To know what clients want, you need to first know what they really value in life. You need to know about their life objectives and their tolerance for various types of investment risk. Then you build a financial plan to give them the highest probability of reaching those objectives while remaining true to their values. I call this enhancing their wealth.
Here's one definition of wealth from Webster's Dictionary: "the things that are most important to you." So when I find out what wealth means for a client, I want to help them create an abundance of whatever that is. Will it be a specific amount of money? No, in fact, I have never had a client who ranked money as number one. What's most important to people are things like their families, friends, health, career, or even spirituality.
When a client engages me as their primary financial advisor, my mandate is clear: Design a plan to take the client from where they are today to where they would like to be. The plan needs to give them the highest probability of reaching their objectives. The plan must also give them more time to focus on what matters most to them.
In addition, as an advisory team, each year we will:
1. Recommend saving strategies. We go over how much they should save (or when retired how much they can spend). If things are tight, we will help find money in their budget to save what they need to. They know that we prefer never to suggest to someone that they need to reduce their lifestyle, unless they really must.
2. Control money management expenses. Performance we can't control, but expenses we can control. We'll never rebalance needlessly to trigger taxes, and that we may rebalance to soak up losses.
3. Reduce taxes. First we will look for deductions or credits. Next we'll look to incur minimal tax on the portfolio by adjusting type of income, as appropriate. Then we will look for any deferral opportunities, and lastly, look for any ways to have income taxed in the hands of the family member with the lowest possible income. It's amazing the many situations in which we can reduce taxes by thousands.
4. Anticipate cash flow requirements. We will make certain they have adequate liquidity to avoid liquidation at the wrong time.
5. Protect net worth. We will be certain that they are protected from an interruption of income as a result of disability or critical illness. It's important to make sure there are adequate funds to protect erosion of what they have accumulated.
6. Keep estate affairs organized. We will suggest any changes that need to be made as the life evolves.
It's quite easy to fall into the performance game... To be measured by ones ability to beat the uncertainties of the market at all times. Investment performance is obviously part of the financial planning equation, but it's the part that we least control. That isn't to say that this mitigates the need for us to use well-defined investment principles and processes, but lack of control of the markets is a constant... I ask myself: What is my value as an advisor worth? (Because I know clients will be asking the same question)
Monday, December 22, 2008
Thursday, December 18, 2008
Thoughts on Future Inflation... (M.C.)
We are in the camp that, although what the Fed is doing is inflationary, it will not cause higher inflation for a while (perhaps at least a year or more). That is because commodity prices, earnings, jobs, consumer confidence and economic activity are all in the dumps with not much expectation of a dramatic improvement in the foreseeable future.
However, Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve put it cogently:
“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating. Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”
It's nothing to bet on yet but, if history is any proxy, the unprecedented stimulus efforts will at some point cause same unintended effects. A world inflation bubble might just be that unwanted love child.
However, Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve put it cogently:
“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating. Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”
It's nothing to bet on yet but, if history is any proxy, the unprecedented stimulus efforts will at some point cause same unintended effects. A world inflation bubble might just be that unwanted love child.
Tuesday, December 16, 2008
Refreshing Idea's...
The market's going to be tough over the next number of quarters. But there are some incredible deals out there in both the Materials and Energy sectors. You're getting companies at single P/E multiples. I believe in Peak Oil, and when you can buy companies trading at half price sales, you want to buy them!
The small-cap cycles are typically 5 years in duration, and this is the 5Th year that small-caps have underperformed, which isn't surprising given the current credit crisis. In this environment, to succeed, you have to not follow the Index, cut your losers, and keep your winners.
Over all, what's happening now is both Deflation in paper assets and Inflation in real assets. To use Eric Sprott's example: "The price of a house is going down, because you can't borrow the money to buy the damn house! Because nobody wants to issue that piece of paper, because paper's not worth what it used to be..." (Our lovely "dual _flationary" environment)
Remember to stick to your convictions. There are periods where the market doesn't embrace your ideas... Unfortunately you have to wait for the market. You can't change the market. Nor shall we chase the market...
