CNBC Today

With a big thanks to reader Bill B for finding the link, I was on CNBC today.
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CNBC

I'm scheduled on CNBC today, early in the second hour of Closing Bell.

Thank goodness I got a haircut yesterday.
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Boo!

On my (computer) desktop I have a quote widget from Yahoo Finance which I use to quickly know what each of the big ten sectors, via ETFs, are doing during the day. I also have an emerging market ETF on there, GLD (client holding) and a couple of currency ETFs.

Yesterday as the S&P 500 was up 2.58%, eight of the ten sectors were up more than 2.58%. The emerging market ETF was up 10%. As I look down the list of stocks that I either follow or own there are many that have had several 5-10% up days in a row, especially in the segments most beaten down.

If you have a long list of stocks and narrow ETFs that you watch then you know what exactly what I am talking about.

In looking below the surface of the broad market there have been plenty of mining and emerging market stocks that dropped 60-70% as the S&P dropped its 45%. The decline has been largely overdone in some of these areas (don't take that as meaning I think a bottom must be in). The partial snapback has been very fast, which is normal, and could help people who felt panic but did not succumb to it by selling a lot stock at the lows breath a little easier.

That some of these mining and emerging (or anything else you want to include) stocks and ETFs could go from down 60% to down 40% and then trade closer with the market (correlations are probably going to stay high for a while) seems plausible.

Take BHP Billiton (BHP) for example. It made a 52 week high of $95 in May and bottomed out below $29, a 78% drop, earlier this week. Since that Monday low it has rallied 32%. In the trailing 12 months it earned $5.50. The 2009 estimate is $6.22 and for 2010 it is $6.54. Should we give the estimates a 50% haircut? Even with a 50% cut in earnings the stock has a cheap valuation. I think a 50% haircut is a bit much but even so there is demand for the stuff BHP pulls out of the ground, assuming a 50% haircut more than, IMO, accounts for economic slowdown/slash price declines in commodities.

I am in no way suggesting this stock and I have no future plans with it. It is just an example that repeats with similar numbers in many stocks these days. John Hussman made a comment about a stock representing a future cash flow. The future cash flows of most companies have not been effected enough to justify the declines we have seen--this might be why BHP rallied 32% in a few days.

Obviously stocks over react in both directions all the time but it is a good bet that most of them will continue to have a positive cash flow. The fate of that future cash flow is the long term. The huge swings thus far and maybe the huge swings yet to come are the short term. If you think of yourself as an investor you should probably be more concerned with the long term.

Need to give a shout out to Eric Savitz, he mentioned Count Floyd over the weekend.
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Thursday Tidbits

I've written a few times about some of the income trusts and other funky investment vehicles from Canada. I have always found them intriguing, conceptually, but have never been comfortable pulling the trigger.

You can click on the chart to enlarge it and get the ticker symbols. The last few months have been brutal. Great Lakes Hydro has come closest over the years to doing what I would hope all of them would deliver; very little price movement and a whole lotta yield.

I've mentioned a couple of times my intention to add a little exposure during panic days (and have disclosed the couple of things I've done) and to put the double short back on in some way if the market goes up a lot in a short period of time. It's a plan, it is not difficult to stick to but yesterday I realized one thing that is missing. What if it does neither? What if there is a stumble across the bottom such that SPX bounced between 900 and 1000, give or take a few points?

There is probably not much of a reason to re-equitize into a market that ends up not doing anything for a while. If the market stayed between 900 and 1000 I would sit tight for a few months, maybe six or so, and eventually deploy some cash. If this scenario were to play out for a while, ok, but it would not last forever. It is a good bet that if the market is range bound like that for a while it would then break one way or another. My hunch is that it would break upwards as some amount of time will cure this market.

Still no progress on the currency ETF front. Both WisdomTree and Rydex and new funds in registration but have not listed any funds in a while. At some point the market will realize that close to zirp in the US and massive expansion of the Fed balance sheet via treasury issuance is not great for the dollar. After such a violent rise in the dollar a fast retracement (may have already started) of maybe 50% of what was gained followed by some meandering seems very plausible. If that turns out to be close to right it'd be nice to have a little more choice.

A reader left a comment that I think expressed surprise that the market was so quick to sell off yesterday at the close. Tuesday's 900 point Dow rally was not a sign of health. A healthy market does not deliver 10% in a day. The market could go up a couple of thousand points despite the current lack of health and even then the market would probably not be healthy. We all have opinions about what is probable here but we should not rule anything else out as possible.
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Two Tarantula Morning

We had two tarantulas in the dog pen this morning. They were smaller than the one from a couple of weeks ago.

Here Pee Wee tries to figure it all out.

I wrangled them into the pooper scooper and took them out to the forest.

No dogs were hurt in staging and taking of this picture.
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The Future Of Portfolio Construction?

Well, maybe.

IndexUniverse.com had an article about Bank of NY creating a bunch of GDR indexes (similar to ADRs but traded in the UK) for quite a few countries and a couple of broad based indexes too.

The list;

• Bahrain
• Croatia
• Egypt
• Estonia
• Georgia
• Hungary
• India
• Israel
• Kazakhstan
• Kuwait
• Lebanon
• Netherlands
• Nigeria
• Oman
• Pakistan
• Poland
• Romania
• Russia
• South Korea
• Taiwan
• Turkey
• UAE
• Ukraine
• Eastern Europe
• Easter Europe ex-Russia
• MENA
• Middle East
• Africa
• Emerging Markets

It is a good bet that these indexes are being created in the hope that someone will license them into some sort of investment product like an ETF.

I've long been of the opinion that portfolio construction is in the middle of a rather swift evolution and have expected/hoped that the world of investment products would generally keep up with that need. Accessing individual stocks from these countries is very difficult and even if they were easily accessible the task of stock picking would be difficult too.

Chances are that when things get healthier in Poland just owning the WIG 20, or something close, would be sufficient for a US based investor.

The gang at Fistful of Euros spell out the problems Poland might be having these days and it does not look good but Poland, or any other country in trouble, will become attractive at some point.

If the US is like Japan in anyway it could be that returns in our domestic market will be below normal (long running theme) so US based investors will have to find another solution besides 75% in domestic equities.

Perhaps the answer will have to be something like one of the do-it-yourself hedgefunds (but heed this warning from Mebane Faber) that gets written about sometimes. I've written about this before of course but some weighting to absolute (I have my favorites), a heavier weighting to TIPS products (after asset deflation ends we could be in for some nasty inflation), a little something in commodities, another little something in currencies, a small weight in maybe two countries from the above list, a small weight in a couple of bigger emerging countries and a slightly larger weight in four or five developed countries could add up to 70% of a portfolio before getting to domestic equities and maybe something to hedge a little bit of all that foreign currency exposure.

I've written a couple of hundred posts over the years about having a plan for defense having thought a bear market less severe than we've actually had was a real possibility. Now I'm writing a lot about figuring out what to do in case the US continues to offer subpar returns because I think that is a real possibility.

There have been comments left of late along the lines of the stock market not working or whatever and while I'm not here to try to talk anyone out of anything, we all need to save for our futures and do something effective with what we save. The issue seems to be that do something effective might be changing. I don't know if it is changing but it might be and I feel it is important to figure something out.
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I Like To Move It Move It

I just came out of a meeting, looked at CNBC and this is what I saw.

