Ok, Joellyn and I figured it all out last night. We are selling everything, putting it in to Swiss francs and moving to a farm in New Zealand. We'll eat what we grow and our money will be sound.Well, we'll eat what we grow as long as we can afford seed and feed. Well, our money will be safe as long as the government of Switzerland doesn't need to bail out UBS or Credit Suisse.
Damn it.
There was a long article in Barron's about selling open end mutual funds before the annual distribution to avoid paying taxes on a fund that might be down on the year.
One thing that I would add that I don't think I saw in the article is that some of the distributions this year (particularly from older funds) could be huge. I have read this in a couple of places. I am more passing this on as opposed to trying to analyze the situation. I do almost nothing with OEFs so if this might impact you I would suggest doing a little legwork.
One theme I have been thinking about and writing about is being open to the idea that we could be close to a bottom in terms of price, not time (this is not about bailing on the 200 DMA concept).
While that may or may not be true I had one thought that might create some useful context. I will preface this by noting that whenever the bottom does come most people will not believe it. This was true in October 2002/March 2003, has been true other times and will be true again.
On March 20, 1998 the S&P 500 closed at 1099. That is where it closed on Friday. After ten years like we have had (which is not unprecedented) it is a good bet that the next ten years will be closer to normal, at least directionally even if not in terms of magnitude.
Think it's over for the US? Ok, the FTSE 100 was first at current levels in 1997. Switzerland first got here in 1998. Singapore 1993. You get the idea. Some of the hot markets are where they were just a couple of years ago.
I think many stocks bought (properly researched) at SPX 1100 (or FTSE 5000 and so on) are going to look like great purchases a few, or more, years from now. This does nothing to prevent them from dropping 30% from here unfortunately but buying a market where it was ten years ago is a rare thing and not the biggest mistake you will ever make.
I've mentioned a few times that I think "normal" average annual equity returns will continue to be more difficult to come by in the USand I still believe that. However, regardless of how poor returns were in the bear market ended last October, imagine how much worse they were for anyone who missed 2003 for being too conservative. Anyone selling out after a 20% decline and then not buying in until after a 20% move up will have dug a very big hole for themselves.
It is stuff like this why markets average about 10%, mutual funds average about 8% and mutual fund holders average about 3%.
Last item; a reader asked for my take on the near term given the possibility of several central banks cutting rates simultaneously. I put up a post on Friday hoping that trading might mellow out some, so we'll see. I also professed in the comments that at times I have a feel for what will happen very short term but that now is not one of those times.
The connection between perception and reality seems to be farther apart than normal. This happens of course but I think I'd be guessing more than normal with this. On Friday it seemed that everyone knew the house would pass the bill. With this knowledge the market was bid up 3%. The bill was passed with no surprise that I know of and then there was a 4% drop. Nothing unprecedented there but it seems to me that the market, discounting mechanism that it is, has many more big things to discount than normal and the degree of importance of these things is much greater than normal. This contributes to the crazy trading.
After so much selling, how could there not be a snapback rally of some sort? This seems obvious but my confidence in this is not great.
The picture is from a hike we go on near our house.
22 comments:
Roger,
Managed Futures ETF (LSC) seems to be working very well since September. Any thoughts?
CA
very similar to RYMFX that i own for clients and have written about numerous times.
I am a fan of Roger and he does a good service for a lot of us. But there is one thing he says which I see repeated endlessly everywhere in books, blogs and bobbleheads everywhere. Simply put it's the cyclicality assumptions built in to all of the models. Commonly you see the 10 to 11% returns touted by investment advisers, the so called average return from US markets, going back 50 or 100 years or whatever. And Roger points out that we are now going on 10 years of 0 returns in the S&P.Hmmm. ,that might hurt the averages a bit. Recompute. Now take those 0 returns and add in real purchasing power, inflation etc and you are looking at real substantial negative returns for the last 10 years. Using returns from a short period of human history as the expected returns going forward is nonsensical blathering. The last 100 or 150 years of US and world industrial economic history was unique and will not likely be repeated. Nearly free fossil energy was the economic underpinning of this industrial revolution and the party is over. Of course there will be bouncebacks and recoveries and mays to make dough going forward but the factors that gave you 11% returns for the last 50 to 75 years will not be repeated for the next 75. Roger is a smart guy and he may see 11% returns but it's my firm contention that the S&P will not. I also manage money for a few people and putting most of their money in Swiss francs and gold and some energy stocks a