The small-cap cycles are typically 5 years in duration, and this is the 5Th year that small-caps have underperformed, which isn't surprising given the current credit crisis. In this environment, to succeed, you have to not follow the Index, cut your losers, and keep your winners.
Over all, what's happening now is both Deflation in paper assets and Inflation in real assets. To use Eric Sprott's example: "The price of a house is going down, because you can't borrow the money to buy the damn house! Because nobody wants to issue that piece of paper, because paper's not worth what it used to be..." (Our lovely "dual _flationary" environment)
Remember to stick to your convictions. There are periods where the market doesn't embrace your ideas... Unfortunately you have to wait for the market. You can't change the market. Nor shall we chase the market...
Thursday, December 11, 2008
Ballooning Bond Yields... (Velocity of the USD)
Below is a recent ex script from Hong Kong's "GaveKal Daily" regarding the most repeated questions being asked by their global clients today. (An interesting piece I found most appropriate as we approach the end of 2008):
“I just don’t get it! The Fed is out there printing US$ as if paper and ink were about to run out, and yet the US$ surges, oil plummets, gold sucks wind and gold mining shares collapse and yields on long dated US government bonds reach levels that I had never thought I would see in my lifetime! How does this all add up? It makes no sense!” As we see it, there are three potential explanations to the above dilemma:
Option #1: As much as the Fed is printing, the velocity of money is collapsing even faster than the money supply is increasing. As such, the total amount of liquidity in the system is still shrinking, thereby bringing down prices (explaining the low bond yields and the low gold) and activity (low oil). Of course, this situation will not last forever and, once the banks get back on their feet (which admittedly may take some time), velocity will bounce back. At that point, the risk is that the excess liquidity provided by the Fed and other central banks will be multiplied aggressively and that we will move from a deflationary bust to an inflationary boom scenario very rapidly; it will then be very important for the world’s central banks to aggressively withdraw the liquidity that they provided or inflation will become a real economic problem.
Option #2: Looking to markets for any kind of confirmation of deep macro-economic trends today makes little sense as markets are still under heavy duress from forced selling in the riskier assets (i.e., oil, gold…) and forced buying of others (US$, US government bonds…). Indeed, how else could we explain that 3-month bond yields were actually negative earlier this week? If this is not a sign of a bond bubble, then what is? And as we all know, the late stage of a bubble is always characterized by “forced buying”; investors know that valuations make no sense but they are forced, either because of regulations, or simply to keep their jobs, to pile into an asset class. In early 2000, all the indexers and closet indexers had little choice but to buy Nokia, Cisco and JDSU. In the first half of this year, oil and commodities were driven higher by Chinese forced buying ahead of the Olympics (see our book A Roadmap for Troubling Times). And now, government bonds are being bought by banks, insurance companies and pension funds in an obvious attempt to “window dress” the books before the year-end. Thus, in the new year, once the need to “window dress” is behind us, we should expect capital to flow out of bonds and into riskier assets.
Option #3: Contrary to popular belief, the Fed actually has not been printing nearly as aggressively as everyone believes. Indeed, as we tried to show in our latest Quarterly Strategy Chart Book, borrowings from the Fed now exceed the total amount of bank reserves, and thus the reserve component of the monetary base is now entirely borrowed money. The monetary base itself is now a levered figure. Thus, non-borrowed reserves growth has been negative; Bernanke, the pre-eminent scholar of the Great Depression, who knew that the contraction of the monetary base was possibly the most significant policy blunder of the 1930s, sat back and let the unlevered monetary collapse by a third. Fortunately, however, that trend has recently been reversed with the Treasury injecting more than $150bn into commercial banks and taking equity stakes.
As we see it, these are the three possible explanations to the dilemma above. Now the interesting thing is that, whichever option you decide to go with, it will tell you that getting out of government bonds today is not only necessary, but could be urgent.
Something to ponder as you follow your path of due diligence...