Obviously this tells us volatility is not gone, panic (works in both directions) is still here and more seriously a big feel good rally can come from out of nowhere at anytime and be huge.
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And Then What?

A reader left a comment noting that SPX going down to 600 would be devastating to baby boomers. Maybe it would be devastating, collectively, to baby boomers but I would look at this differently. If 600 ends up being the number, then what? After 600 what comes next? If the bottom comes at some other number, then what? Whatever the bottom what then happens?

After the bottom it then begins to work back. The time table may or may not be to our liking but the bottom is the bottom and after the bottom prices go up. Regardless of when a bottom comes or how long it takes to make back a meaningful portion of what you are down, the above description is how it will work. Again, the variables are when and how long.

Of course when and how long are beyond anyone's control so instead of worrying about what we cannot control, we should worry about what we can control (at least partially) like not panicking, staying disciplined and recognizing when others are freaking out.

In the last couple of months, not surprisingly, I have had more contact with clients than normal. There is a balancing act here with realizing how numbers and markets work and being appropriately sensitive to client concern.

As for the numbers and markets and tying in with the reader comment about baby boomers; it's a good bet that a healthy baby boomer will live to see a new high in the market, by a wide margin probably. The market had a decade long round trip to nowhere that ended in 1946. In October 1946 the Dow was at 186, ten years later it was at 479. After a famous decade long round trip ending in 1982 the Dow went from 991 in October of that year to 3226 in October 1992.

Think this time is worse? Ok, say that it is and it only doubles over the next ten years (much worse result than the other times), a healthy baby boomer will very likely live to see new highs. Think this will turn into 20 years of a round trip to nowhere? Ok fine but that final result would not come in a straight line. There would be plenty of 20% ups to be in on and 20% downs to avoid or short.

If things turn out to be truly different ok, figure out how to adapt and then stick to it.
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Bootstraps

Yesterday I came across three different articles that I thought all tied to a similar theme about whether we should or should not rely on the idea of stock prices going up over the very long term. There were also comments on the blog this weekend along the same lines.

Regardless of what the futures holds, asking these types of questions has become much more popular because the S&P 500 is 18% lower than where it was exactly ten years ago and the world is in the middle of a financial crisis that has yet to be sorted out.

The first article was by Felix Salmon that makes a case for reorienting expectations toward dividends rather than capital gains.

The second article is from David Leonhardt about why prosperity is not an unalienable right.

The last one was an interview, of sorts, with Jack Bogle advocating stocks as an asset class are attractively priced now that they are down a lot, maintaining a diversified portfolio and that the world is not ending. You may not know this but Bogle has a pretty good track record for recognizing cheap markets and expensive ones. He says now it is cheap (this is obviously a long term opinion not short term).

This evokes two reactions in me. First is more of a practical idea which is easier said than done, but save more money. We have all read statistics about the savings rate possibly being zero or negative (the tracking of this tends to be flawed and while I'm not sure what is accurate it is obviously very low). There is tremendous psychological value in having savings and being a few months ahead in your checkbook. It provides a greater margin for error and a sense of accomplishment having set something meaningful aside.

The other initial reaction is a reminder that how we define retirement will have to change if it has not done so already. More people will have to figure out how to derive income for longer. That could mean working longer in your career, transitioning to some sort of secondary career, monetizing a hobby or something else.

I've written a few times about my neighbor with the backhoe, another neighbor who plows roads and driveways here in the winter and a hiking friend who has all the work she wants as a dog sitter. Some who is 50 and has had a hobby of some sort for a while will know whether it is possible (realistically speaking) to monetize it or not. At the same time someone who is 50 has enough years to figure something out if they don't want to work at some store or the like.

Candidly I am far less worried about the long term fate of the stock market versus the fate of social security and medicare. I have been writing for ages about the possibility of lower than normal returns in the US (hence the need for more foreign IMO) but believe the US financial system and stock market will resume functioning. While I am no expert on social security and medicare the numbers there make no sense to me. The worker/recipient ratio is out of whack and it stands to get worse.

As mentioned above the S&P 500 is down 18% from ten years ago (SPX closed at 1072.32 on October 26, 1998). Ten year periods like this are not unprecedented but are rare. Some element of looking forward and imperfect discounting still exists in how the market functions. The stock market warned of future trouble in q4 2007 when it started to roll over. The crash now being worked through is imperfectly discounting a worsening of GDP growth and higher unemployment.

The US has encountered serious financial problems before and recovered successfully on some sort of timetable and I believe it will do so again even if things look different on the other side. Success must include responsibility for your own actions like saving more, figuring a way to generate income for longer and my favorite; living below your means. This approach can help mitigate continued bear market equity results and an altered entitlement program.
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Sunday Morning Coffee

There will be no regular blog post for Sunday. Friday night/Saturday morning we had a structure fire to fight. The call came in at midnight:15 and I did not get home until 8 am.

We were incredibly lucky. We got there and the house was engulfed in flame (no one had a camera, damn it) and surrounded by trees with all sorts of logs, brush and slash on the ground but there was zero wind. So it was hours of work but I would say essentially no danger of spreading.

As the house disintegrated though there were pieces of house all over with nails, bolts and screws but no one was hurt. Additionally there was one room in the basement with cans of paint and roofing tar but there was never a color of smoke or flame to indicate danger from those things.

It was my first structure fire, the longest I'd ever worked on one fire and as has often been the case I was the incident commander. It was a great learning experience but needless to say it has messed up my entire weekend. I did no work during the day on Saturday and am just now getting to Barron's.

Normal blogging should resume Monday, thanks for your indulgence.
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The Big Picture For the Week Of Oct 26, 2008

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Frustrating Open

I flipped on the TV at about 5:10 (80 minutes before the open) saw what was going on and was ready for a crash--we may get one later today, who knows--I fired off an email to clients warning them of ugliness, I scrambled to figure out how many shares I would need to buy for a couple of different names (would only be buying one however) and then the panic never came or at least not yet.

The decline thus far today has been well within the tails for this bear market. I may yet do something today but after the threat faced earlier compared with how it is actually playing out there is a shortage of fear. I'm ready to go but I do not expect to buy anything without a real scare during the regular session. Right now there is relief.
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Finding The Forest

Several comments came in that explored the notion of whether traders, as opposed to investors, are pushing the market around.

Then a link to an article about Roubini's opinion that hedge fund closures/unwinding will cause the markets to be shut for a few days and that the worst is yet to come.

Finally a reader lamented about just wanting steady, moderate growth.

After a forty whatever percent drop you know I am leaning bullish having slightly increased long exposure.

That being said it would be foolish to deny the possibility of any seemingly extreme outcome and to be clear closing for a few days seems like a very remote possibility but almost all of the fallout of this crisis so far would have been viewed as very remote.

The one thing I would say to Roubini would be haven't hedge funds been selling all of this time? Hasn't hedge fund selling contributed to the 40% drop in US stocks, the ravaging in commodities, the pounding in emerging markets and the halving of oil (I realize oil is a commodity)? It is easy to believe the selling is not completed but that the worst is yet to come seems difficult to imagine.

