You might recall what Clubber said when he was asked for a prediction and coincidentally his prediction back then would have been correct in 2008.A great discussion broke out in the comments on yesterday's post about stock market predictions with long time reader BillB stating his belief that, essentially, there is no predicting only guessing.
Another reader mentioned John Hussman's seeming knack for market calls.
The notion of predicting where the market will be at a certain time is difficult, absurd and obviously most people get it very wrong. The consensus prediction in BusinessWeek (they have stopped doing this survey) was wrong just about every year. Of course I ah, um, er have tried to make predictions along these lines too. The important thing is not letting the predictions take you too far from your exit and re-entry strategies. If you thought a given year would be up but appropriately took defensive action when your trigger point hit and spared yourself some downside then who cares about the prediction? This is what I do; have an opinion but stay disciplined.
My bigger picture thoughts have some similarities to Hussman although they developed before I started reading his commentaries. Where I think Hussman and I are similar is with the risk at a given period of time being in one direction or the other. I think I come to these conclusions with more macro factors based on what the market is doing. In my simple way of thinking a breach of the 200 DMA signals unhealthy demand for equities. Regardless of what I think the reason might be if demand becomes unhealthy there is then greater risk to the downside.
Now that we have fallen forty whatever percent I think there is more risk of a massive rally (even if it would just be a bear market rally). This notion of course could be wrong and we could take another massive step down from here however the way things usually work fast, big declines are usually followed by fast big rallies. From there it gets tougher to get a feel for what would be next. The details of this bear market might be different but the emotions of fear and greed are not different.
I think it is fair to say there is an element of contrarian thinking in some of this; there is more risk of decline when no one is afraid and less risk of decline when everyone is afraid.
Another difference between Hussman and me is that he places a lot of emphasis on valuations and I do not. While it is not the only thing he looks at, I don't think PE ratios reliably predict anything. Of course the biggest difference with Hussman's approach and mine is he is much better at this sort of thing then I am.
44 comments:
...and Hussman doesn't beat around the bush. He explicitly states his view of market climate each week. I don't know anyone else that goes out on a limb like that on a regular basis. Well, except maybe Cramer.
The various Elliott Wave guys do.
Economists are the worst of the bunch. Then their predictions get aggregated into a consensus forecast that is always wrong, but the markets react because reality is always better or worse than forecast. Look no further than today's jobs report--much worse than expected.
Thanks for the mention. I would like to clarify one point. I (and I think you, Roger) feel strongly about probability. What you state, a 40%+ down market PROBABLY means we may be up in x months or y years from now, I completely agree with.
This isn't blind guessing and it's not predicting.
On the negative side...
Worsening employment
Housing continuing to crumble
More foreclosures
Difficult to get loans
High credit card balances
Delinquencies
Credit harder to get
Illiquidity
Big 3
Retail
On the positive side...
Hmm?
What have I missed on either side?
Oh and to lighten it up a bit, I really get a chuckle out of the new name for the Big 3. The Beg 3.
Also...
Worse economic news in many decades. Is this time finally different?
anon 7:19,
at the bottom (whether that is essentially now or later) there will be very little on the positive side of the ledger. When there is no hope, plenty of despair and so on it can't get worse (for discussion's sake) that would mean it can only improve. If it can't get worse it can only improve. I concede the variables and difficulty in recognizing this but that is what happens.
anon 7:29,
different than what? worse economic news in decades? assuming that sentiment is correct are you saying this as as bad as the 1970s? if so then it is not different it is the same, the same as a lousy decade but the same.
I've probably been wrong about magnitude (yes on this WRT to stocks and too early to know WRT to the economy) but it seems like the dropping is done and now we are in a churning phase between 800 and 900 or 750 and 950 or whatever.
Roger
If we rallied strongly from here...up to the 200MA...would risk be greater at that point???
risk of what? IMO a 30-40% fast rise would create risk of a decline. If we went back above the 200 DMA it probably signals demand is again healthy--in that scenario it would be difficult for me to have a high dgreee of confidence in any opinion.
from anon 7:29
Different than it's ever been since 1929. We're down 40% with the possibility of dropping another what, 30%?
The 70's were not this bad. We're in a recession but I think we're closer to a depression. We will get to the point where jobs are very scarce and only bare essentials with be purchased.
The numbers were pretty terrible today which will make the coming recovery seem all the more palatable, however weak it is. Isn't this what all large company CEOs and Finance Officers do when they first get into a new post?
Anon 7:19, the only positives I see are cheaper resources and many bubbles being burst - both good for the medium/long-term picture.
from anon 7:19
I agree that things can only improve...eventually. But at what point in this terrible economy and at what additional cost to equities?
You can be as defensive as you want but a loss is a loss is a loss. And the losses aren't over. Capitulation has still not happened!!!
from anon 7:19
I filled my gas tank for $34.50 yesterday. That compares to a high of $90. Guess what, I'm not spending the $55.50 difference. Am I the only one thinking that way?
I fear not.
i am spending the difference on lottery tickets.
JOKE JOKE JOKE
From anon 7:19
I've changed my mind. I'm going to the crap table where I have a 49.8% chance of winning.