“I just don’t get it! The Fed is out there printing US$ as if paper and ink were about to run out, and yet the US$ surges, oil plummets, gold sucks wind and gold mining shares collapse and yields on long dated US government bonds reach levels that I had never thought I would see in my lifetime! How does this all add up? It makes no sense!” As we see it, there are three potential explanations to the above dilemma:
Option #1: As much as the Fed is printing, the velocity of money is collapsing even faster than the money supply is increasing. As such, the total amount of liquidity in the system is still shrinking, thereby bringing down prices (explaining the low bond yields and the low gold) and activity (low oil). Of course, this situation will not last forever and, once the banks get back on their feet (which admittedly may take some time), velocity will bounce back. At that point, the risk is that the excess liquidity provided by the Fed and other central banks will be multiplied aggressively and that we will move from a deflationary bust to an inflationary boom scenario very rapidly; it will then be very important for the world’s central banks to aggressively withdraw the liquidity that they provided or inflation will become a real economic problem.
Option #2: Looking to markets for any kind of confirmation of deep macro-economic trends today makes little sense as markets are still under heavy duress from forced selling in the riskier assets (i.e., oil, gold…) and forced buying of others (US$, US government bonds…). Indeed, how else could we explain that 3-month bond yields were actually negative earlier this week? If this is not a sign of a bond bubble, then what is? And as we all know, the late stage of a bubble is always characterized by “forced buying”; investors know that valuations make no sense but they are forced, either because of regulations, or simply to keep their jobs, to pile into an asset class. In early 2000, all the indexers and closet indexers had little choice but to buy Nokia, Cisco and JDSU. In the first half of this year, oil and commodities were driven higher by Chinese forced buying ahead of the Olympics (see our book A Roadmap for Troubling Times). And now, government bonds are being bought by banks, insurance companies and pension funds in an obvious attempt to “window dress” the books before the year-end. Thus, in the new year, once the need to “window dress” is behind us, we should expect capital to flow out of bonds and into riskier assets.
Option #3: Contrary to popular belief, the Fed actually has not been printing nearly as aggressively as everyone believes. Indeed, as we tried to show in our latest Quarterly Strategy Chart Book, borrowings from the Fed now exceed the total amount of bank reserves, and thus the reserve component of the monetary base is now entirely borrowed money. The monetary base itself is now a levered figure. Thus, non-borrowed reserves growth has been negative; Bernanke, the pre-eminent scholar of the Great Depression, who knew that the contraction of the monetary base was possibly the most significant policy blunder of the 1930s, sat back and let the unlevered monetary collapse by a third. Fortunately, however, that trend has recently been reversed with the Treasury injecting more than $150bn into commercial banks and taking equity stakes.
As we see it, these are the three possible explanations to the dilemma above. Now the interesting thing is that, whichever option you decide to go with, it will tell you that getting out of government bonds today is not only necessary, but could be urgent.
Something to ponder as you follow your path of due diligence...
Tuesday, December 2, 2008
Using Discipline in an Undisciplined Environment.
Courage is at the core of every great investor and genuine courage is rare.
Every market climate tests our investment conviction, today's environment is especially intimidating.
For an investor, challenging popular thought is never easy, but the fact is a number of solid companies with good fundamentals lie in the market wreckage.
Greed blinds us to danger while fear blinds us to new opportunities.
This occurs when logic loses out to emotion.
It is one of the principle reasons why it is so hard for investors to buy low and sell high.
Often, even when individuals plan strategically, they deviate from their plan when the market is too challenging or too tempting.
The elements of Investment Discipline:
- Don't chase performance - it can be hazardous to your wealth!
- Act Strategically, not emotionally. Build an investment plan
- Rebalance your portfolio regularly
- Stick to your plan even when your emotions tell you to do the opposite
- Seek experts when you do not have the tools, the time, or the experience to do it yourself.
Every market climate tests our investment conviction, today's environment is especially intimidating.
For an investor, challenging popular thought is never easy, but the fact is a number of solid companies with good fundamentals lie in the market wreckage.