One reader asked how much heed to pay to Roubini. He has been right of course in the big picture and most of the small picture. He was very early which is not a bad thing. One bit of trouble I have in trying follow him is his use of words like disaster and collapse. Reasonably speaking those are very subjective words. Someone might think of a 10% drop in housing prices as a collapse where someone else might think a collapse comes at 40%. I hear more subjective adjectives from him than specific numbers.

If your portfolio drops by half as much as the market, you keep your job and don't plan to move will this have turned to have been a disastrous collapse? Most people can count on those last two and some will have all three. So I have trouble thinking of this as a collapse but I have no argument against a rose colored glasses critique. I will say that portfolio troubles, job troubles and housing troubles can occur at anytime regardless of what is going on in the world. I have tried to mitigate all of those potential troubles with all of the portfolio stuff I've been writing about for four years, living in an inexpensive cabin that is paid for and being self-employed with two jobs.

Back to hedge funds; a year ago was there $1.5 trillion in hedge funds, maybe $2 trillion in something like 1000 hedge funds? Couldn't 20% of them be successful, either moderately or tremendously? Couldn't that 20% account for 40% of the assets in the space? Couldn't a case be made, with numbers by someone inclined to look, that much, not necessarily all, of the selling has been done? Maybe not.

In terms of is it the traders, I would not spend a lot of time on that. I think it misses the forest. I lump that in with things that are beyond your control, that and it isn't really knowable. The market is down a lot, it will either keep going down, hover or go up. I lean toward hover with an upward bias. What we can control is staying rational, sticking to a game plan and being prepared to being very wrong either big picture or tactically.

Last item is the lament for moderate but steady returns. It might be reasonable to define moderate as high single digits to low double digits, maybe 8-12% or 7-13%. Since 1950 there have only been ten years that the S&P 500 was up between 7-13%. Between 8-12% only four times since 1950. Unfortunately it just doesn't work that way.
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Sentiment

This is a rough market by anyone's measure. It would be reasonable to be a bit grumpy or concerned.

Yesterday was yet another day of crash related selling. Fear is ratcheting back up, VIX is higher than the price of oil as they mentioned on CNBC. Not sure that matters but it is a little interesting factoid.

Given what seemed like an emotional reaction in the market as manifested in the run down to SPX 900 I bought one of the publicly traded exchanges almost across the board with about 60-90 minutes to go in the session.

I've been very underweight financials and an exchange is at least a couple of degrees removed from the meat of the financial crisis. I'm going to hold off on naming names on this one, what matters is the increased, albeit slight, exposure. Additionally, like most publicly traded exchanges the name is very volatile and if we ever have a rally again (feel good or otherwise) I would expect it to outperform meaningfully on the way up.

I titled my Greenfaucet post about buying a little Statoil as Bear Markets Should Make You Feel Uneasy. I talked about buying stock in a panic as being difficult in case it turned out very wrong thus causing anguish for clients (I'm not trying to freak anyone out after all). There was no such thought yesterday (not sure what to think about that). I think SPX was at 908 when I decided to do it, I mentioned the other day that down near 900 I'm probably a small buyer, we got there and I was a small buyer.

I would revisit a point I've made many times before. I am a big believer in trying to make a plan of action and then trying to stick to it. It should have been clear from recent blog posts that I fully expected to see another run down so I was ready for it emotionally and strategically. The notion of thinking of a decline ahead of time does a lot to insulate from panic.

None the above means we can count on a bottom, or ensures that the purchase will be "right" in the near term. My focus is (repeat coming) realizing the market is panicked and knowing that buying during a selling frenzy usually works out well.

I stumbled across something useful the other day when making the video for last weekend. I said I could buy a fair bit of stock and still be very defensive when I was done buying. I feel fortunate to be in that position. I know from reader comments that there are plenty of folks that were more aggressive raising more cash than me and lately have been more aggressive moving back in.

There is no guarantee that they will be correct but we do know they are not panicked, again a good place to be.
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Wednesday

You feeling like this guy?
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Absolute Funds

At different times I've talked about adding more absolute return in if we can no longer rely on equity returns the way we used to.

That sounds ok I guess but finding absolute or market neutral products that are not prone to bouts of anxiety, even if just temporary, might be tough to do.

The chart captures a bunch of names from the space, there are others that I did not include. The ones charted are;

• Merger Fund (MERFX)
• Arbitrage Fund (ARBFX)
• Hussman Strategic Growth (HSGFX)
• JP Morgan Multi Cap Market Neutral (OGNIX)
• Permanent Portfolio (PRPFX)
• TFS Market Neutral (TFSMX)

I'm not sure about the ticker symbols WRT to class of funds, A, B, C and so on.

The worst of the lot is down just under 15% YTD through Monday versus a drop of over 30% for the S&P 500. In thinking about an absolute or market neutral, is down 15% in a down 30% world acceptable? There is no right answer, to you that either is or is not acceptable.

PRPFX has been the laggard, and maybe it should not be considered in the group, but most of that lag came in the last three months. It rolled over a little starting in May but since August 1st it is down 16.5%. Keep in mind that at the same time SPX was down 26%. Great performance but I'm not sure if that is what someone seeking absolute or neutral has in mind.

TFMSX had a great run into its high in July. From July 1 it dropped about 15% versus 23% for SPX. Again, I think that is an excellent result but someone expecting flat might not be happy with an 8% beat or even a 12% beat in that circumstance.

OGNIX was, to the eye, the least volatile of the bunch. If you wanted boring (not being critical) you got it with this fund.

HSGFX was low octane the vast majority of the time (again it may be a mis-characterization to include this fund in the post but many people view it in this context) but it did have a few hiccups along the way. Coming into October it was up 4% on the year and then dropped 6% through Monday. Again, way better than SPX but I bet at least one fund holder panicked out during the hiccup.

Both MERFX and ARBFX were dull all year, had early October freak outs and are now working back. The credit market freeze potentially gets in the way of the strategies employed by the funds.

I have two funds from this category (not charted) in my ownership universe. The Nakoma Absolute Return Fund (NARFX) is down less than 5% YTD which is probably a good result by any measure but a back in May it was down 10% for the year which at the time was worse than the market. People who were patient came out very well. The other name I use (and have mentioned many times) is the Rydex Managed Futures Fund (RYMFX) which is up a little over 5% for the year. Again that is a good result but it got smacked around some when oil started to rollover but before the rebalance took oil out of the fund.

Assuming my picking RYMFX was just luck, should I put 10% of the portfolio into it? It has done pretty well so why not? The current event has shown repeatedly that things don't always work as they are supposed to, this has happened countless times in fact. Putting 10% in absolute/neutral as an asset class would be one thing (not sure I like that number, just an example) but all in one fund no matter how much I like is more than I would do.

There are ways to build your own market neutral using long versus inverse ETFs (this would not be perfect and could be labor intensive) that could be done in conjunction with owning a fund.

Anyone having any interest in pursuing this in their portfolio needs to have their own expectations and realize that every so often these funds are going to have a bit of a spasm and then it will go back to doing its thing. No product can offer perfect protection 100% of the time. If you find something that has been "perfect" thus far great but at some point it will hit a rough patch. If it really is a good fund then the rough patch would be short lived. Well hopefully.
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Tuesday Tidbits

Yesterday after the close, as I usually do, I went to the gym. As I waited for the next song on my iPod to kick in I heard two guys talking about the stock market. After the gym I went to Walmart and heard two other guys; "the most you can lose is $500." The crisis has made its way to main street.