But I'll stop for a lottery ticked on the way.
Back of the envelope told me to wait until the lottery hits $100,000,000 before buying a ticket.
It's still not a good bet but, it's a fair bet. At that point the actual payout is in line with the odds of winning.
If what goes around comes around, why not put everything on the DDM and collect 3.78% along the way?
It's at $28 and its high was $96 last December.
The other issue with forecasting is that the media who report the forecasts use such incendiary language. Just go to Yahoo and read the financial headlines today. If I see the word "slash" one more time, I think I'll, um, cut my wrists.
Do the Beg 3 think there is some pent up demand for autos? I haven't heard the committee ask that question.
Gad just look at the bottom process
in 1974, 2002-03, we have a long
way to go, I think. ALthough I do
believe in tinkerbelle rally but
the reality is the market is "trapped" by the 200 day moving
average. Everybody and his brother
will be selling when it hits. But
for the aggressive a lot of dough
to be made.
I think the most "fun" is the crash
dive of the 10 year note. Talk a
about a bubble, there will be some
suffering in that security and in
a major way, just look at chart.
Parabolic blow-off. maybe some of
that dough goes to stocks. Think
about who is buying this thing
with a 2.nothing yield for ten
years, Maybe some pension funds
like the oil futures!!
Ricky
Anon 8:52,
Don't forget 'crisis'.
to Ricky
Are you making a case for the TBT?
Why is there a disconnect between the IEF & PST and the TLT & TBT?
Is it leverage?
It seems to be the same with other long vs short ETF"s.
A bit more clarification:
Value investors like Hussman never use PE multiples predicatively and, in fact, don't attempt to predict market direction under at all; there are only more or less favorable valuations within more or less favorable environments. The classic value approach only uses normalized PE's (not forward or even trailing) to estimate whether present values in a particular asset class offer a reasonable chance of satisfactory returns over time.
The recessions and bear markets of '71-3 and '80-2 were demand shocks within hyperinflationary and high interest rate environments; valuation multiples had to compress very heavily into single digits for stocks to compete with bonds or other assets but that is not where we are now; stock yields already match bond yields.
We are in recession all right (hard to believe there was ever any doubt) but it is showing significant signs of deflation and those like Ben Bernanke who study such things fear that above all other scenarios because when money increases in value by doing nothing but could be lost in other ways then people horde it, a liquidity trap opens, economic activity contracts, unemployment goes up, previously manageable debt loads devolve into bankruptcies, and a downward spiral begins that feeds on itself.
Monetary policy is singularly unable to do much about this because adding more money to the system just adds to the hordes people and institutions are attempting to create so the Fed does things like it is doing now; e.g., buying up long T-bonds in an attempt to force long rates down and make loans more attractive so folks will do something with their money other than make fatter mattresses (this also addresses Anon 9:24's question WRT long v. short duration bond ETF's) and jawboning policy makers to get some programs going that will use money to do some work or, at the very least, sop up some of the excess dough out there.
The market is likely to churn heavily until this issue becomes more clear; i.e., degree of uncertainty is very high so market churn rate and amplitude is very high.
You can call that a prediction if you like but it's JMO FWIW
1) if you are interested in investing nad in predictions, you should read the black swan by taleb. in that book he makes a very strong argument that one can't predict much of anything. period. he states this much better than i will, but for someone to predict what would happen at the start of the 20th century, they would have had to have known that the auto and airplane were on the verge of discovery; however, if they would have known this, they would have had to have also known significant details of the methods for flight and auto propulsion etc; and if they knew these, they would have been able to invent the auto and airplane. if that is the case, they create the future rather than predict it. moreover, often the creators don't even see how the world will employ their creation. read the book. period.
2) for those of you who think it can't get too much worse: think again. from the high in 1929 to the low, the dji dropped 89%. the same decline would move the s&p 500 to about 172 (from the 1565 close on 10/9/2007) --that is roughly another 80% decline from here. that is actually WORSE than what we have already experienced. based on comment 1 above, please realize that that is not a prediction. however, you should consider what you might do if that continued decline in the market were to occur. try to avoid static locked in thinking; if you are the only one thinking "correctly" in the world, you better not depend on anyone else in any way shape or form.
--gjg49
There are huge gains out in the market being held by long term holders of treasuries - what will they do with them ?
Who are the big holders ?
Insurance cos, Foreign govs., ??
with the big jump of late, there is at least one windfall folks are gong to want to deploy at some point - who, where ?
How about Jim Roger's prediction that we started an equity bear market and a commodities bull market in 1999. And further that this trend has historically persisted for about 18 years. This means that equity investors would not make any money above inflation until 2018 or so!!
Looking at the DJI index back to '29 you see flat performance until 1950 when you would have seen an equity bull through '66. Then you would be nominally flat, but down in real terms until '82 which would have been a great buying opportunity. After '99 will we be loosing to inflation for another decade if we focus on equities? There is certainly historical precedent for this scenario...
