Here is an interesting quote from Jeremy Grantham in Barron's.
"So although the fair value of the S&P today may be about 1025, typically bubbles overcorrect by quite a bit, possibly by 20%. That is very discouraging."
Clearly the interview was done a few days after the worst carnage of the week. A 20% 'overcorrection' works out to SPX 825. The low on Friday was 839.
The dilemma faced by market participants right here is the battle between reason and fear.
Colgate (CL) will still sell plenty of toothpaste, Proctor & Gamble (PG) will still sell plenty of detergent, most of the companies that service where you work will continue to do so, most people will keep their cellphones, you will have a bank account somewhere and so on. And you know this.
Also on the side of reason, there have been panics. crisis and bear markets before. There is no fear that you have now that someone hasn't had before in a past episode. You know this as well. From a big picture stand point there is very little that is new. Bank crisis, poor response to the crisis, misuse of leverage, bear market, this time is different, the bond market not functioning properly, enormous corporate failures and so on. The details are different this time but the details are different every time.
And it is the details where the fear comes in and, for some people, trumps reason. What if this time is different? What if the stock market doesn't come back? What if the rescue plan does not work? What if all the banks go under? What if the government fails? What if it devolves to martial law?
People have these fears but of course people have had them before.
Dr. Brett recently wrote about something I believe is called hindsight bias. The general idea is that something becomes more predicable after it happens. For example of course the failed UAL LBO in 1989 did not have long term importance and stocks should have been bought with both hands in the mini-crash that ensued.
I chose that as an example because many people forget about that one but there was real fear that it would be 1987 all over again. People look back at every panic and say of course I should have been buying stocks but how many actually did?
To me, the biggest variable is how long it takes to start to recover and how long it takes for people's emotion to ratchet back down.
The picture is the Colorado River at the floor of the Grand Canyon near Phantom Ranch.
29 comments:
Do you think Columbus day keeping the banks closed will affect the market tomorrow?
I would not normally even think about this
If Columbus day matters I'd think the close of the bond market would be the bigger thing.
Roger, good morning. You're not tempted to "buy with both hands" here and abandon the 200 dma, are you? I ask because I think you said in yesterday's video that you'd lighten up on a bounce. Still, buying would be the triumph of reason over fear and, in some long run, the right thing to do, no?
in a way yes because no matter what direction the next 100 SPX points is I believe 899 will look cheap at some point.
In a way no because there is fear amongst clients now and just randomly buying in a manner not consistent with our plan could make things much rougher emotionally if the first hundred SPX points or so is wrong.
Part of what I try to do is smooth out the ride, after how things have gone over the last year, i would not want to give too much back.
but what about your personal money roger, are you doing any buying at these levels if you think 899 will look cheap someday?
this blog is a look over my shoulder at how I manage money for others.
my personal stuff, while overlapped with clients, is allocated very conservatively. we live below our means and have a high savings rate.
meant to add, the reason for this is that my entire livelihood is derived from the stock market and I hope to do this work until I'm at least 110.
"my personal stuff... is allocated very conservatively"
now we know how you're so unemotional when it comes to this type environment :-)
i think it helps
I'm not a strong proponent of closed end funds but now seems to be one of best bargains out there with 20-30% discounts to NAV and distributions of 15+%. Since the market prices have corrected more than NAV, is there something I might be missing? Time to back up a CE truck?
Ron
Odds are that 899 will look cheap at some point in time. Let's assume that as a given. Then would it make sense, in a long term view of the market, to just buy an ultra long ETF like RSU and not try to pick stocks? And what is a long term view? 5 years, 10 years, 20 years?
JEC49, double long is meant to be double long for today. over time it may or may not work. in 2007 double long SPY lagged SPY--that was for the year.
Dear Roger,
Just some of my thoughts after
reading your site for several years.
I'm down about 25+% and still main
taining 30-50% cash. It depends
because values have tanked giving
wierdo readings of cash on hand v
inventory. I have remained true to
my thesis of not being BROKE at
the bottom or purported bottom such
as it is.
I think there will be a butkicking
monster feel good sweet spot Bull
Durham rally through the end of the
year and into Q1. It will rally
my opinion only on the back of bad
news(earnings). Current talking
heads will say wow the end of this
crunch in here buy buy buy oh all
here know the drill!! Then some
are racing back in when recession
comes to forefront of everyone's
mind as Pres. Obama worries that he
really has no dough to accomplish
anything. market tanks because
everybody and his brother(don't have one) shorts and sells all big
rallies.
Like all bottoms this takes time
and just like the deja vu of 2002
and 2003 we hit skids for two or
three bottom test events ending in
2009 fall. That's just the way I'm
playing it after getting put in the
blender last week.
Stan Weinstein's books on 10 and 30
week moving averages is really
what I will hang my hat on in the
future as I have done in the past.