To any of my friends (acquaintances really) at WisdomTree, the dollar has had a big rally (I think counter trend) against almost everything. This might be a good time to to launch some of those currency ETFs especially the ones from some of the healthier (relatively anyway) economies like Israel, Norway, Chile and even though it is in a recession Singapore.

At some point in the last couple of days I said I thought we might see daily moves ratchet down to only 4-5% and bingo we get 4.77% yesterday, too funny.

A lot of chatter about Hungary being the next Iceland. One of the WSJ blogs interviewed Hungarian central bank Governor Andras Simor. A couple of interesting things he said were that Hungarian banks are owned in large part by banks from other European countries, so they are not like Iceland because of this and a few other things. He also said that Hungary is not a big country like the UK so they need help from their friends. No mention of all those mortgages taken out by Hungarians in lower interest rate Swiss francs (mortgage carry trades) and the recent skyrocketing if the franc against the forint.

In an article for IndexUniverse, John Serrapere (who's work I respect) laid out a case for a very big rally. A quick reminder is that 20% rallies during bear markets are common occurrences. My own take is that the faster it comes the less staying power it will have. Watch out for a lot of glee and pronouncements that the bear is over-- if John turns out to be correct.

I made a comment in passing in yesterday's post; "...or you could double your savings." Doubling is probably a tall order but what about 10% more?

Here is a link to Jeremy Grantham's latest.

It seems that a lot of people, especially those who have felt every bump down, are looking to find a new investment strategy based on the performance of their old investment strategy. Maybe some people do need to make changes but doing so within a few percentage points of the bottom, the bottom for now anyway, is likely to be a very bad idea. If you are down 35-40% you have confronted most of the risk of your allocation you might want to hang around long enough to reap some of the reward of that allocation.

Charles Kirk interviewed me for his blog, it ran last Friday. I think you need a login to see it. It is quite lengthy. I think it is ok to share one question and answer so:

Kirk: Generally speaking, do you believe that investors should implement passive or actively managed strategies in their approach and why?

Roger: I think the number of moving parts in an investor’s portfolio, assuming they prefer to do it themselves, should correspond to the amount of time they want/are able to spend managing the portfolio and studying the markets. For people who do not want to mess with single stock selection, ETFs now allow for embedding some very narrow themes and exposure into a portfolio. Between the many choices in sector and theme ETFs, people can create very sophisticated portfolios.

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(Yet Another) Money Quote

From John Hussman;

The most expensive resource on Wall Street is short-term comfort. Investors who constantly seek comfort over the short-term ultimately give up a fortune over the long-term.

Just getting around to reading him now.
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Trying To Look Forward

For the last couple of weeks the tone to many of the blog posts has been more constructive on the market than I've been in quite a while. I've even responded to the last two TickerSense Blogger Polls as bullish.

I am far from all in as discussed at length in this week's video but down 40% is a good time to start looking here and abroad.

As I try to look forward it seems that, repeat idea coming here, the US is closer to a secular event while many countries, ex-Western Europe and Japan, have more cyclical issues.

The implication of this theory is that the countries that are only in cyclical downturns will begin to comeback faster than countries dealing with more secular issues. A couple of places that might be in the club are Norway, Chile and Israel. Not quite making the theoretical cut include the US and maybe Korea. I wrote negatively about Korea on Friday at Greenfaucet and they made more news this weekend.

I've never owned Korea and I'm not sure how popular it has been as an investment destination.

Another repeat point is that I'm not focused on trying to correctly buy a bottom just trying to recognize the panic that has been created and lean a little against that panic.

Another segment to possible favor could be stocks with must own long term themes. This gets to be fairly subjective but to get the dialog moving a little this list might include infrastructure (projects that can get funding), alternative energy and aging baby boomers. None of these are new, they have all had fits and starts but the money is going to be spent eventually.

One last idea for this post is absolute return. There are plenty of products to research. Some have done well during this bear market and some have not. I have had good luck with the Rydex Managed Futures Fund (RYMFX). It had a rough stretch for a short while when crude oil started to roll over but the methodology took oil out and the fund is a couple of percentage points from its all time high.

Unfortunately for some folks these types of ideas do not lend themselves to broad based index funds. While broad based has never been my first choice the scenario I am laying out means slower average growth for US equities (something I have been theorizing for a while now)--this can't be shocking as we're down on the decade.

So if the US averages 5% for some extended period you could either double your savings rate or seek out "normal" returns elsewhere.

Tough loss for the Sox. I thought they would win game 7 but they could not get on track offensively. Congrats to the Rays and their fans.
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Sunday Morning Coffee

Obviously too many things going on to cover them all so I thought I would try to hone in on a couple reader comments.

One reader noted that I looked more tired in last week's video (buy signal) and less tired this week (sell signal?). If I were to be an indicator I would be incapable of recognizing it's value but have at it if you think there is something to it.

I actually felt more wiped out this week due to being pulled in progressively more directions in terms of emails from work, media inquiries but not trading. If you've been reading this site for a while you know most of the work was done ages ago.

The small portfolio tweaks are not usually time consuming. As the phone has been ringing for me a little more often it has been ringing for Joellyn a lot more often as apparently dog rescue issues have gone up as the stock market has gone down.

Another reader asked a question about entering and exiting the market during what he calls a complex market. He believes in thinking of the current cycle as a complex bottom and although he tends to be shorter term in nature wonders if points of entry and exit take on additional importance right here.

Well there's all sorts of things there I don't know. The first thing I think is buy and hold and whether that notion is dead. I've never thought it was dead dead but the tweak I have written about is buy and hope to hold. When I first bought Bank of America (BAC) a few years ago I figured I'd never need to sell it. Then the merger with Merrill came along and I sold it. Had there been no MER merger I'm pretty sure I'd still own it.

I'd love to be able to assemble a portfolio that never needed any changes but that is not realistic but that is my starting point in trying to answer the question. I do take a longer time frame than the reader and as a top down person I am more concerned the the exposure of the entire portfolio and reducing that exposure or increasing it depending on what I think the market is doing consistent with other more objective concepts I rely on.

I've outlined the couple of across board trades I've done of late (a few long sales a while back, selling the double short, buying a little Statoil) but I would say I probably have the next three offensive and defensive moves planned, which I do or the order they might get done depends on what the market gives and to tie in with some comments yesterday, I could add a few names and still have a cash position most folks would consider defensive.

There are a couple of things that are foremost on my mind these days. The most important ties in with down a lot. I'd been writing about trying to avoid big chunks of down a lot. We've now had down a lot (you can look at the quarterly recap videos to determine whether you think I was successful in trying to miss down a lot), many people are very afraid and there is a lot of questioning of the future of our financial system. Quite simply that describes a time to gear more toward entry than exit at the portfolio level.

At the index level continued volatility, although maybe soon we only move in 4 and 5% increments, should be expected. Apparently David Rosenberg from Merrill thinks SPX 750 is in the cards. That is 190 points from here. In the context of a 1565 starting point, 190 points would be another 12% after already falling 40%. If you do not think this is the great depression revisited then you probably need to realize the vast majority of the decline is in.

