A couple of anecdotes.Yesterday at the studio for my segment just about everyone there was asking me about the market and what to do. One of the guys looked at his 401k balance while I was there and he became bummed out.
A couple of different friends said they saw the segment but didn't really know what the segment was about.
The first one tells me that people who don't usually follow the market closely are paying more attention than normal. Obviously this belies more fear or some other emotion as the market is lower and maybe the regular news covering it more than normal too. BTW my visit to the dentist on Monday was similar.
The second anecdote might be important. The segment was about the (financial) news of the day but still it was difficult to follow for these friends. As I have been saying this is a normal bear market (regardless of whether that turns out to be true or not) what I have meant is how it is manifested in the stock market; the slow rollover, the feel good rallies, the magnitude of the decline and so on have happened before despite some of the comments to the contrary.
The details of these events certainly can be different from event to event; Mexican peso, Kennedy assassination, oil embargo, whatever. One thing that dawned on me with this is the difficulty with which people who don't spend all day with the market might have in trying to understand what is happening.
Wachovia (WB) CDS spreads freaked on Wednesday, absolutely freaked. Did that contribute to the decline yesterday or over the course of the entire three days so far? And if it did how would someone explain what that means to someone else?What about the action in Constellation Energy (CEG)? Friday it closed at $58.37, Monday $47.99, Tuesday $30.76 and yesterday $24.77. CEG appears to have connections to Lehman Brothers (sort of counter party thing) you can read about here. There is nothing simple about this story.
The move down in commodities over the last couple of months was odd for several reasons. Wednesday commodities panicked higher. Ninety day t-bills were yielding zero (CNBC said it was negative for a while, I was in the car when they said it and the low quote on yahoo finance was 0.01). I haven't really even touched on the bailouts, bridge loans or shotgun weddings from the last few days.
Past events were probably easier to understand (Russia defaulted, Orange County went bankrupt). The current event is seems more complex but I would also note that this week might end up being the craziest of the entire bear phase. In addition to the stuff mentioned above the price declines of some of stocks here and there has been bizarre.
This being the craziest week (if that stands up) has nothing to do with a bottom coming this week. There has been so much tumult in this bear market that I think the real bottom will be a quiet one.
No one can explain everything or anticipate all the shoes that will drop which is ok. I think the big macro besides that this is a bear market is that right here right now things are a mess. I would brace for more fallout and reverberation but I also think the velocity will slow down markedly--hopefully by the end of the month.
22 comments:
Past events were probably easier to understand (Russia defaulted, Orange County went bankrupt).
I think they're easier to understand thanks to the benefit of hindsight. Someone will come up with an explanation that seems plausible for this one day and that how we'll remember it. :)
What I haven't heard mentioned on the major news outlets that have all of a sudden made the markets their top story is that this is typical. For awhile, as we did in the late 90's, everyone forgot about risk (as evident with a VIX *BELOW* 10). Risk is a bit of an attention whore and if you ignore it too long, it bites back hard. I wish we could hear more of "this is normal". Because while it feels very abnormal, it's normal.
"There has been so much tumult in this bear market that I think the real bottom will be a quiet one."
Well, if that happens, this won't be your typical bear market. Most bear markets end with a crescendo of selling: Sept '74, May '80, Nov '87, Oct '90, Sept '01. In fact, the only case of a quiet bottom I can think of in the past 35 years is Feb '78.
This is exactly the type of panic selling you see at a market bottom. That of course doesn't mean we can't go lower e.g. '87 crash aftermath. It also doesn't mean we saw the bottom of this bear market yesterday, but remember; markets and the economy always look gloomiest at the bottom.
funny, i think of oct 90 as being quiet. one other problem i have with this being the bottom is that this being the worst whatever since the depression and we get off the hook with only a 25% bear?
that would be great but difficult to fathom.
just to clarify oct 90 as being quiet, i was doing a lot of cold calling then and people were terrified about the iraq-kuwait situation
just to clarify oct 90 as being quiet, i was doing a lot of cold calling then and people were terrified about the iraq-kuwait situation
Right! And if you called people now and said "gosh, this is scary just like 1990" ... they'd think about locking you up.
I'm buying down days. The pain is definitely there, though. No denying that.
normal is a great point (I think so as I ahve been trying to make it too).
different details, same market manifestation... so far
I'll give you '90, but the ultimate low was only about 3% lower than the panic low (311 on the SPX in late August, 300 in early October).
