right now the crowd is selling, is often a mistake. If you need to sacrifice one stock in order to sleep then you probably should do that but there are parts of the market that are trading like they are permanently broken (no one will ever need oil again, some emerging countries will be out of business by the end of the month, the NZ dollar is going to zero) which of course is not the case.
Periods of abnormality (fast declines) have happened before, will happen again and to be clear is happening right now.
For anyone new to this site I am not 100% at all times guy. I'm a huge believer in defensive action (when SPX crosses below its 200 DMA as a trigger point) but not in the middle of what could be described as a panic 11 months after the peak.
Periods of abnormal trading often end with a reversal of some sort. If you think this time is different then maybe you should get out now, but if you were smart enough to have had a defensive strategy in place before things got this ugly you have a much better shot of facing this without emotion.
I'll close with couple of great, but unrelated, quotes.
I don't remember where I read this but one person who must be particularly concerned about all of the problems unfolding used the baseball inning analogy to say we are about to throw out the first pitch.
Max R, a fraternity buddy, who is a republican but who was not thrilled about the VP choice said "the wild thing is that at some point they all pushed away from the table agreeing she was the answer."
19 comments:
We are turning Japanese.
Not only will things get worse than you believe, but they will last longer than you think they will.
"Max R, a fraternity buddy, who is a republican but who was not thrilled about the VP choice said "the wild thing is that at some point they all pushed away from the table agreeing she was the answer."
In football it's called a Hail
Mary.
I suggest to stay in health care
cause everyone that is still in
this market is going for an
echo cardiogram...anxiety drugs
etc.
No where to hide?
The government should seize the
empty or repo houses and give
them to our returning troops..
still working on the details.
In politics it's called a Hail Sarah!
Really, who do you want as president? The guy who would choose Joe Biden or the guy who would choose Sarah Palin?
I'm going with the babe ticket...Mrs. McCain and Mrs. Palin.
As a Independent retiree living on dividends and capital gains, I say "Go Sarah Cuda".
I don't agree with many of McCain and Palin's social policies but the big picture of national defense and financial solvency makes voting for them a no brainer for almost every retiree that I know.
retiredinprescott
"Periods of abnormality (fast declines) have happened before, will happen again and to be clear is happening right now."
Roger, are you referring to Energy, commodities, Emerging? Or U.S. equities? I don't see a fast decline in U.S. stocks, in fact, one reason I'm so bearish right now is the intermediate term sentiment indicators aren't really signaling any pessimism.
yes i am referring to Energy, commodities, Emerging
The national defense issue is debatable (will we really feel safer if McCain starts a war with Iran and Russia?) but this is an investing blog so here's a summary of the probable impact of the two respective economic plans: http://tinyurl.com/6cuost - there's lots more data and reports to wade through at Congressional Budge Office (www.cbo.gov/) or Tax Policy Center (www.taxpolicycenter.org/) for those who are willing.
Shorter version, no matter what you think of each plan individually, both are projected to significantly increase government debt over the next decade: McCain's by about $5 trillion and Obama's by about $3.5 trillion. There is no amount of 'government waste' that could be cut to make the slightest dent in that mountain of debt even if such cuts were politically feasible so interest rates must rise to attract more foreign capital into US debt markets.
Unfortunately there are clear signs that foreign purchasers of our bonds are getting nervous (IMO this was a fundamental reason for the Frannie bailout but it appears to have extended some of the nervousness to treasuries) so interest rates may have to rise more than desired even in the face of economic weakness. This could support the US dollar more than expected squeezing the margins of one of brighter economic spots, US exports, while also reducing returns from portfolio allocation to international assets (a US investors liabilities are perforce denominated in the home currency).
It seems highly probable that eventually our national debt will become so large -- it will be 70% of GDP when Bush leaves, mama mia! -- that our international creditors will insist we actually pay some down rather than attempt to monetize it (inflate it away) or face the possibility of a reduced international credit rating so taxes are likely to go up across the board no matter who is in power.