That does not mean that if we go up to 1050 this week that we don't go down to 850 the next week and scare the bejeezes out of everyone. And then that type of action repeats a few more times.

At the stock level we should expect more wipeouts. If you have a 2% weight to a stock that goes to zero you don't really have a problem but most people put more than 2% in one name. I do think there needs to be a willingness to come out of any stock you own in this type of environment, BAC as a case in point for me.

Market history shows us that buying some stock after a huge selloff that scares people has worked far more often than it hasn't.

Exactly a year ago I mentioned JD Drew's grand slam against Cleveland. He gad been having a dreadful time at the plate but all the while I kept telling Joellyn he would do something good. Last night was the exact same thing with Jason Varitek. He may not be a major league hitter anymore but when they flashed that 0-for the series stat, I knew the Rays were in trouble.

Game 7 tonight which obviously the Sox have a shot at which is good but that means we have one more night of Chip Carey and Buck Martinez announcing (Ron Darling is nowhere near as bad as the other two, in fact Darling doesn't bug me in the least). In addition to not being able to judge flies balls as homers or not Carey also has trouble with fair and foul. I swear to you I could do a better job than him.

The picture hearkens to a simpler time, 2006, in the Icelandic countryside.
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The Big Picture For The Week Of October 19, 2008

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E Piffanee

I had an epiphany yesterday, a moment of clarity if you will. I figured out how to articulate my view on the current market.

First, this came about from a small trade I did early in the day Thursday. With SPX near 882 I started to buy back the Statoil I sold in May. Specifically I sold about 25% of the position back in May around $43. I bought those shares back times two around $16.10.

If that is not clear, if someone sold 100 in May they bought 200 yesterday. For a little more color please check out Greenfaucet.

Somewhere between SPX 900 and SPX 1000 there is an important Mendoza line that marks the difference between normal bear market and oversold freak out.

I don't know exactly where that line is but at SPX 900 or lower I tend to think more about re-equitizing and up over SPX 1000 I start to think about defense (either selling or buying the double short ETF back). A bigger idea is that a portfolio will probably look a little different at the end of a bear then at the start of a bull. The dance between 900 and 1000 is perhaps where the transition needs to occur.

This is not about bottom calling but more about the understanding that the world is not ending, most companies will survive and a new cycle will start even if it takes an uncomfortably long time to happen.

I talked about not having a great feel for the short term (sometimes I get hunches) and I think contributing to that has been the inability to articulate this 900-1000 theme. While I still don't have a feel for the bottom in terms price or time, this notion of scared prices at SPX 900 and normal bear market prices at 1000 (just round numbers so don't obsess on them) does make things a little clearer.

Buying stock below 900 was not comfortable. I have no worry about the world ending (metaphorically) but I'd obviously prefer to minimize whatever emotion any of our clients might feel. The bottoming process, a process that can go on for a long time, should be uncomfortable. If we go down I may buy something else and if we have a meaningful rally, as mentioned before I may sell something (or buy double short).
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Pork Chops and Apple Sauce

As random, ahem, as my reference to the Brady Bunch might seem so too are the movements in the market as the bear market condition continues to process through to its conclusion.

After the rally on Monday I commented on the lack of health belied by such a huge move up. It seems that moves of greater than 5%, regardless of direction, are going to be a normal thing as we work to the next bull market.

A huge focus in my writing and more importantly in my practice has been to brace for something bad and at the same time keep a sense of reason.

On yesterday's post a comment came in that said "screw iceland, my retirement portfolio is shrinking fast." Maybe that is a joke and I was too dense to pick up on that but if not then that is a deplorable attitude. There may be issues in Iceland (still trying to resolve conflicting accounts) with importing food, that's access to food. Bear markets to equities come along every few years, trouble accessing food does not so get a grip and while your at it, a clue.

One notion that has been moving around is that many hedge funds have gone to cash. I have no idea if that is true or not but it seems odd to me. Delever, sure, sell out I don't get. Barry was on PowerLunch trying mightily to make the point that down 40% is the time to think about getting back in and for anyone aggressive to consider leverage, he disclosed using a double long ETF to do so.

Buying a lot of stock is reasonably a difficult proposition for many people but this idea makes the point of how much of a mistake selling out would be

I disclosed recently selling the last of my double short with the same general idea of getting a tad longer; a comment I've made a few times which is that the risk of a big drop is less after a big drop. That is an important consideration for you psyche as well as for any tactical considerations.

Down forty whatever percent is a lot. Fear is sky high as is volatility, people don't know what to do and are getting worked up enough to leave comments like the one I ragged on up above.

It is ok to not know what comes next, not know where the bottom is and to be worried. No one ever did financial damage to themselves by being unsure and worried. People have damaged themselves financially by acting on their being unsure and worried.

One bit of clarity. I said I sold the double short ETF to get a little longer but on Monday I sold a stock (not part of a hedge strategy) at the end of the day. That may seem contradictory but 10% up in a day seemed like a good time to take something off.
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Joe the Plumber

Is it me or are these guys are stand-up philosophers
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Around Europe

Things are still going poorly in Iceland. According to Bloomberg the ICEX 15 Index reopened on Tuesday after a three day trading halt. The result was a one day 77% drop. Of course YTD the ICEX was down a little over 50% coming into the Tuesday. I've read conflicting reports about whether there are or are not food shortages, this from Dealbreaker yesterday says the shortages are for real. The krona is trading at about 109 to the dollar. When Joellyn and I went there two years ago the rate was in the low 60s.

The drop is skewed some because of the disproportionate weighting the financials had. Kaupthing alone was in the mid 30s. It looks as though Kaupthing, Landsbanki and Glitnir never traded (they all were nationalized one way or another) and so appear to just be gone from the index. The fishery index, made up of Alfesca and Vinnslustoein (that last one some letters and punctuation I don't have on my keyboard) did a little better, down 17% and no trades respectively.

The comeback for Iceland will have to involve the fishing industry and whatever companies build build production plants--I still hold on to the idea that certain types of manufacturing and data storage will migrate there to capitalize on the geothermal.

I also found this from a site called A Fistful Of Euros (the best name for a blog I've ever heard) noting that Estonia, Latvia and Lithuania may be on a similar path as Iceland. I've blogged about Latvia's problems a couple of times before but don't know much about the other two.

The reason to revisit these places now while they are in various stages of duress is to talk about country selection. Iceland, Lithuania and Latvia are deficit countries (Estonia; current account yes, budget no). The Fistful article also says Hungary (another deficit country) is in trouble too. Although not mentioned in either article above I read in the FT that the Ukraine (yet another deficit country) is having problems as well.

I been on a jag for a while about needing to seek out new investment destinations in order to have a better chance of getting whatever average annual number your plan calls for. Despite the difficulties that many deficit countries are having they are not all forever bad investments. This is a rough time for many of them due to the nature of how the economic cycle is ending. A new cycle will begin and most of them will come back just fine eventually.

This is not to say that surplus countries are not down during this but as an example in the last month the WisdomTree Middle East Dividend Fund (GULF) and the Market Vectors Gulf States Fund (MES) are only down 5% versus 15% for the S&P 500. Norway is down more than the S&P 500 in the last month.