Greed blinds us to danger while fear blinds us to new opportunities.
This occurs when logic loses out to emotion.
It is one of the principle reasons why it is so hard for investors to buy low and sell high.
Often, even when individuals plan strategically, they deviate from their plan when the market is too challenging or too tempting.
The elements of Investment Discipline:
- Don't chase performance - it can be hazardous to your wealth!
- Act Strategically, not emotionally. Build an investment plan
- Rebalance your portfolio regularly
- Stick to your plan even when your emotions tell you to do the opposite
- Seek experts when you do not have the tools, the time, or the experience to do it yourself.
Monday, December 1, 2008
December 1st, 2008... Here we go.
The levels of market volatility continue to be an incredible force to contend with. It’s almost like viewing a Richter Scale during a large seismic event… Imagine you’ve lived through an earthquake… You rebuild and life goes on. But from that day forward, anytime you hear or feel the slightest tremor, you expect the utmost worst to happen. This “fear” becomes a permanent “Pavlovian” response in your mind. But does that stop you from living your life? Does it drive you to escape? If that were the truth, then places like California and Japan would be uninhabited ghost-towns. People pick up the pieces and rebuild.
Some rebuild better than others, improving on their foundations to protect against future rumbling’s.
Some rebuild quicker than others, utilizing the skill and expertise of industry tradesmen to recover what they once lost.
Right now it’s time to focus on Things That Are Really Important:
Last week was the first week up on many indices like the TSX. What makes this very interesting to me is that the TSX has not enjoyed 2 consecutive weeks up since the index was 13771 back in late August. So if the market is going to come off a bit, it should probably do it very early in the week and then by this Friday, I would think that it stands a very good chance to close higher than the 9270 close on Nov.28th. I would think that if we get 2 consecutive up weeks on all the major indices, that would be very positive given we are going into a very bullish seasonal time and the prospect of automakers getting their bridge loans when they reconvene in Washington this week and with the inauguration set for Jan 20th, the table does seem to be set for an opportunity finally for all of us to make quite a bit of money from the long side for a change. The rally is only 6 days old and that is why I think if they come off for 2 or 3, you have to be all over that.
Friday, November 28, 2008
An update by Leon Tuey... (A MUST read)
Conditions are ripe for a Tsunami rally. On Thursday, November 20, the popular market averages plunged to new lows, which caused another wave of panic. Clearly, investors remain mesmerized by the short-term movements of the market averages, and not on things that really matter. At the risk of sounding like a broken record, the things that really matter are the monetary, economic, valuation, and sentiment factors. These are the factors that really drive the market, and they continue to indicate that a low-risk, extremely high-reward juncture has been reached. At this juncture, we can’t stress strongly enough that investors should focus on these important market factors and to ignore the noise.
Monetary
As mentioned, the unprecedented monetary growth and co-operation of the world’s central banks will help to turn the economy
around. Clearly, that’s their goal.
Economic
Despite the consensus, the explosive monetary growth and the dramatic steepening of the yield curve will cause the economy to
recover, probably in the second half of next year, if not earlier. The current quarter will likely represent the trough of the economic
downturn.
Valuation
By any metrics, the market is exceedingly cheap. Historically, the price-to-book for the S&P 500 Index has ranged in the 1.0 - 4.2 area; currently, it’s 1.1x. Moreover, the IBES Valuation Model shows that the S&P 500 Index is 68% undervalued (on November 20, it was 73% undervalued). Furthermore, the dividend yield for the S&P exceeds the yield on the 10-year T-notes – the first time this has occurred in 50 years. From a valuation standpoint, the market is as attractive as in 1982, which marked the commencement of the biggest bull market in history. Buy low, sell high.
Sentiment
Fear has reached an extreme. In October, the VIX reached a record high, and fear was so extreme that it could not get any worse. In the months ahead, fear will subside, which implies the market will rally. It is interesting to note, however, that while the public is pulling their money out of their accounts, insider buying surges to record highs. Fools rush out, but the smart buyers are rushing in.