year ago hasn't made them any money but it has kept them from the 30% losses that most of the rest of us have experienced including myself by staying in equities. There is nowhere to hide if we are in a deflationary bear market. Whether this deflationary recession turns into an inflationary depression or recession is unclear. But the factors causing this destruction of our banking and insurance systems, the unwinding of leverage and the proliferation of toxic securities, CDS's. CDO's and other carcinogenic derivatives are not going away any time soon and speculating whether we are now at a bottom at 1095 on the S&P or any other number is a waste of time IMO.If you read books of the great depression you find comments identical to today like: don't panic, stay the course etc. The people who held on using that advice didn't lose 30%, they lost 90% top to bottom in the great D.If you lose 90%, you aren't coming back. If you have lost 30%, it will take you about 4 years to recover your losses if you can meet historical average returns. What if your return is 5%,1%? My final point is that most financial advisers don't look at the big picture issues of the economic and financial system. If the way we finance governmental expenditures is based on debt and credit and it is unsustainable, I think it is no stretch to say that our financial and economic system and our currency is in grave peril. There are so many converging predicaments and incurred obligations that calling it a Black Swan event understates the gravity. There is no way this debt will ever be paid off, that these obligations will ever be met. This is a Black Swan event with a whole flock of swans. Roger, I hope you keep hard at it but I hope you and your readers try to examine your underlying assumptions from time to time and at least consider the possibility that cyclicality assumptions about stock performance nay not work if the economic paradigm is changing. I would encourage any interested students of this subject to turn off CNBC and start reading worldwide sources of fact and opinion. Der Spiegel carried a recent long article on this american crisis which was well crafted and stunning. The link:
http://www.spiegel.de/international/world/0,1518,581502,00.html
SV Koho, sounds like you have done very well by your clients, kudos.
Actually I have talked quite a few times along these lines. I am not apocalyptic but specifically I ahve said many times that normal equity returns in the US could be tougher to come by, that I could see going much more into foreign in the next couple of years, that while the US might be dealing with some more secular or even systemic there are other countries whose slowdown is more cyclical and offer the chance for close to normal returns.
good work want something more
LCS are exchange traded notes ETN's. Doesn't that raise the risk level over the mutual fund?
Sorry ,LSC not LCS.
Roger - I do agree with your take on the short term. Here is mine http://maxkapital.wordpress.com/2008/09/30/whats-changed/.
For the long term, I believe US has some structural issues to work through (reduce debt, increase savings, reduce consumptopn, fiscal austerity & reduce fiscal deficity). So it is possible that return expectation should be subdued. Yet, I believe that US corporates are in good shape (outside financial services). They do have access to the best managerial talent, access to capital and ability to innovate and create intellectual property. For this reason, I feel while returns over the next few years may well be subdued, looking out on a 10-15 year horizon, it remains positive. Corporates are well positioned to lead globalization; equally important, I believe US will return to its position of primacy as a producer nation as a result of the economy shifting from one led by consumers to one led by producers and service.
Within a country, you have distinct secular cycles; these are powerful trends lasting typically 15 to 18 years. For example, US went through a powerful IT secular cycle from 1975 to 1993. Immediately following was a major cyclical continuance of the secular trend because of the Y2K fear. Since 1993 to 2008, there has been a secular age of consumer discretionary which now draws to a close. Logically, US should now enter the age of basic materials; perhaps simply because there is a perceived need for US to renew its status as a producer (i.e. it needs industrial growth and for that to grow it must first renew demand for materials). See http://maxkapital.wordpress.com/2008/09/25/a-magic-multiplier/ including comments for more explicit thoughts.
I actually think US is going to come out of this very well. The rescue package is a good first step.
judging by recent events the ETN might be riskier but i don't think there will be provider after provider that fails.
that said i do prefer other wrappers when available. i do not have any etns currently but would not hesitate on the Barclays products--meaning i do not think they are going under.
What is needed is a "VIX for Blogs"; reading Roger I tend to feel that we are slightly on the downside of "bad" and he has been adjusting downward some of his expectations, but remains firmly in the camp that the sky will hold and that prudence and caution are appropriate, but selling everything and buying ammo and whisky is still (mostly?) for humor.
However, if you read Mish it has just slipped beyond "worse" with no relief coming/on the horizon.
I'm sure it can get even worse out there in the blogosphere...
Using past history, all this gloom and doom should be reassuring. But then the poster above tells us that it really IS different this time and better start digging the foxhole.
Hopefully, this is shaking the tree and the loose hands are letting go. I am defensively postured, but more than ever, I'm starting to look hard at long to medium term opportunities, in a variety of jurisdictions.
Schumpeter lives.
R in NY
Hi Rog,,,
In speaking with my uncle,,(board member of a large bank in San Diego), his thought on a 'black swan event' as econimists see it now, is this,,, it would have to be triggered from outside the country and that event would include the commercial banking system,, seems it may well trigger a rush to cash, which would be a disaster as bankers put it..
He wouldnt go further..
thoughts
Mac
R in NY that may not work, lol. i've been within a narrow range of expected outcomes while Mish and others have been in their same expected ranges of outcomes.