I think, sure I could bottom fish
here but if I pay 20% higher for
good long term hold, then so be it.
Ricky
butkicking monster feel good sweet spot Bull Durham rally.
You're going to have to cut back on the jargon, lol.
not having enough money...crucial point. Jimmy Rogers says this is leading to an inflationary holocaust...after the deleveraging process runs its course
Roger,
I see that. Thanks. The double shorts have made a killing on this downturn and I was thinking why the opposite wouldn't be true.
Stayed up very late to watch the Sox with disappointment but leaving there tied is still pretty good. I think I should wash my Sox t-shirt. Maybe the luck ran out when it started to smell!
double short has an extra interest kciker (many moving parts) that imo give it a perf advantage over double long.
can't tell if Beckett is rusty or if there is a problem. Javier Lopez apparently doesn't fool anyone with is delivery, at least not very often, so what's the point?
Beckett has not been the same. We see shades of his talent but he's been inconsistent all year. And our bull pen? It's a crap shoot when they take the mound. But it was good to see Pedroia getting his bat on the ball. Ortiz needs to offer some rum and cigars to Jobu!
lmao, jobu.
It's being mentioned in the media that 'panicked investors' are causing such large outflows and this is one of the reasons why the markets are falling so quickly. Surely for every panicking guy there's another who sees value? I find it difficult to believe it just people getting margin calls having to liquidate their positions causing such enormous corrections on an hour by hour basis. I hope the real story behind all of this comes out one day.
Roger,
Jeremy Grantham of GMO is advocating to go long the yen and swiss franc. What are your thoughts on more of these alternative type investments for your clients?
Japan is very unhealthy, more so than the US maybe. How is the strong yen not merely a sign of deleveraging?
Swissi? My concern there is the UBS is four times the size of GDP and Credit Suisse is 2.5 times GDP (per Alphaville). What if either or both have to be bailed out?
swiss banks are 6.5 times gdp. Would not 5 to 10% recapitalize the bank? Isn't that 0.3 to 0.65 gdp? Isn't japan and italy borrowing at 1.1 to 1.3 gdp if my memory is correct?
couldn't the swiss weather this better than most others? All the swiss have to do is perform better on a relative basis not actually be in better shape for the currency to be a good bet.
seg
Tell me how this stock is anything but a strong capital gain prospect while earning an extraordinary yield as things normalize?
- PZC A closed end stock holding California municipal bonds.
- NAV to market price: A -25.58% discount.
- Tax free yield 10.18%
Tell me how this stock is anything but a strong capital gain prospect while earning an extraordinary yield as things normalize?
- PZC A closed end stock holding California municipal bonds.
- NAV to market price: A -25.58% discount.
- Tax free yield 10.18%
I'm no muni bond guy but isn't California begging for a fed hand out to stay solvent? Seems like a big risk. So you might be banking on the fact that California is "too big to fail".
Hopefully someone with more expertise will chime in.
Not that familiar with Muni CEF's so take this with a grain of salt but I took a quick gander at PZC and there are a few red flags from my POV.
Premium/discount history looks okay, in fact in 2006-07 the premium was nothing less than astonishing -- can't imagine who was paying a $1 for a $1.18 in bond assets, guess it was part of that housing can't go down so neither can the tax base logic -- but in any case periods of discount seem to have closed with reasonable predictability in the past.
Still it's a rather small fund with above average expense ratio and earnings appear to be less than the stated distribution rate which casts the dividend into question.
Also this is a difficult time for muni's generally and California muni's specifically, with tax base and credit availability shrinking at the same time, so the chance the discount will close from a falling NAV rather than rising price seems rather high.
And speaking personally I'd rather see more general obligation (GO) bonds in this economic environment even with a shrinking tax base but only 14% of the fund's portfolio appears to be invested in GO bonds.
Not trying to dissuade anyone, this was a cursory glance, PIMCO is a great shop and I have no doubt the fund manager has forgotten more about bonds than I will ever know, but speaking as someone who does work CEF inefficiencies now and then, PZC has some issues that would make me want to investigate it's working parts a bit more thoroughly and scale in small even then; e.g., take a small position and add in increments if behavior remains favorable.
JMO (FWIW which probably isn't much).
to art 1:29
I agree that CA is looking for Fed funds. If a CEF is what you're looking for, and they're all way under NAV, look at the non-leveraged funds. They seem a bit more secure.
roger, when you say very conservative are you saying invested +/- 40% in Fixed income?
The conservative models I have seen show 40%+/- fixed income like bonds, CD. If bonds, bonds issued by whom? Where do I find fixed income that is keeping pace with inflation, commercial paper?
What criteria do you use to structure your very conservative portfolio?
thanks to you and the others for supporting this site.
PZC close up 31.7% today, Monday, Oct. 13th. I sense the last week's downtrend has generated any number of solid, conservative opportunities, even after today's record uptrend..
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