Also, technically, the market is historically oversold; in fact, the whole world is oversold. However, commodities are also grossly oversold (on an intermediate basis), and as they rally – as they are doing so right now – it will just add fuel to the launch.
Finally, our work shows clearly that investors should abandon bonds and buy stocks, as stocks will outperform bonds in the months ahead.
In conclusion, conditions are in place for a monster rally. There is nothing to fear but fear itself. Investors should maintain their staged buying program. Short-term weakness is not to be feared, but should be viewed as an outstanding buying opportunity.
Monetary
As mentioned, the unprecedented monetary growth and co-operation of the world’s central banks will help to turn the economy
around. Clearly, that’s their goal.
Economic
Despite the consensus, the explosive monetary growth and the dramatic steepening of the yield curve will cause the economy to
recover, probably in the second half of next year, if not earlier. The current quarter will likely represent the trough of the economic
downturn.
Valuation
By any metrics, the market is exceedingly cheap. Historically, the price-to-book for the S&P 500 Index has ranged in the 1.0 - 4.2 area; currently, it’s 1.1x. Moreover, the IBES Valuation Model shows that the S&P 500 Index is 68% undervalued (on November 20, it was 73% undervalued). Furthermore, the dividend yield for the S&P exceeds the yield on the 10-year T-notes – the first time this has occurred in 50 years. From a valuation standpoint, the market is as attractive as in 1982, which marked the commencement of the biggest bull market in history. Buy low, sell high.
Sentiment
Fear has reached an extreme. In October, the VIX reached a record high, and fear was so extreme that it could not get any worse. In the months ahead, fear will subside, which implies the market will rally. It is interesting to note, however, that while the public is pulling their money out of their accounts, insider buying surges to record highs. Fools rush out, but the smart buyers are rushing in.
Also, technically, the market is historically oversold; in fact, the whole world is oversold. However, commodities are also grossly oversold (on an intermediate basis), and as they rally – as they are doing so right now – it will just add fuel to the launch.
Finally, our work shows clearly that investors should abandon bonds and buy stocks, as stocks will outperform bonds in the months ahead.
In conclusion, conditions are in place for a monster rally. There is nothing to fear but fear itself. Investors should maintain their staged buying program. Short-term weakness is not to be feared, but should be viewed as an outstanding buying opportunity.
Tuesday, November 25, 2008
"Don't Judge Your Financial Future On The Last 40 Trading Days..."
There are incredible movements in the Canadian banking sector to stimulate lending again. A luncheon recently took place in which the Presidents/CEO's of many institutional banks and private firms met to discuss strategies going forward. The great thing that's taking place is that even the OSFI (Office of the Superintendent of Financial Institutions), which is the regulating arm here in Canada, is closely monitoring the rate-cuts and other actions of the banks. This ensures that all are on even ground, with no one straying from the plan to "undercut" the next guy and gleam some sort of profit during the next few quarters. (There's one in every group...)
So to sum up what we are already hearing, Canada is in a pretty liquid position. Our nations banking structure is Oligopolic in nature, which allows the need for very little foot-work to encourage unanimous change. (Just need to apply a little "moral suasion" to the top 4-5 banks to make the necessary changes... The rest will fall into play). The problem is, even when credit gets moving again, it is but a pin-drop to truly effect the real problems going forward... The US is of course the key.
Unfortunately, the US banking system is much more layered than ours here in Canada, and leads to the number of banks recently failing in America. (There are more to follow...) On the other hand, Obama seems to be doing everything right. Selecting his people, allowing for certain information to "leak out" to the markets. (We all saw the effect on Friday in the final hour of trading) Also, Government guarantee's in the mortgage market seems to be giving financial institutions some breathing room. Who knows, they may get credit moving after all. (I'm still holding to my guess by the New Year... Fingers crossed Santa)
The code of the Samurai: "Expect nothing. Prepare for Everything."
