The market is off to a big start for 2007.
The more it goes up the more bearish I become in thinking that it is over extended, over due for a drop, and there are anecdotal problems (like sub-prime) that all point to trouble coming.
I have more equity exposure now than when the quarter ended, I am ahead of the market (as measured by the generic portfolio I maintain on Yahoo Finance) by a noticeable amount so far and the trend has been to move higher.
On the way home from Phoenix I heard Pisani on Kudlow say that the bears keeping talk about three things that they are waiting for to crack this market; derivatives, disruptions in the spot price for rhodium and solar flares (I may not be quite right on those last two).
My sentiment is bearish. The market is much higher than when I first, incorrectly as it turned out, became bearish. The defensive action taken last summer was far from extreme and I am less defensive than I was a few months ago. Technically speaking we are closer to the next correction than we were six months ago.
The point here is one that I try to make often. If I had made a big bet on a correction last summer client accounts would be smaller than they are today. You and I are not smarter than the market and since the market goes up the vast majority the time you should not have too much in cash relative to your allocation very often. Rarely it makes sense to raise a lot of cash, as opposed to some cash, and in those times go for it but those times don't come along too often.
One last point about Pisani talking about the three things bears are worried about, whatever the three really were, I believe that when the market turns (not a prediction just the acceptance that at some point there will be a correction or bear market), the actual turn will not be caused by anything in particular it will just happen and then pundits will, after the fact, tell us what caused the turn. The pundits may get that part of it right but big turns tend to just happen. The tech bubble could have easily peaked six months earlier or later. There was no reason for it turn in March per se it just did.
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14 comments:
Barry Ritholtz just posted an excellent comment at http://tinyurl.com/ywkprv that echoes your point; it certainly captures the ambivalence I feel very well.
Those in retirement, nearing it, or advising others on it, shouldn't miss John Mauldin's "Outside the Box" Titled "Destitute at 80: Retiring in Secular Cycles" by E. Easterling.
He compares success rate in retirement to starting market valuations (P/E's)
OG
As a money manager, I have been bearish for apprx 6 months. I wholeheartedly agree with Roger that big bets will hurt performance. I have allocated too much in cash over the last 6 months, and my account and my clients have been negatively affected. I can't get in now...best to follow Roger's "no big bets" philosophy.
that is a powerful comment. thank you for your candor.
I have moved from 97% invested to 94% invested in equities this week. What do you think is the proper amount to have in equities for someone 55 years old?
I HATE bonds right now. I do not know the exact answer, but it seems like interest rates have been in decline for roughly 25 years. So I am keeping money not in equities in money markets. I am not even comfortable with short term bonds yet.
i like having some fixed income. in deciding how much you need to have in equities you need to assess how long, realistically, you might live. if people in your family have made it to 85 or 90 you need to be prepared financially to live longer than that.
also you need to assess where you are now in relation to where you need to be.
i can;t try to blanketly adivse a stranger how much they should have in any part of the market but those are two important questions.
for fixed income i like the hartford floating rate fund. better yield than bonds and i think it is safer given the interest rate enviroment. I have as much as 15% allocated to said fund.
Hi Roger:
Can you help me understand what writers mean when they say 'market is over bought'. Whenever somebody buys some body else sells. What am I missing? The number of shares bought is exactly same as the number of shares sold at all times. (Of course, some people might short sell - still somebody else buys them).
Thanks for your inputs.
15% allocation to Hartford Floating Rate, a sub-investment grade, bank-loan fund? That much would make me sweat a little even in better times but now, in the midst of a subprime lending collapse, I do believe I'd break out in hives.
PS: I agree with Tom G at "Accrued Interest" (e.g., http://tinyurl.com/2ufttv; http://tinyurl.com/2grfeu) that, for most individual investors, a mix of T-bills and floaters are probably superior to TIPS so I've got nothing against floaters (I tend to prefer senior though).
I commented here a short while back that I purchased some shares of the Wisdom Tree ETF, DLS in early November of '06. This is their international small-cap dividend fund. Ten weeks later it is up a whopping 18.53%. That sort of performance is equal to around 190% for a year if things stayed the same performance wise.
Since ETF's are not really what Jim Cramer calls 'best of breed' stock picks, I have to conclude that we must be due for some sort of correction in the not too distant future.
I am still holding the ETF as well as my other ETF's, but I have a stop loss on them that I keep adjusting up with my gains.
I too have been sitting on too much cash though. And as others here I am not going to jump in here with the DOW at record levels. I do believe as other do the the DOW will reach into the mid 13000 level either this year of early next year, but I believe that it will happen after some sort of 10-15% correction. I just hope that it happens soon. (I can't wait to but more DLS :-) )
Roger,
I share your concerns about the market being over valued. I have felt that way for over a year now.
However, unless the Fed and Administration stop the excessive printing of money (as reflected by the M3 money supply - www.nowandfutures.com/images/m3b_long_term.png) and/or the Yen carry trade comes to an end, I do not see how the markets can crash. With so much liquidity sloshing around, all dips will be bought. Look at the Chinese and Indian stock markets - they are doubling every year......
So, instead of fighting the tape and selling too early and accumulating cash, I cashed in a lot of my index ETFs (my portfolio is all ETFs) and purchased LEAPs instead (on SPY, QQQQ, MDY and IWM). With volatility at historic lows, options are a great value. With this LEAP studded portfolio, if the market keeps going up, I am a participant; if it crashes, my downside risk is limited to the cost of the option AND I have a ton of cash to purchase more ETFs when the market is down.
Your thoughts on the merits of this strategy are most welcome.
I was also wondering if you know if the M3 money supply calculation includes the billions of dollars being printed to fight George's war on terror........
Jey.
If he Fed is indeed printing loads of fiat money, then do you suppose that we should be buying gold as well?
Hi Anonymous,
Should we be buying gold? Yes. Indeed, with excessive money printing, gold, silver and most commodities would go higher. As you can readily see, this has already happened. Oh and the dollar would naturally go lower.
"the actual turn will not be caused by anything in particular it will just happen and then pundits will, after the fact, tell us what caused the turn."
So true!
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