Finding The Forest

Several comments came in that explored the notion of whether traders, as opposed to investors, are pushing the market around.

Then a link to an article about Roubini's opinion that hedge fund closures/unwinding will cause the markets to be shut for a few days and that the worst is yet to come.

Finally a reader lamented about just wanting steady, moderate growth.

After a forty whatever percent drop you know I am leaning bullish having slightly increased long exposure.

That being said it would be foolish to deny the possibility of any seemingly extreme outcome and to be clear closing for a few days seems like a very remote possibility but almost all of the fallout of this crisis so far would have been viewed as very remote.

The one thing I would say to Roubini would be haven't hedge funds been selling all of this time? Hasn't hedge fund selling contributed to the 40% drop in US stocks, the ravaging in commodities, the pounding in emerging markets and the halving of oil (I realize oil is a commodity)? It is easy to believe the selling is not completed but that the worst is yet to come seems difficult to imagine.

One reader asked how much heed to pay to Roubini. He has been right of course in the big picture and most of the small picture. He was very early which is not a bad thing. One bit of trouble I have in trying follow him is his use of words like disaster and collapse. Reasonably speaking those are very subjective words. Someone might think of a 10% drop in housing prices as a collapse where someone else might think a collapse comes at 40%. I hear more subjective adjectives from him than specific numbers.

If your portfolio drops by half as much as the market, you keep your job and don't plan to move will this have turned to have been a disastrous collapse? Most people can count on those last two and some will have all three. So I have trouble thinking of this as a collapse but I have no argument against a rose colored glasses critique. I will say that portfolio troubles, job troubles and housing troubles can occur at anytime regardless of what is going on in the world. I have tried to mitigate all of those potential troubles with all of the portfolio stuff I've been writing about for four years, living in an inexpensive cabin that is paid for and being self-employed with two jobs.

Back to hedge funds; a year ago was there $1.5 trillion in hedge funds, maybe $2 trillion in something like 1000 hedge funds? Couldn't 20% of them be successful, either moderately or tremendously? Couldn't that 20% account for 40% of the assets in the space? Couldn't a case be made, with numbers by someone inclined to look, that much, not necessarily all, of the selling has been done? Maybe not.

In terms of is it the traders, I would not spend a lot of time on that. I think it misses the forest. I lump that in with things that are beyond your control, that and it isn't really knowable. The market is down a lot, it will either keep going down, hover or go up. I lean toward hover with an upward bias. What we can control is staying rational, sticking to a game plan and being prepared to being very wrong either big picture or tactically.

Last item is the lament for moderate but steady returns. It might be reasonable to define moderate as high single digits to low double digits, maybe 8-12% or 7-13%. Since 1950 there have only been ten years that the S&P 500 was up between 7-13%. Between 8-12% only four times since 1950. Unfortunately it just doesn't work that way.