If you envision going more foreign and doing so country by country I think the current episode underscores the need to own different types of countries. Deficit and surplus, service and commodity, emerging and developed, centers of the universe and in their own worlds all need to be represented to maintain a diversified portfolio. Obviously a country can serve as multiple proxies just like a stock can.

Some sort of defensive plan is also still important either on a portfolio level or country level.

On a related note IndexUniverse reported last week that iShares filed for a Peru fund. I don't know when it will list and chances are it won't be that popular but as more of these products list and if the need to have more foreign does head where I think it will then a lot of these funds will become portfolio savers--if the providers can hang in there long enough with them.
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An Observation Or Two

And where better than from the top of Mauna Kea.

My brother had the best one liner of the day yesterday. He emailed me at the close and said 'yeah, this seems rational to me.' Hysterical.

I was jumping for joy rooting the market on, keep going! Clearly the crisis is over and we should buy them with both hands. Depression? What depression?

Um strike that entire paragraph. Getting happy about an up day is as unproductive as getting upset on a down day.

In the video this weekend I mentioned the possibility of reducing exposure by a stock or two if we had a big feel good rally. I was thinking big would be 20% in a couple of weeks. With the big open I thought that if we got close to 10% I would sell something. As we got 9% with about 30 minutes to go left in the session I sold a widely held name that was not down a lot (a lot is relative these days of course) but also has no must own catalyst to it.

Obviously the day finished with an 11.6% gain. To repeat; yeah, [that] seems rational to me. If we rocket up more I'll look to get a little more defensive one way or another. A reader commented about panicking up not being much better than panicking down. Well in terms of market health I agree but the phone did ring less yesterday.

Funny anecdote; yesterday as dragged my knuckles along the floor away from the stairmaster at the gym I heard a guy just getting on the treadmill let out 'woo-hoo, now that's a recovery' as he looked up at the TV.

A reader left an interesting comment about re-working how to re-equitize given that the SPX is 34%, um make that 22% below the 200 DMA. I was grappling with this some over the weekend but yesterday's massive rally takes that issue off the table some.

It is very difficult for me to believe all the market's problems have been solved. I was never in the depression camp but there is still a long way between here and fundamental health. Yes equities will turn up for real before the economy but not with a bell ringing. Additionally I don't think it should be so easy emotionally at a real bottom. But that's just my opinion.

The other day I mentioned something called hindsight bias which is something becomes obvious after the fact like a big rally coming after a puke down. Was anyone feeling a little hindsight bias yesterday?

For anyone who was fearful last week, you were probably less so during the day on Monday. While I'll save the fear is the wrong reaction speech for another day I would note that you probably still remember exactly what the fear felt like. You will have a chance to confront that feeling again. I don't know if it will happen this week or not until the next cycle. If nothing else the rally on Monday serves as a reminder that stocks can still go up and that they will again either starting yesterday or at some point in the future regardless of anyone's fear.

If you can remember that fear, then see the rally that came (no matter how long it lasts), well hopefully this can help you see why that fear from last week was unnecessary. This is a bear market event. Bear market events come along every few years and then they end.

One thing about crazy markets is that you may not do anything right but you'll be ok as long as you don't do anything wrong--like panicking out.

Hey hey, Barry Obama is going to let us raid our 401ks! Oh yeah, that's what we need.

Thanks for the comments about Pee Wee.

Is it me or are Chip Carey and Buck Martinez the worst MLB announcers you've ever heard? I'm not saying that because the Sox got smoked, I've been griping about those two all summer (they've been doing the Sunday games on TBS).
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Baltic Dry Index

Kind of difficult to see because the drop is so vertical but the BDI shows being more than 5000 points below its 200 DMA.

Actually I just saw a quote on CNBC Asia that at showed BDI down another 10% from where it is on the chart.

I'm not sure what to conclude but it clearly reveals how crazy the last couple of months have been.
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Money Quote

From John Hussman;

Word to the wise - don't accept advice or analysis about this crisis from anyone who failed to anticipate it in the first place. The people warning about Depression now (or even talking about it casually on the financial channels) are the same reckless jackasses who told investors that stocks were cheap and “resilient” at the highs.

and

My impression is that investors who abandon properly diversified and carefully planned investments here, with the stock market already down by nearly half, will regret it as the emotionally panicked decision that wrecked their retirement prospects.

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What Are We Learning?

One thing I have touched on before but maybe not written extensively on is the idea of continuing to learn about navigating markets. However well or poorly you have done in this bear market, there is a learning opportunity to try to improve during the next bear.

One thing that may have happened on this go around, and unfortunately this feels like a carry over from the last bear market, is too much exposure to equities.

That may seem like a contradiction from past posts but I don't think so. In terms of numbers when thought of over long periods of time (three different decade long round trips to nowhere in the last 100 years shows long means more than ten years) 100% equities offers the best growth potential. If you have a reliable defensive strategy then all the better.

Unfortunately 100% equities does not offer the best potential for a good night's sleep.

This is why asset allocation exists. It is a good bet that people have recently learned they have too much of their money in risky assets. Too much defined by the magnitude of the emotional response. Realizing you have too much in risky assets (this includes many segments of the fixed income market too) after a 40% drop is a bad place to be.

Beginning to take defensive action after a 40% drop is a bad idea unless you truly believe it is all going to zero, and while I hope no one thinks the bottom is zero, someone in those shoes needs to figure out a recover strategy if they do sell out now (again I hope no one does this).

The idea behind proper asset allocation is that whatever decline occurs it does not trigger a panic point that causes you to deviate too far from the plan you spelled out before anything bad happened.

Over the years of blogging many comments/questions have been left about various high yielding things (equity, bond or in between). My answer is almost always the same. A 10% yield in a 2% world carries some risk, you (the person asking the question) either understand the risk or you don't.

There is nothing wrong with owning a high yielding something or other that has cratered since you bought it. The problem occurs when you own too much of that thing or too much of that thing along with other similar things. And hopefully anyone in this situation has a better understanding of the rationalization that the high yield will make up for the decline. A 10% yield doesn't do much for a 40% decline especially if there is then a dividend cut.

This sentiment obviously ties in with my theme of moderation when selecting what to own in a portfolio. The lessons about too much exposure to something that we learned from 2000 should not be forgotten but there are risk junkies who cannot help themselves.

One thing we have learned is that we cannot foster dogs any longer. I mentioned in this week's video that we were fostering a little dog that we were calling Pee Wee, who I said looks a lot like our dog Trixie. Yeah, well we're keeping him. He fit it perfectly from day one and as Joellyn said, no one was ever going to be good enough to adopt him.

That is him up above getting some sun with Roscoe. The shadows of a chain and bucket to the right of the picture is our foray into green/self-sufficiency. We are in the process of setting up water catchment off of our roof. An inch of rain on a 1000 square foot (metal) roof will generate 1000 gallons.
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Sunday Morning Coffee

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.
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The Big Picture For The Week Of October 12, 2008

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Friday Night Funny

If you did not see this on Barry's site.

He attributes it to someone named Michael Muhlbach.
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Impressive Bounce!

And it gets better because W will be speaking in a few minutes!
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A little dark because of when it was taken but that is the South Kaibab Trail at the Grand Canyon.

It looks like the path the stock market will need to take to get out of its hole.

