The jobs report printed yesterday and it stunk in every direction. There is a lot to digest right now in terms of whether there is an honest recovery or not, all aspects of QE are being second guessed and dissected, the housing market has legitimately double dipped, at the very least there is reason to be skeptical that the banks are really getting healthier all of which contributes support to the idea I've been talking about which is that the worst financial crisis in 80 years will not wrap up all neat and tidy in just a couple of years.
If we were talking about a different country in the context of top down portfolio construction then the issues above along with the debt and Social Security/Medicare issues and it would not take long to conclude it should either be avoided or underweighted.
In my opinion the general top down investment case for US equities has been weak for a long time but of course this has not prevented the market from doubling in two years. Perhaps the decline into March 2009 was an overshoot or perhaps the snapback is the overshoot but it should be obvious that markets and fundamentals diverge and converge all the time. A market or a stock can go up a lot in the face of lousy fundamentals and of course they can go down a lot in the face of great fundamentals.
Internet stocks with essentially no fundamentals went up a lot in 1998 and 1999. In my opinion the fundamentals at Banco de Chile (BCH), the Chilean bank we don't own, did not warrant a 55% decline in the price from March 2008 to October 2008 but that is what happened anyway.
I would think that as a general rule of thumb you would not want too much exposure to holdings whose fundamentals stink. Assessing that the fundamentals for something stink is easier than picking individual stocks to buy. The process of figuring out what to avoid combined with picking ETF that minimize exposure to lousy fundies gives a decent chance of successfully navigating the stock market cycle. On top of that still needs to be some sort of defensive strategy because as noted above good fundamentals will not prevent something from going down in price when everything else is going down.
The bigger point here is the notion that I among others have been writing about for years but which has gotten more attention lately which is minimizing declines in the course of a full stock market cycle. Completely avoiding large declines is not realistic but minimizing them is possible.
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3 comments:
First time vising your blog. Really appreciate the top down approach and I never thought about looking at U.S. equities as if we were evaluating another country. Based on fundos, I'd probably stay away ! Thanks !
Roger,
it is hard question about fundamentals on the real economy and the stock market. It seams that the two things are seperate and on two different planet. In 2008(oct,17) Warrent Buffet's NYT article was suggesting that he was buying american stocks. Yet fundementlas were worse at that time than today. Yet he put to work 30 billion in burlington. Take BP at 24 it was a great peice it has double since june 2010. Yet perhaps a better pick would have been COP ithink safer. But both since 2010 have made money, yet fundamentals for bp have not been that great after the accident. Roger, it is a hard topic. Look at the day when the announcement was made about bin ladden death. That was a bin ladden short. In the market there was euforia. It was a time to short. That day, that moment, the markets gapped up. This blog even had a two day post with full participation. Just like 4/23/2010(26 was the short). Now we are going through the same process as april 2010. The markets are correcting and we have not yet finish. The markes have lots to do with psycological make up of the collective human behavior. It is quite different from the real economies. It is how humans interprit the news the economies. Both have shorts have been scary for me but my system on both gave the signal to sell and am sure when we fully correct from this it will give me the signal to buy yet it will be scary to do. I think we get payed for non being confortable but being on the edge. Your post on mavrick was right on the spot. I suspect that at the end of this correction there will be lots of post as to "this market is scary". Another flash crash? Perhaps waiting with lots of cash at hand for that opportunity.
Best,
Jeff from Milan, Italy
Jeff, I have said repeatedly that trades can be had in anything and I noted in this post that lack of fundamentals did not prevent all sorts of things from going up a lot in the last two years.
The point is to know the difference.
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