Mac, not to be a jerk but a black swan is something that cannot be predicted.
Whatever your uncle's thoughts are, and he could be 100% right, would not be a black swan. people fear depression, not a black swan. people fear systemic failure, not a black swan.
at this point something positive that no one is talking about is a more likely black swan.
I bought RYMFX over LSC after tracking them for awhile and the main reason is that LSC is a VERY thinly traded and small ETN. RYMFX invests in ETN's {I really don't like these, they are simply bonds in a single entity} but it is much more spred around. Also, I noted some print in the LSC prospectus that if it isn't at $10 on x-date {in 2010?}, then they can call the note and pay off the holders. That doesn't strike me as a positive for investors.
RYMFX has a higher expense ratio than I would like but it will provide you what you are looking for if you are interested in absolute return funds = namely, zig versus zag / little correlation and modest, steady returns.
DE
PS - Thanks for your site Roger, I have been quietly enjoying it {and your input at other sites} for awhile now and I have used some of your ideas to dampen risk near year-end last year as I began to fear this market. Had been a b*lls out stock investor in the past but by being less of a risk taker, my portfolio is off 13.2% this year instead of the 25%'ish a fully stock invested portfolio would be yet I'm still nearly 70% equities so if there is a recovery, I will participate. For the first time, I have a plan and I like that.
Update, that 13.2% off was as of Friday. Quarter end was off 10.3%
:-)
DE
good stuff DE, TY
I believe all this speculation about the future is irrelevant to anyone's investment future. The stock market doesn't care about anyone's predictions of the future. It goes where it goes.
If you get a grasp of the technicals, rather than guessing on the fundamentals, you can be profitable in up or down markets. And you don't have to be particularly lucky or a genius to do it.
Hello Rog,
Speaking your mind would carry no labels,, however i think my uncles
point was only that a unanticipated
event would be met by someone,,over seas,,not sure..
Now i have to say that it looks like the CB's are being proactive enough to where it may be true for them also....
Mac
as I check things at 9:30 EST, the Nikei is down 300, the S+P futures are down 19 and tomorrow is starting to look like another black Monday. This is becoming more of a water torture market with nothing but dispair and probobly capitulation. An oversold bounce is in the card, so everybody says, but so what? We are still headed lower and little that anyone can do to salvage their investments. Quality means little as does diversification. Anyone have the crystal ball?
It's a little late, but if you're more concerned with stopping the bleeding than you are of missing a bounce in the market here, you could buy insurance in the form of an inverse etf. Size up the current value of your portfolio and buy enough SDS, QID or TWM to neutralize your account. Remember that each of these are double shorts, that is, they will go up 2 times the amount the market (or their respective index) goes down.
At 11p EST, E-minis are off 16... looks like Rog's forecast of 1095 is a "now" rather than "later" or "soon" event.
The market is steeped in negative sentiment, so maybe a bounce and rally are due. But too many of my friends are still afraid to open their brokerage/401-k statements. If they did it this weekend, they might be thinking "sell" while there's still a tomorrow.
I'd welcome a capitulation, but I fear more 200+ down days.
Trader Dick, I'm already where I want to be with the inverse ETFs (my overall portfolio has a mildly negative delta (benching against S&P), with small negative gamma), but here's the rub: because I'm well diversified, I'm STILL down from September 1st. Portfolio metrics are useful for reassurance, but in the end, "past performance is no guarantee of the future". (In my case, exposure to the AG stocks was "not accurately represented by their historical correlation to the S&P".)
And that's the paradox of any trading strategy: I could increase the SDS exposure to compensate for the amplified negative delta from AG exposure... but then I risk a reversion to the mean from that (and any other "anomalous" performances in September).
By the time I recalibrate/re-weight to account for current performance, I'd likely be whipsawed by a reversion, if not by AG, then maybe with consumer discretionary or (pick your poison). That's the trouble with technicals: they give you a great view of what's behind you.
In this environment, I'm sitting down to a nice piece of humble pie, happy to losing a little less, trying to think in monthly ticks, not minute ticks.
Way too many ways to get it wrong right about now...
R in NY
R in NY: At least you're not bleeding to death! Hedging is not an exact science, but it can keep the patient out of intensive care. Admittedly, the time to hedge was much earlier and the technicals could have told you exactly when to do it. Moving averages such as the 233 SMA or some other critical moving average could by used. This is not looking into the review mirror, it's real time. Sure, it may give you a false signal and you may get some slippage, but I found them to be effective in the long run. And it is uncanny how oscillators like stochastics an CCI can give very good short term signals, if you are into that type of trading.
Trader Dick, I have used inverse funds without much success. Seems I get stopped out with either small or large losses and not much gain. How do you solve that?
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