So to sum up what we are already hearing, Canada is in a pretty liquid position. Our nations banking structure is Oligopolic in nature, which allows the need for very little foot-work to encourage unanimous change. (Just need to apply a little "moral suasion" to the top 4-5 banks to make the necessary changes... The rest will fall into play). The problem is, even when credit gets moving again, it is but a pin-drop to truly effect the real problems going forward... The US is of course the key.
Unfortunately, the US banking system is much more layered than ours here in Canada, and leads to the number of banks recently failing in America. (There are more to follow...) On the other hand, Obama seems to be doing everything right. Selecting his people, allowing for certain information to "leak out" to the markets. (We all saw the effect on Friday in the final hour of trading) Also, Government guarantee's in the mortgage market seems to be giving financial institutions some breathing room. Who knows, they may get credit moving after all. (I'm still holding to my guess by the New Year... Fingers crossed Santa)
The code of the Samurai: "Expect nothing. Prepare for Everything."
Thursday, November 20, 2008
Thoughtful Quips for the day...
"Undervaluation is not a timing signal. But, for the longer run it is better to accumulate undervalued stocks than waiting to buy strength."
"When the tide went out not only did we see who was swimming naked, but all of a sudden there was a law against public nudity..."
(-"How can someone have "naked-shorts" on anyway?...")
Tuesday, November 18, 2008
Signals and Solutions
This morning I sat through an interesting presentation by Gerry Brockelsby from Marquest Asset Management. At first I was fearing another "history lesson" in which he re-iterates the steps that led us to this awful predicament in the market. But I was pleased to find out that it was more of a "scenario builder", one where we are presented clear indications of massive upside potential (Ie. An action plan), pending one little hitch (Ie. A trigger to light the powder-keg)... Credit.
Lets look at precedence... (In this case - 1980 - Jimmy Carter - as it is the closest comparison to our problem at present.):
Similar to the illiquid situation we are in now, the Carter team effectively introduced massive credit controls which stalled lending and turned the market sharply downward. (Similar to September this year after the collapse of Lehman and the "mark-to-market" idea...). Banks stopped lending all at once! (Eventually, on a Global basis.) Looking at the "whip-saw" effect on the markets during the Carter fiasco, the credit collapse lasted roughly 1 quarter. Now, here's the scary part... We currently have 6 weeks or so to reach that full quarter duration. It is assumed, by many many smart people, that a credit collapse lasting more than 1 quarter may lead to a full economic depression. (Considering the speed of markets due to increased technology, maintaining this 3 month "buffer" is quite liberal to say the least).
So all other indicators are lined up for a great correction (or Bull run) with the only caveat to get credit moving. How then should we position ourselves? If credit is not loosened by year end, we could see extreme government measures introduced in January... (Possibly Nationalizing the entire Banking system, and government forcing credit back into the markets. Hopefully the financial system finds that "magical suppository" before anything like that happens...)
2 possibilities:
1. Credit gets moving again. Greed and all those other good measurable things return to the markets. The trillions of dollars sitting on the side-lines flood back in. We witness one of the greatest, most profitable movements in market history. (Hopefully Europe and Asia follow suit... Back on track).
or...
2. Credit stays stuck. Extreme Government intervention in the Financial system. Credit is forced back into the markets. Long term recovery, and uncertainty continues to exist in the markets due to the nationalization process... The pin-drop leading to the death of Capitalism as we know it?
Either way, it's very important to stop looking at the stories leading to this mess. To quit following and reading about who's to blame; slave to the government and media's diversions. All that is done is done.
It's also important to stop trying to call a market bottom. It's a suckers game. The funny thing is analysts will always try to "chart" and fix a thesis to call a bottom. One of them will hit the nail on the head out of luck, and taa-daa! Here's your next guru who we will all watch and listen to, and purchase their book on e-bay... Yadaa, yadaa, yadaa.....