Erin Burnett made some sort of optimistic silver lining type of comment which she has been doing for several thousand Dow points. For the first time (after hearing her everyday for all this time) I actually thought to myself 'no idea if that makes any sense or not' because of her lack of credibility on these things.

That and my surprise at how the last couple of weeks has unfolded.

Also odd, I am now thinking in Dow point. Can't remember the last time I did that.
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Alone, So Alone

In the videos last weekend I played part of a song called Cold White Christmas by the Casiotones For The Painfully Alone.

Yesterday, sort of early in the day I sold the rest of SDS when the market was about flat. I also sold another stock (not so widely held) along with it as a partial offset to being wrong on the sale and for the tax loss.

The cash level is now very high but still anyone who has used inverse products during the bear market has probably come to view them quite fondly as either a crutch, emotional support or an old friend (lol). So I sent an old friend packing yesterday with the market down 37% from its high.

The logic is simple and posted before, the risk of the market going down a lot is much less after it has already gone down a lot, yesterday's closing notwithstanding.

Clearly this has been bad on a historical level as market action goes. I don't think it changes the notion that at some point it must exhaust and work higher. Reader TomK left a comment boldly (not being sarcastic) calling the bottom as being yesterday. I simply don't know.

As I wrote about taking defensive action more than a year ago I commented that being correct about magnitude was not a priority just missing a chunk of the decline was the priority. The biggest difficulty for me personally is that people are worried despite the action taken.

Being worried is reasonable as this is what happens during panics; seemingly no end to the selling in sight. A 20% decline in a couple of weeks is real gut check time. If you have been reading this blog for a while you know where I am coming from in terms of faith that as the market has malfunctioned before it then works higher. Whatever fear you feel now, I am telling you the fear in 1987 and the summer of 2002 was the same. I try to post a tone that reflects my emotion which as my brother told me the other day, I have no emotion.

I take my own advice about bracing for periods like now, knowing what has happened before and realizing that the only thing I can control is the action I take (which I've obviously been writing about for years now), I have no control over what the stock market does. I have enough to worry about with the bridge from the Red Sox starting pitching to Jonathan Papelbon. The middle relief has been tough all season.
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GM Was $4 Billion In 1929?

CNBC is talking about GM being back to 1929 levels in terms of market cap.

They had a graphic on the screen saying the cap was $4.07 billion in 1929 and is $3.8 billion today (subject to the price hopping around today). The report also said that GM topped out at $52 billion in 2000.

I don't know but something there does not seem right to me. From 1929 to 2000 it only went up 13 fold? The high point for the Dow in 1929 was 381. The low point for the Dow in 2000 was 9796. So while the Dow went up 25.7 fold, GM went up only 13 fold? If we use the 2000 high point of 11,722 then the Dow was up 30.7 fold. In that light how was "what's good for GM good for America?"

I really don't know, does anyone know if the market cap info is right? I also have no idea if the car pictured is a GM or something else.
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Well, The Week Is Almost Over

I'm wondering (maybe that should be hoping) that yesterday's action revealed some selling exhaustion.

After a lot (a ridiculous amount really) of selling we know that the selling will exhaust.

That will happen.

It doesn't have to signal a bottom (short term or otherwise) but it might. There have been past instances where a rally has come right away with much velocity and other times where there was some meandering.

I don't really have a sense of what will happen on this go around (I get hunches sometimes) and of course the selling may not in fact be showing signs of exhaustion.

The things you have read about investing being difficult, well they are talking about right here right now.

Difficulty means different things for different people. Some folks are panicked and either have or on the verge of selling a lot of stock at a point where history shows is a horrible idea. Some folks are literally having trouble sleeping as they know they should hold but struggle mightily to do so. Some folks are getting hurt trying to catch falling knives (let's face it there are a lot of companies that have been sold down in ways that don't make sense). My difficulty is mentioned above; no great feel for the next few days and so nothing great to tell someone.

There has been some commentary about SPX 800 as being a stopping point. I don't think it will go that low, but it could. That would be tough for a lot of people but after it hits the real bottom, what comes next? After the bottom what is next? You know the answer.

It will recover. You don't know the price level form where a recovery starts, you don't know when it starts and you don't know how long it will take but it will happen. A few days ago I said "we'll look back and say it took X years to make it back." I doubt it will be one year but I doubt it will take ten either. However long it takes in the US, there will be other countries that come back much faster.

Another repeat is that it is times like now where both huge fortunes and huge mistakes are made. What direction do you want to lean?
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Closed End Funds

I had an article about closed end funds run on TheStreet.com today.

This chart was sent along to me in response to the article from TFS Capital which is the firm that runs the TFS Market Neutral Fund (TFSMX).

The point of my article was in times of crisis (real or perceived) CEFs usually get crushed.

I have a couple of CEFs in my ownership universe and they are no exception.

One reader left a couple comments on this morning's blog post (I'm guessing he read the TSCM post?) calling CEFs weapons of financial destruction.

Anyone owning too many of them would certainly feel that way. I used to write about them more when the ETF space was much smaller. I talked about moderation, which I believe is important in all aspects of investing, but it would not be surprising to hear about people owning to many of them. For some people even one may be too many.

Sorry, let 'er rip too early. The chart shows the point made in the article. Every so often CEFs puke down and scare the hell out of people. After that they either come screaming back work work back slowly. Coming back after this crisis is a good bet but I have no idea if they will scream back or work higher slowly.
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Up Hill From Here?

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.
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News Team!

I was quite public about my sale of Bank of America (BAC) in the low $29's because of my lack of faith in the merger with Merrill Lynch.

I was "right" for a minute or two, then I was "wrong" when they banned short selling and now "right" again because of the earnings, dividend cut and capital raising.

Well, no, that is completely bogus. The timing clearly turned out to be unlucky. When you sell something that thing will either go up or go down after your sale.

In the video over the weekend I conceded the timing was poor (which it was) but if you couldn't tell I wasn't too worked up. I sold for a fundamental reason; lack of faith in the merger. That could be wrong, the merger might work very well but I will not be right or wrong for months.

When something needs to be sold, regardless of the reason (fundamental, rebalance, profit taking, panic) sell it but it doesn't make sense to get too happy when a sale is right or too upset when a sale is wrong because you will have some of both.
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Norwegian Fisheries?

So I was trolling the Glintir Bank website (the same Glitnir that was saved by the government of Iceland) and found an index for fishery stocks, most of which are Norwegian. There's almost enough Norwegian fishery stocks to create an ETF (Claymore, can I get a hollah?).

• Marine Harvest MHG.OL or MNHVF.PK
  
• Austevoll AUSS.OL
• Cermaq CEQ.OL or CRMQF.PK
  
• Leroy Seafood Group LSG.OL or LYSFF.PK
  
• Salmar SALM.OL

Obviously fishing stocks are recession proof and bear market proof as everyone keeps eating. Well we might keep eating but the stocks have all been crushed this year. Marine Harvest is the top performer down only 20%. Three of them are down 50% and if you go back one year Marine Harvest is down 60%.

MHG sells just about every edible fish you've ever heard of in Norway, Ireland, Chile, Canada, the Faroes (small island nation in Europe west and I think north of Denmark) and Maine.

AUSS has operations in Norway, Chile and Peru. It operates fishing boats, makes fishmeal, canning fish, extracting fish oil and freezing fish.