Btw, Jason Goefert has been publishing some great analysis the past couple days on his "Panic Button" indicator. It reached a level on Monday shared by only a handful of days since 1950: 05/28/62, 05/27/70, 08/17/82, 10/19/87, 08/20/07 and 03/19/08. Obviously, each of these days didn't result in an immediate turnabout, but six months later the market was quite bit higher.
I have no financial interest in promoting his service, but a Sentimentrader subscription is a cheap price to pay for great data and analysis, especially during times like this.
Roger:
Given that we are seeing across the board asset class deflation and everything now seems to be correlated (with the exception of yesterday's big gold rally), how much portfolio insurance in terms of ultrashort positions do you deem appropriate? (since the "endowment model" is not working with everything down)
Thanks...
Roger
You run an excellent blog. Your insight into the markets are always enlightening.
In the current phase, I'm amazed at everyone that is trying to predict future movements. Hello...it can't be done with accuracy.
Keep an extensively diversified portfolio of all asset classes and de-emphasize equity holdings. Make minor allocation shifts as economic conditions change.
Part of the problem is the 2008 crisis-driven media. Every burp in the markets receives the same treatment as the Weather Channel dramatically chasing the lastest storm (they can even turn pollen counts into a life-altering event).
Bear markets occur. Bear markets go away.
It is my belief that the lust for drama by financial media and others who may have a political axe to grind needlessly panics investors and purposely avoids balance in not utilizing perspective, especially a cyclical time frame, to present a fair and balanced rendition of current events.
T
http://www.federalreserve.gov/releases/cp/
The combination of a contraction of credit to the magnitudes that are occurring combined with a bear market is not normal.
Roger,
I am seeing the reasonableness of your "this is normal" despite the 4% down grinds in 2 of 3 days this week.
I think now (next 2-8 weeks) is time for rotation to begin, and in my mind I'm looking to accept another 5-10% down (from here) on names I'll be happy to own 2-3 years out (with the assumption that they'll be at least 0% down in 2-3 years). (I mostly trade premia for income, so if I can find investments that will hold their 0% down value in the next 2 years, but will return for me 2-3% div and 6-10% premia income, I'm a happy trader.)
When sentiment is this bad, I think upside speculators are pulling out, and panic sellers (the studio guys suddenly focusing on the elements of their 401-k) are getting out. This suggests value analysis may be timely, with the right horizon. Don't misunderstand, I know (better than most, I'd say) that the financials are going to be toxic, and finding a way to invest with minimal exposure to financials remains a challenge, but the world will keep turning and we are laying the groundwork for the next phase. People gotta eat, some services have to be present, life will go on. And value players may begin to step away from the tumult and adjust their charts away from "min" ticks and look at "day" and "week" parameters.
That shift in analysis is - I'm loathe to use it - "normal".
I hope to take some of what you've been teaching for the past 10 months (since the peak) and start constructing my own "investment house", which I plan to own for several years. I will be charging rent, in the form of options premia, and my rent roll will hopefully collect something more than 10% off my cost of construction. Every year.
Do I care about the "current valuation" of my construction? Only to the extent that it makes collecting next month's "rent" less and less plausible.
But "down 30%" means, to me, that down another 30% (where true implausibility of necessary rent collections would be a real risk) is simply unlikely. The VIX may grind higher for awhile, but reversion to the mean is my expectation.
Strangely calmer, I see some hope amid all this destruction.
R in NY
PS: As for the hindsight, here it is: things were moving too fast to do the kind of diligence that was required. 400pps++ of documentation cannot be reviewed (much less properly negotiated) in the time that issuers were giving buyers. And buyers were wrongly relying on their agents: lawyers (who wrote opinions that said everything EXCEPT what buyers were actually expecting (i.e., "you won't lose money"), rating agents (who defend their work with "we have to rely on the accuracy of the information provided and the assumptions used by the bankers and accountants", and accountants "if the following assumptions are true, here is fair value".
In the end, there is no one to blame: the cost of doing it the way buyers/investors REALLY wanted it done was uneconomic, so everyone used "incrementalism" ("this deal is just like the last one but with these few tiny changes" but the changes were usually meaningful in ways that no one had time - or were properly compensated - to analyze). Prices now and in the future will simply reflect that truth. Pipers will be paid - no surprise really. Sorry, no free lunch. The pain felt now is nothing more than the presentation of the bill for the "meal" that so many enjoyed for so long.
