Fear seems to be escalating as we move closer to the final bailout which leads to concern for what the consequences will be. How long will this take to sort out?One reader expressed concern for an L shaped recovery, which is to say stocks not going up for a long time.
One thing is certain, having an emotional reaction will not make things better.
We know a couple of things about the big picture. The crisis is such that there will be big failures. Hang with me on this. There are always big failures during events of this sort. The failure of WaMu seemed to not matter to markets. The shock of big failures on this go around is over. This may help toward easing apprehension which IMO contributes to the idea that in terms of points lost we are much closer to the bottom than the top (my thought all along has been a bottom around SPX 1095), the timeline for a bottom is anyone's guess I'll go Q2 2009.
We know that dramatic action is at hand, either a bailout comes through or it does not and if not we may have a bit of a panic as a reaction (a no-bailout-panic might actually resolve this a little faster).
So that is my opinion about what will happen (nothing new). It will either be right or wrong but hopefully I have conveyed my being less concerned with being right about bear market magnitude and more focused on sticking to the defensive strategy I laid out long before the crisis began. If you did the same then you took proactive action and were not faced with we're down 20%, what should we do?
I would suggest anyone focus more on their portfolio than full and first comprehension of the bailout and other current events. If this market decline turns out to be worse than a normal-ish bear what will you do? If it takes longer for the US market to begin to come back what will you do? If you really think the end is nigh what will you do? As you answer those questions you need to also ask yourself what you will do if you are wrong.
I've mentioned a few times that if the US is facing more of a secular thing (but we are already an ten years with no stock market progress) ok, but there are some countries that are only dealing with cyclical issues, so those countries become attractive as a starting point. I've been in the camp thinking higher US rates are coming (way way too early with this), so an inverse treasury fund might become a good hold. If the dollar is headed lower then maybe a diverse mix of foreign t-bills becomes attractive. A lot of the absolute products that were supposed to do well in a bear market will probably begin to work better as we start to stumble along the bottom (the idea with that one being the strange distortions caused them to behave strangely).
There will be no shortage of things that can work but they may be more difficult to find. The task might not be so bad if you have been willing to go narrower than SPY/EFA/IWM for your equity exposure.
As you think about this I would add that if the outcome for the US turns out to be as bad as the gloomiest people think then we all need to heed that Will Rogers quote about return of as opposed to return on.
I will paraphrase from above, more emotion will not help you but less probably will. The outcome is beyond your control but staying level headed and calculated is within your control and focusing on this give a better chance for a superior outcome for you personally.
12 comments:
Looks like the initial market reaction isn't very favorable. Maybe it was buy the rumor and sell the news?
It bugs me that the media, alway happy to induce fear, are already linking the TARP with failing to avert a worldwide economic slowdown. At best, that's a second order derivative benefit and the program hasn't even been approved, let alone implemented. Sheesh!
Morning Roger,,
All this money coming in to play,,,everywhere it seems,, begs the question, "if done,,will inflation be a primary concern of 2009? If so,,would inflation hedges be on the table with good prospects for the short term"....
I need to look at this from a business prospective..
Mac
Mac, I can only answer from the perspective I have which is not necessarily in the context of running a business. For a long time asset prices have been deflating and the things we pay for every week (or month maybe) have been going up in price. Which one trumps? I think asset price defaltion trumps.
To the extent that the price for weekly items still has upward pressure (and I believe this is the case) then inflation protection products make sense.
to be clear i do not think inflation is the primary concern yet that may change later but it would be tough to slap a date on that, at least for me.
I'm a terrible market timer, but noticed that my consensus feeling about what might happen over the next couple of years based on sampling media, web/blogs, etc, often gets the broad outlines right. This doesn't necessarily help my investments because the timing is not precise enough. For example, I turned bearish too early, suffered 20% losses until sometime in 2007, finally selling out of inverse funds about a month ago, just before the current crisis, at about 12% gain (again too early, but as they say taking profits is never wrong).