Cermaq focuses on "aquaculture" which makes R&D a big priority. I can't tell from a glance of the website if it is more of a pick and shovel type of company or does a lot of fishing too. Besides Norway it does business in Vietnam, Chile, Canada and Scotland.

The Leroy Seafood Group site was also tough to navigate but they seem to be involved in farming, aquaculture and distribution with offices in Norway, Turkey, China, Japan and the US.

Salmar does salmon farming and shellfish processing and it looks like it has all of its operations in Norway.

As the world appears to ending, intentional hyperbole, why write about publicly traded Norwegian fisheries that are down a lot? Well the world probably is not ending. If the thread that many, including me, are working with that the US may not offer normal market returns once the bear ends that means looking elsewhere. A Norwegian fishing company might be one answer at some point.

Or maybe not, I don't know. But the task for anyone is to continue to explore and learn. I just found these by accident. There are all sorts of segments we don't know about and while we cannot learn about all of them we can study some of them and maybe include one or two at some point in the future.

Being defensively positioned does not mean putting your head in the sand and shutting 'er down. In case it is not clear, I am not suggesting anyone buy any of the names mentioned. They exist, that's all and if you read the entire post you know as much as I do.
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Mountain Lion

Literally!

I did not take this picture.

We have had more mountain lions here lately than normal. One was sighted last night very close to our house.

If you live in the woods and feed deer you will attract mountain lions. This is very difficult for people to process but it is true.

We need to start packing heat to let our dogs out at night.
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Wild Day

No not the market, well maybe that, but also this...

I had to coral this guy in the dog pen. Our dog Trixie first found him and called our attention to him.

The comments have backed up, I have been busy with client email and an interview, I'll try to catch up on the comments.
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Five Year Money

FT Alphaville has this quote by Jim Cramer that I am guessing is from the Today Show;

Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now

I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,” Cramer told Curry. “I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.

Five year money should not be in the stock market period. The current circumstance does not re-write this rule. This differentiates from a portfolio generating an income stream for a lifetime but a piece of money with a specific purpose that is five years, or closer.

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Ooof

I hadn't thought about it this way until I read this article in the NY Times but the S&P 500 is down 25% YTD. In the video over the weekend the focus was obviously quarter end but after a down 9% week it is down 25%. Wow.

That NYT article talked about dividend investing, why indexing has struggled, why active managers have struggled and so on. Dividend investing, via funds, probably means heavy financial exposure although some dividend funds have held up very well. Active managers, per the article, never saw this mess coming.

There was an element missing which is simply to have less exposure. One point I tried to make about bear markets (before this one started) is that finding the few stocks that will go up while the market is going down a lot is very difficult. Sure a portfolio of 40 or 50 stocks will have a couple of names that are doing well but knowing what those would be ahead of time is a long shot.

A client asked me why "demand for equities is poor." I told him I don't spend a lot of time trying to figure out why because being right is irrelevant for you managing your money or me trying to do my job. Someone will win the Nobel for figuring all of this out and I am happy to leave being right to them.

If you look back at the posts I put up in the summer of 2007 as the market was skipping around the 200 DMA and then in Q4 was the market rolled over slowly (as it always does at the start of a bear market) when I said the bear had started I was just focused on the message of the market. It warned of trouble but did nothing (that I could see anyway) to predict magnitude.

It appears, based on the NY Times article and this Barron's piece that I linked to yesterday, that too many people had no plan for defense. Raising a little cash early on is by far the simplest thing you can do. Hopefully you can remember what this feels like, how the market warned way ahead of time and how many pundits told us not to worry.

I can tell you first hand that most people do not remember these sorts of things but hopefully you will. From the tough to remember camp is that bear markets end eventually. They end after the market drops a lot, when sentiment is lousy and there is no end in sight.

I can't make any case for this bear being over and the market is a long way from demand being healthy but this is exactly the time to a plan for re-equitizing if you are defensively postured. It may be over a year away or just a few weeks there is no way to know but the fact that bear markets end should not be forgotten. That they occasionally end very loudly with big fast moves up should not be forgotten. It doesn't cost you anything to be open to the possibility that the market will confound everyone at a time when no one (including me) thinks it is possible.
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Sunday Morning Coffee

Ok, Joellyn and I figured it all out last night. We are selling everything, putting it in to Swiss francs and moving to a farm in New Zealand. We'll eat what we grow and our money will be sound.

Well, we'll eat what we grow as long as we can afford seed and feed. Well, our money will be safe as long as the government of Switzerland doesn't need to bail out UBS or Credit Suisse.

Damn it.

There was a long article in Barron's about selling open end mutual funds before the annual distribution to avoid paying taxes on a fund that might be down on the year.

One thing that I would add that I don't think I saw in the article is that some of the distributions this year (particularly from older funds) could be huge. I have read this in a couple of places. I am more passing this on as opposed to trying to analyze the situation. I do almost nothing with OEFs so if this might impact you I would suggest doing a little legwork.

One theme I have been thinking about and writing about is being open to the idea that we could be close to a bottom in terms of price, not time (this is not about bailing on the 200 DMA concept).

While that may or may not be true I had one thought that might create some useful context. I will preface this by noting that whenever the bottom does come most people will not believe it. This was true in October 2002/March 2003, has been true other times and will be true again.

On March 20, 1998 the S&P 500 closed at 1099. That is where it closed on Friday. After ten years like we have had (which is not unprecedented) it is a good bet that the next ten years will be closer to normal, at least directionally even if not in terms of magnitude.

Think it's over for the US? Ok, the FTSE 100 was first at current levels in 1997. Switzerland first got here in 1998. Singapore 1993. You get the idea. Some of the hot markets are where they were just a couple of years ago.

I think many stocks bought (properly researched) at SPX 1100 (or FTSE 5000 and so on) are going to look like great purchases a few, or more, years from now. This does nothing to prevent them from dropping 30% from here unfortunately but buying a market where it was ten years ago is a rare thing and not the biggest mistake you will ever make.

I've mentioned a few times that I think "normal" average annual equity returns will continue to be more difficult to come by in the USand I still believe that. However, regardless of how poor returns were in the bear market ended last October, imagine how much worse they were for anyone who missed 2003 for being too conservative. Anyone selling out after a 20% decline and then not buying in until after a 20% move up will have dug a very big hole for themselves.

It is stuff like this why markets average about 10%, mutual funds average about 8% and mutual fund holders average about 3%.

Last item; a reader asked for my take on the near term given the possibility of several central banks cutting rates simultaneously. I put up a post on Friday hoping that trading might mellow out some, so we'll see. I also professed in the comments that at times I have a feel for what will happen very short term but that now is not one of those times.

The connection between perception and reality seems to be farther apart than normal. This happens of course but I think I'd be guessing more than normal with this. On Friday it seemed that everyone knew the house would pass the bill. With this knowledge the market was bid up 3%. The bill was passed with no surprise that I know of and then there was a 4% drop. Nothing unprecedented there but it seems to me that the market, discounting mechanism that it is, has many more big things to discount than normal and the degree of importance of these things is much greater than normal. This contributes to the crazy trading.

After so much selling, how could there not be a snapback rally of some sort? This seems obvious but my confidence in this is not great.

The picture is from a hike we go on near our house.
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