FWIW I still see a real "muddle through" scenario unfolding where we can have relatively normal appearing cyclical bear and bull markets (with mushy edges, no sharp V's) within something that looks like a secular bear when measured in real terms but mostly with a net effect of not getting much of anywhere in nominal terms. I am currently long long-duration US bonds based on weakening national fundamentals and the possibility the Fed may try one last easing but, as intimated above, do not expect to be in them for long and personally think you can stick a fork in monetary policy at this point, it's done, so any changes must come from fiscal policy.
So Shortest version: The fiscal policy proposals of the two candidates really matter this time so better read them closely including the fine print.
Frankly we could use a decade of peace and quiet to fix the plumbing but the odds we'll get it don't seem particularly high at the moment. Sure hope I'm wrong though.
Roger, hear about the new double short solar/green ETF. The symbol is GWB. lol
Shoot, got so interested in the fiscal implications I didn't finish my opening thought: If McCain wins I plan to increase allocation to commodities, defense contractors and emergency equipment suppliers; if Obama wins I'll overweight domestic infrastructure and alternative energy plays.
OT but keep the folks southern Texas in your prayers: Hurricane Ike doesn't have the highest winds around but it has one of the biggest wind fields I've every seen or heard of -- the total area covered by higher winds -- so the storm surge looks like it could be one of the biggest on record, enough to easily over-top the sea wall and even many of the houses in Galveston.
interesting ticker, those are the presidents initials, AHEM!
Your fraternity brother would rather have a "community organizer" in office, to care for all 57 states?
Great blog Roger, appreciate the insights and I stop by frequently.
Roger, I'm not a conspiracy theorist, but there are lots of folks smarter than me who blame the hedge fund lemmings for the abnormal rise and fall of the sectors/markets/themes that you refer to.
Do you pay attention to hedge fund activity? How does an investor who manages her own portfolio know when the hedge funds are done selling (commodities for example) and it's safe to go back into the water? Or is the answer to swallow hard, stay diversified, and evalute positions over the entire cycle?
Thanks much.
Roger,
I know we have disagreed on the size of the correction for about a year. I have been rather impressed with how you have handled your portfolio none the less, but it looks like deflation as better described by Mish will be taking hold in the future IMO.
If we do get deflation what are your thoughts? how will you change your portfolio? I still like my cash, but do get long occasionally when everyone seems to be puking. I am not big on staying short over long periods because irrational rallies can and do occur and I prefer making money to be "right", so 99% cash is about as adventurous as I get most of the time.
So what do you suggest for a delationary environment when or if it occurs?
Roger--It's on weeks like this one where I'm glad to have at least one blog I can read where the author (a) doesn't claim to have all the answers and (b) is relentlessly long-term in his outlook.
The level of thoughtfulness and humility you bring to your blog is refreshing and inspiring. You have helped at least one person keep focused on the long-term in the face of a lot of froth. I find I'm framing more of my investment decisions with "When I'm 70, will I look back and think this was a smart choice?" and that's got to be a good thing.
Thank you.
anon 2:47 i answered your question as best i could in the video that will post tomorrow. as far as how am individual would know, i don't really know. there is plenty of coverage of hedge funds but don't know how accurate any of it is.
anon 3:35 a deflationary environment and full on deflation can be two different things. Mish has written about what to hold, he likes gold among other things.
i would it depends on what is happening elsewhere in the world. if it is just a US based thing then foreign equities should be ok. if it is a global malaise i would want a lot of short term treasuries from other countries--short term paper does not get killed if rates go up.
I would be open to soft commodities if the ascendancy theme was still in place (in terms of what is happening on the ground if not in the respective stock markets).
Foreign cash flow stories might be able to hold up well too.
For now those are just preliminary thoughts.
Rick, thanks for the kind word.
http://www.nyse.com/equities/nyseequities/1022221393023.html#moshortint
Just found this interesting fact. Morgan stanley has shorted 100,000 shares of
FFD. They just started the fund in August?
go figure? They choose the investments??? Then they short the fund???
not exactly sure what that would be but i doubt they are actually short. that sounds like something to do with the process of listing and allocating shares.
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