I have been referring to the market action of the last six months or so as a normal bear market.In the months leading up to the bear I wrote repeatedly about why I thought a bear was coming and most of that opinion was based on a very simple premise which was this time will not be different.
Normal, based on history, would be about a 30% decline from the peak over a period of time of nine to 18 months.
The length of the bull, the excesses that built up, the distortions in the yield curve and the slow-ish rolling over last fall that was denied by most folks were all classic signs of a bear market--one I still think will be a run of the mill bear market.
It is a good bet that someone will leave a comment here or one of the other sites where my posts get re-run noting concerns with some aspects of the current bear and why those aspects make this one different.
There is a tendency to expect the worst from the current set of current events. This has repeated many times over throughout history and this is no different. There is no getting through to the person so motivated by current circumstance that they leave a comment telling the world why I am an idiot for not realizing why this is different.
Assuming you're not that guy, think about what is on the world's plate at the moment. In no particular order we have very high oil prices with a big debate over why (FWIW I think time spent wondering why is not very productive--what's the prize for being right?), well this is not the first time for that. Something is not right in the housing market (you can fill in your own adjective and magnitude) which has happened before. People are worried about the greenback and various deficits-surely no one thinks that is unprecedented. The banks are in trouble, Paulson says that happens every few years.
There are mores flash points than that but there is nothing new about the big macro for any of them. The details of each one might be a little different but as these sorts of worries have popped up in the past they have each engendered genuine fear only to all do the same thing; cycle through for a short while with much less actual impact than expected. The poster child for this effect (and I have mentioned it before) was from the summer of 2002 when CEOs were going to have to sign off on their earnings. Many of you may not even remember this but it created real panic and was a non-event for the market.
None of this is to say you should do nothing. I've written at length about how I try to avoid down a lot, disclosed most of the steps I have taken along the way in belief of taking action when demand for equities becomes unhealthy. The context today is not to freak out and become emotionally unglued. People fear the unfamiliar and assume the worst but markets have a way of working and so far this bear market is going exactly by the book.
14 comments:
There is a tendency to expect the worst from the current set of current events -- One of my very favorite comments from this bear market.
I graduated college in 2003 and from the news headlines you would think that the market has been in the tank that whole time. We ran too far too fast and now we are paying the price for it. The banks will stabilize and once they start writing up some of these assets they have written down we will swing back to the positive side in the financials.
Roger, I´v been not doing very much of late regarding investing. You could say i´ve been sat on my hands for a while. I´m contemplting a process whereby I can take advantage of these cheaper prices for equities, assuming this will be a ´normal´ bear market.
Averaging in seems to be the conclusion I´ve come to. Maybe just a very small amount to begin with, gradually growing as the market falls. I´ve already got nearly 50% of capital invested but could pull some out to be just 20% in (which is in housing/banking-related stocks and a lot down, but I´m assuming that will reverse within 10 years and I don´t want to solidify my losses).
If I´d done this 8 months after the start of the last bear market I would have caught the bottom plus a pretty steep slide down as well, but who´s to say this bear will be anywhere near as ferocious? The recent expansion was because of real, sustainable developments throughout the World so I´d expect the pain to be shallow. Although commodities are proving a drag we don´t want to go too far, too fast.
Re wondering why oil is high.
If it's high because of speculation, then wait for the bubble to pop. If it's high because of increased demand and Peak Oil, then the prices will continue to rise.
So, the prize for figuring out the reason might be you then have a better idea what to invest in.
I've read / heard on TV several times recently that eventually the banks will rewrite the value of some assets up. That they've over written down some assets. I'm a retired 40+ year banker and I've never heard of a bank re-writing an asset up. Is this wishful thinking? Does anyone have an example?
Knowitall - I'm not sure about banks inparticular, but I have heard of companies writing down more than they actually had too so the next qtr. they would look better. I'm not saying that is what is happening with the banks.
11:02 anonymous: Yes, companies, including banks, aggressively expense items, including asset write downs, occasionally. But I haven't seen a bank or any other company write up previously written down assets.
Re: 08:22 post:
Peak oil almost has to be an on or about thing. ie, maybe now or a few years from now and shouldn't be a factor except to speculators. I travel this country extensively. I have yet to see a gas station with a sign that says "out of gas today". It just hasn't happened which implies demand is easily being met. Doesn't gas prices "have" to be the result of speculators by default???????
re by default
FWIW I think part of the effect we have seen is an attempt by the market to price in future changes in the supply and demand dynamic. we know other countries are using more oil, the market knows this.
i believe there is an anticipation for the future being built in (this has been going on for a while WRT China and India). As this continues oil will go up a lot sometimes, like now, and go down a lot as it cut in half a year and a half ago when ti went below $50 for a few minutes.
I don' know if this time is diferent, AS YOU HAVE SAID ANYTHING IS POSIBLE, but you left out the 800 LB gorilla in the room in your commentary-- THE IRAQ WAR ETC., WHICH IS DRAINING OUR TREASUREY AT THIS TIME OF ECONOMIC pERIL
good point but there is nothing new about a protracted, open ended war that is too expensive
Roger,
I agree it's still a Bear Market and find most investors have not heard the following quote:
"Just because the river is quiet does not mean the crocodiles have left."
- Malay proverb
great one liner
The banks will be forced to write up these mortgages as they are being paid off. They have been forced to price them on their books at the price they could sell them at today. so you take a mortgage and price it at 20 cents on the dollar since no one wants them. If a pool of mortgages had a 20% payoff rate then alot more people are going to be foreclosed on than we think. Hell even if 80% of the mortgages are good then banks are going to have to realize or write up 60 cents on the dollar on some of these loans.
We have never seen it before because these type assets have never been forced to be written off before.
As you say there is nothing new about an American protracted war, but in conjunction with the other factors draining our economy it looks to me like the war's cost limits our options and perhaps makes for a perfect storm. I believe this takes our current recession into the very serious recession mode.
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