The picture I have now is:
-stocks will go sideways or down another 10-15% until mid 2009, with a few small rallies in between. Sideways movement could last longer than that.
-stocks of consumer staples companies which pay a dividend are a good hold.
-it is likely that Asians (both individuals and institutions) will be less enthusiastic about keeping their savings in the USA in the future.
-currency hedging/diversification is important at this time
This picture gives me some ideas I can work with. Having a small short position in industrials for a few months if that remains possible. Buying consumer staples companies with exposure to the Asian consumer market. Doing some research into currency ETFs or other currency products such as everbank index CD's. Researching where to reequitize next year. Right now I am 98% cash, short term money market in safe institutions, not something I am happy with but I don't know what else to do at the moment.
As an aside, there's an article at bankrate.com dated Sept 24 recommending buying short term CD's until the financial tumoil ends:
" Wachovia is offering a 12-month CD with an APY of 4.3 percent; and a seven-month CD with a yield of 4 percent. Washington Mutual is paying 4.25 percent on an eight-month CD and 5 percent on a 12-month CD that must be opened online. The average yield for a typical one-year CD is 2.47 percent, as tracked by Bankrate nationwide surveys. Even a five-year CD, yielding an average 3.55 percent, can't match these specials. "
http://www.bankrate.com/brm/news/investing/bankrate_investing_news_CD_high_yields_a1.asp
Also, check Google Finance, at 11:00 AM reporting Wachovia Corp up 4,900%!
Jim
I wonder what or who is going to fund all of the governmant social giveaway programs now that Wall Street is not providing profits (quite the reverse) for the Treasury.
Can significant inflation be at hand?
T
using the strict definition, increased money supply, we have inflation. does it lead to crazy price increases? lets hope not!
roger,
you referred to buying foreign t-bills. where or how do you do that? i have accounts at schwab, how can i buy foreign t-bills or notes through schwab (preferably not thru an etf--i already own some wip [foreign equivalent of tips], but would prefer to buy the direct instrument if possible-i also prefer not to have to go to iceland or wherever to buy the foreign t-bill.)
thanks
gjg49
Appreciate your talking us down off the ledge...
I think the market has been and continues to be "over-reactive". Makes it a very tough place to hang any sort of dispassionate investment hat, right now.
The down move >500pts suggests fear is steadily replacing reason, and perception is everything.
At this point, I have my hands full just locking in trailing stops on a variety of short calls, and trying to pick up the pieces when something unexpected pukes down in the middle of all this (e.g., CALM reported stinker earnings despite huge sales - even though feed for poultry is cratering now... go figure).
I have some dry powder, so I'm trying to decide between selling some juicy puts (with the expectation of picking up the underlying at still a further discount), or if there is a snapback rally, pocketing the premia and doing it all over again next weekend (seems that football Sundays are being replaced by feverish fed Sundays...).
Anyway, keep up the "steady on, boys and girls" mantra. At some point, even an L shaped bottom would be a welome relief.
All the best,
R in NY
not easy to do for now for individuals as the min order size is $100k. I think it will get easier with products or if you are a real doom and gloomer maybe as a function of US failure they will just be available.
R in NY, thanks.
this is the throws of the panic right here. How many times have you (talking generally, not you alone R in NY) seen this movie before?
this is a bear market and that scares people. if you took proactive action you are much better off, MUCH BETTER OFF, than you would have been but that does not get you out of being down some.
Roger, great entry. I was wondering what your feeling these days are about asset allocation. In a market like this, so little is working.
Is it plain dumb to allocate to SPY, IWM, EFA, EEM, ICF and SHY?
I am starting to think that everything we are taught, or advertised to, is wrong, i.e asset class allocation and staying the course.
What are your thoughts?
Volatility spiked to ~55 and then it was retested. Check your history of stock matket reactions when this happens!
Volatility spiked to ~55 and then it was retested. Check your history of stock market reactions when this happens!Go to Yahoo and enter ^VXO. Look at it from 1997 thru 2004.
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