To open another topic: does it even make sense to bet on one economic scenario or another instead of protecting your portfolio against all of them ala Harry Browne? People keep throwing out TBT - do you realize that this is a bet against deflation. All of us are going to be in trouble if deflation gets going, so it seems like there is little reason to double down your exposure in this case right?
There are other, perhaps more prudent ways to profit during inflation such as hard assets and gold, the commodity / reserve-currency hybrid.
"Different than it's ever been since 1929. We're down 40% with the possibility of dropping another what, 30%?"
Huh? What does that mean? Why 30%? Why not 5% or 99.9%?
People who think a 40% down move increases the odds of a further 30% need to take basic lessons in probability.
"How about Jim Roger's prediction that we started an equity bear market and a commodities bull market in 1999. "
Put some allocation (10-20%) towards commodities in late 2007 based on what I read from him, and mainly to diversify away from a potential crash.
Rogers Index now down 45% YTD.
So as of right now what he says has no value. Commodities are no better or worse than stocks when everything gets thrown out. And when everything gets throw away there's no basis for him ever saying "I told you stocks suck!".
Idem for the other big Rogers play, China, though personally I would still be more confident in that one than playing the "guess the price of oil this month" game again.
Seems to be too much despair being posted here. Its time to step back and take a good look at things - this article from Pimco might help. It has a bond bias, of course, but since Roger is kind of anti-bond it helps to balance out.
http://www.pimco.com/LeftNav/Global+Markets/Global+Credit+Perspectives/2008/US+Credit+Now+Equities+Later+Kiesel+Dec+2008.htm
OG
That damn thing didn't print out all the way - here is a reference -
PIMCO Web Site -
U.S. Credit Perspectives
Mark Kiesel | December 2008
Credit Now, Equities Later
OG
For OG's link try this.
Yes, lots of despair.
Lets all wring our hands some more.
Outrageously high jobless claims and the market goes up on horrible news. Don't look now but I think the sellers are exhausted.
what do we think about using the jobless numbers as a headcount - and then comparing to 20-40 years ago- when the labor force was a fraction of the current size?
looks like adjusting for labor force size we are not at all comparable to 73 or 82...
H/C fine for trending, but meaningless as a headline
plenty hype today
to dontworrybehuppy
down 30% more would put us at 600 on the s&p. it wasn't an arbitrary number. it is a number that is discussed. and lessons are not needed.
Another difference between Hussman and me is that he places a lot of emphasis on valuations and I do not. While it is not the only thing he looks at, I don't think PE ratios reliably predict anything.
In terms of P/E ratios "predicting", I think the difference is time frame.
Based on my reading of Hussman, I don't think he thinks P/E ratios predict the next day, the next week, the next month, the next year, or even the next 2 years.
What P/E ratios do predict fairly reliably (and he has covered this a few times with charts that show the "prediction" is quite accurate) is the 7-10 year return.
An example would be the starting P/E in 1998. It didn't predict what would happen from 98-00, 00-02, and then another bull from 03-07, but it did predict the cumulative return from 98-08 quite well. Similarly, today's P/E probably is a good indicator of buy and hold returns through 2018, but won't tell you anything about 2009
Has anyone heard this interview with Russell Napier from Dec 2007? Interesting stuff and well worth a listen.
http://dailymoneytips.blogspot.com/2008/03/will-bear-market-last-until-2014.html
anon 913 - agree that TBT may be a screaming buy here. Time will tell, although a 20%+ move in 3 weeks may be a blow off top
don'tworrybe huppy,
Re: J.Rodger's index being down 45%...one thing I've been seeing over this drawn out slide, is that correlations seem to have been tightening. What in "normal" times would be a well-diversified portfolio that has winners and losers, now has almost all losers, the difference being that some are "down some", and others are "down a lot". Times like these make things like Roger's use of SDS really worthwhile.
I recently picked up El-Erian's "When Markets Collide", and am about 25-30% through it. Its interesting to see how things have played out, so far, when compared to what he wrote so recently (a hint...he seems to be a strong believer in global de-coupling).
Jan
I don't care what anyone thinks......free markets suck. I think we have proof there needs to be a change in our societal philosophy. Perhaps there is a more orderly system!!!
In a Barron's article Hulbert tests the 200 day moving average. Turns out that since 1990 it is worse than buy and hold, even with the latest crash.
A poster on investorVillage, oldmanknows, just posted this:
Warning: The NAVs of every single JBCEF hit an all time low today
except for one (PHK). I just checked the historical NAVs for every junk bond closed end fund on the WSJ's list of JBCEFs except for the ones that didn't report their NAVs yet, and they all hit lifetime lows except for one. For the ones close to violating their leverage covenants this could foreshadow a leverage call in the near future. You don't want to be holding a CEF when it gets a leverage call. I have seen some of them have their NAVs drop as much as 20 to 42% in one day when they are forced to liquidate assets to meet it.
BTW, the NAVs of many California muni-bond CEFs are approaching the lows they made in mid October. I would keep an eye on these too if they are close to a leverage call (the Pimco funds just had one).
I agree with Anonymous | 11:31 PM. We should be communist or socialist. Permanent recession is the answer
Post a Comment