There was an interesting bit on the WSJ Marketbeat page about the market's recent strength along with some bearish sounding quotes from various people.
There are a few things worth understanding about current market events. I think there are some similarities to the top that was put in in 2000. The curve is inverted, the new high list is shriveling, sentiment (as casually observed) seems to be quite positive and there is not a lot of confirmation from other indices.
Obviously there are differences between now and then as well.
To be crystal clear I am not calling for a decline anywhere near the magnitude of earlier this decade.
All I am saying is that there are some issues present today that have caused trouble in past market cycles. These troubles, last time around took months to matter. The market has overcome these problems and many others to have the run it has had and it could continue to do so but these internal issues should not be forgotten or ignored. Nor for that matter should the big macro issues be forgotten either.
There is no question we have the ingredients for a decline. Ingredients however don't bake the cake. At some point I need to think about whether my moderately defensive stance is incorrect. It makes sense to reexamine the portfolio. Perhaps a move to make would be to add another defensive consumer name, with yield, that might outperform cash.
Also I am very underweight tech. I could add a little more and still be underweight. All the while I was selling tech, and getting that part right, I said I would probably miss the bottom which for now appears to be the case and has contributed to my lag for the quarter. I do not see a strong fundamental case for tech but it is doing well and I am very light in the sector.
This post really is just an inner monologue of thought process.
Wikinvest Wire
11 comments:
Good article in today's Journal @ a Neuber Berman manager who is also light in tech.
Nice to see that you are worried...
g
I think you were to negative for what looked like a correction to me. But who does not make mistakes.
You are in a badd situation IMO. You have to choose when to buy back in before a strong 4th quater rally. I would not wait to long.
One of the reasons this is my favorite Blog BTW is you do not seem entrenched in a position, and are normally very objective. Of course we all have are blind spots, but you have much fewer than most.
Most of the indicators I normally look at suggest a 4Q decline is pretty much baked in but I need to get a better handle on global money flows as it appears these may be exerting a greater effect on US markets than I realized (international capital flows have always moved smaller markets of course but US markets are so big I haven't really analyzed them this way before, at least in any kind of detail).
As Barry Ritholtz just pointed out (http://tinyurl.com/lqxq6), cash has beat the Dow quite handily since the last peak in 2000 but that's still a rear-view mirror; although I remain defensive for now it's time to think about what the next position needs to be even if I do decide to wait a bit longer while pursuing greater clarity.
Barry's post was very interesting. good stuff about foreign flows. If you find anything feel free to shae it here.
I am also very light on tech and have no regrets.There are plenty of wonderful investment opportunities elsewhere. Considering the present world situation, being on the defensive side with a good portion of one's portfolio is prudent. For a defensive consumer investment, I like Fortune Brands (FO) and added it to my portfolio this past June at around 70.Interline Brands (IBI) is another potential defensive play but is narrower in brand scope and type than FO.
Don't worry. Be happy.
http://bigcharts.marketwatch.com/intchart/frames/frames.asp?symb=fo&time=&freq=
Lower interest rates might have/might help tech due to the concept of duration. In a sense a fast tech growing tech company can be thought of as a zero coupon bond. As long as an economic slowdown is not horrible the P/E expansion from lower rates could compensate for slowing earnings growth. Just my 2 cents.
Commercial construction is generally a lagging indicator. It happens to be booming at the moment and taking up some (in some cases more then some) of the slack from the residential slow down.
If you view inflation as part of the equation per Engineering News-Record, the YOY numbers for July cost indexes were up an annualized 3.8% to 7.6%. The selling indexes were up 9.1% to 10.3% and the valuation indexes were up 5.6 to 6.5%. Different indexes use different metrics and different geographic spreads which explains the spreads. The numbers are all high, and the drops in residential-only materials is masking some gigantic increases in some specific materials (copper pipe and tube + 99.8%).
It would not surprise me if down the road the economists decide that we are already in a recession. Obviously they will have the hind sight advantage of knowing where the economy went from here. If the economy continues to slow: we are already in a recession. If the economy picks up speed from various demand feedback loops: then its just one of those little jogs down on the upward moving chart.
I am pessimistic, but commercial construction can make you a that way.
Russell
No.....I don't think inflation IS in housing, etc....it's not that things cost more.....it's that our dollars buy less.
Roger,
I'm also pessimistic about the market outlook for Q4, but I don't let my personal opinion get in the way of my investment decisions. My trend and sentiment models have me heavily in stocks, and until those change, I'll stay the course.
The yield curve and monetary situation is pretty ugly, but unfortunate monetary indicators tend to be imprecise. That said, I think there is a good possibility that we stay in a wide trading range over the next couple quarters.
Roger - I think one thing that is VERY different from 2000 is the lack of enthusiam, as noted by your post. There isn't any crazy exuberance and denial I see yet. . . which means that this rally should have some more legs to go.
I think it is important to note that all the bears that were calling for the start of a bear market in May/June were dead wrong. It really was just a correction. If one is calling for a decline here, one has to realize that you're doing it in the face of a continuing equity bull market.
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