So anon, if you're saying that this is abnormal (a lot of things are not right, which is why the market is down and not up), then we will not recover and the U.S. economy is history. I'd say that's a risky bet.
saying someone should have X in a double short fund in this forum is a no no, sorry. i will say i disagree about not working. expecting a diversified portfolio to protect 100% of the time is not realistic but if you stuff has allowed you to miss a chunk of the bear market (which is 11 months old now) that is a great result.
winslow, as for can't be done with accuracy, tough to argue but i think it is very worthwhile to think about what may come so that you are not caught off guard when it happens. in saying more selling will come, or whatever, i am trying to get readers to think about this now so that if correct they may not be as emotional.
T, clearly fear sells. CNBC mentioned something about triple the traffic on monday, booyeah for their ad revenue.
contraction of credit will change some aspect of the landscape. maybe the change is what you think or maybe not. it will require a resourcefulness that i think (hope?) we are capable of.
I find some consolation in using mutual funds for most of my investments, since I can research the manager and fund with more confidence than I can research an individual stock. with so much uncertainty and unavailability on the information on a company, I prefer an experienced portfolio manager with a decent record over different matket cycles to invest my money.I at least know that a bad choice of a stock will be a small position and not have a huge affect on my holdings.
Good morning,,
The more i look around, the more i notice a recurring thought,,folks are starting to put together a wish list of long term names that will build a lot of value if we ever get to a turn, its been a long time,,it seems everyone became traders, not investors..
I'm wondering if you folks are also in 'preperation mode??
Mac
Mac, you asking me?
I have had a watch list on My Yahoo of about 20 names or so called names to buy. I won't need to buy that many stocks but it is an easy way to follow a pool of names i expect to choose from. I created this watchlist about a year ago.
Roger: Why not just buy the stock market hen you think we have bottomed (like VTI)? Do you really believe picking individual domestic stocks is a winning strategy after what we have seen happen to "fine blue chip companies" like GS, BAC and AIG? just wondering as I know you are one of the kings of ETF's...
Thanks
i've got four years of blog posts about my beliefs with selecting sector, country, style, market cap, volatility and yield characteristics.
broad based products don't offer that chance. above a certain dollar size i think broad based is far from the best way to go.
but of course this is about the only thing i do with my time
Bill B,
I never said the US will not recover. I have just been saying this bear market will be a lot more severe than normal.
We are following the Japan scenario way to closely to be optimistic about a bottom and future rally.
I do not expect the sky to fall and I do not think we will be as bad as Japan, but I am not buying equities long term any time soon.
Trillions of dollars worth of debt will not be paid back and that is going to take some time to work off.
I still like my treasury money market funds.
Thanks for clarifying anon. I don't think I ever called a bottom and subsequent rally. I'm a buyer at these levels, but there is still plenty of dry powder in the form of treasuries. If/when the big one hits 'lizabeth, I'll go to powder house and buy aggressively.
So if the bear is 20%, I can say I bought at the bottom, if it hits 30, 50, 60%, I can say I bought those bottoms too ... won't I look smart :)
Well, it seems everyone is relieved that Treasury is going to do a resolution trust type solution for the derivatives (CMOs, CDOs) which no one knows for sure what they are worth.
Wouldn't a better solution have been to suspend the FASB rule for marking these derivatives to market? Since there is no market for them, they have had to be written down drastically. Add short selling to the mix and all these financial companies have had to take huge write downs necessitating raising large sums of new capital.
IMO if they would just suspend the mark to market rule for 18 months and let the companies value the derivatives at their cost until they can go through them and find their true worth, then things could proceed at a normal pace without all the fear that has gripped the market. And the government would not be involved except to make sure the companies are open and transparent about the true valuations of the CMOs and CDOs. Steve Forbes has recommended this in his magazine column, but there has been such fear and panic no one has been listening to him. Ken Fisher believes we have a bubble of negativity caused by all the uncertainty. Maybe the RTC idea will burst the bubble and the financial system will slowly return to some form of sanity. It is certainly true, as FDR said, "The only thing we have to fear is fear itself."
Time will tell.
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