Concentrate on position. Watch like a hawk for indications that credit is starting to move again. If it looks promising, take your positions quickly, as the speed at which the sling-shot moves will be extremely fast. I know it sounds like I'm advocating "timing the market", (which I think is next to impossible), but I'm merely trying to emphasize the importance of having your ducks in a row "before" this occurs. (Take your positions now, or yesterday, or tomorrow. As long as you can stomach the risk. I think the upside is well worth it, but that's my own opinion.)
It appears that down-side risk is being contained... Selling pressure is diminishing as stock prices are discounting all the bad news. Buying is still very timid and therefore cash continues to build on the sidelines. Again, negative market sentiment is a key ingredient to the bottoming process. Soon buying demand will surpass the selling pressure and a sustainable rally will take shape.
Hopefully the great minds and powers-that-be are ready for the challenge. We have seen some great moves by the Government and banks to restore liquidity to the system, and it's my bet that credit will get moving again before the New Year. At least that should help to shake off some of the deflationary pressure, and we can start to focus on other problems like "de-leveraging" and good-old-fashioned inflation... War... Etc...
Ahhh... This may be like waking up from a long drawn-out, bad dream; Only to find a pile of cash under your pillow where you recently placed all your teeth after the knock out punch the markets delivered in Fall of 2008... (Put a steak on it.)
Lets look at precedence... (In this case - 1980 - Jimmy Carter - as it is the closest comparison to our problem at present.):
Similar to the illiquid situation we are in now, the Carter team effectively introduced massive credit controls which stalled lending and turned the market sharply downward. (Similar to September this year after the collapse of Lehman and the "mark-to-market" idea...). Banks stopped lending all at once! (Eventually, on a Global basis.) Looking at the "whip-saw" effect on the markets during the Carter fiasco, the credit collapse lasted roughly 1 quarter. Now, here's the scary part... We currently have 6 weeks or so to reach that full quarter duration. It is assumed, by many many smart people, that a credit collapse lasting more than 1 quarter may lead to a full economic depression. (Considering the speed of markets due to increased technology, maintaining this 3 month "buffer" is quite liberal to say the least).
So all other indicators are lined up for a great correction (or Bull run) with the only caveat to get credit moving. How then should we position ourselves? If credit is not loosened by year end, we could see extreme government measures introduced in January... (Possibly Nationalizing the entire Banking system, and government forcing credit back into the markets. Hopefully the financial system finds that "magical suppository" before anything like that happens...)
2 possibilities:
1. Credit gets moving again. Greed and all those other good measurable things return to the markets. The trillions of dollars sitting on the side-lines flood back in. We witness one of the greatest, most profitable movements in market history. (Hopefully Europe and Asia follow suit... Back on track).
or...
2. Credit stays stuck. Extreme Government intervention in the Financial system. Credit is forced back into the markets. Long term recovery, and uncertainty continues to exist in the markets due to the nationalization process... The pin-drop leading to the death of Capitalism as we know it?
Either way, it's very important to stop looking at the stories leading to this mess. To quit following and reading about who's to blame; slave to the government and media's diversions. All that is done is done.
It's also important to stop trying to call a market bottom. It's a suckers game. The funny thing is analysts will always try to "chart" and fix a thesis to call a bottom. One of them will hit the nail on the head out of luck, and taa-daa! Here's your next guru who we will all watch and listen to, and purchase their book on e-bay... Yadaa, yadaa, yadaa.....
Concentrate on position. Watch like a hawk for indications that credit is starting to move again. If it looks promising, take your positions quickly, as the speed at which the sling-shot moves will be extremely fast. I know it sounds like I'm advocating "timing the market", (which I think is next to impossible), but I'm merely trying to emphasize the importance of having your ducks in a row "before" this occurs. (Take your positions now, or yesterday, or tomorrow. As long as you can stomach the risk. I think the upside is well worth it, but that's my own opinion.)
It appears that down-side risk is being contained... Selling pressure is diminishing as stock prices are discounting all the bad news. Buying is still very timid and therefore cash continues to build on the sidelines. Again, negative market sentiment is a key ingredient to the bottoming process. Soon buying demand will surpass the selling pressure and a sustainable rally will take shape.
Hopefully the great minds and powers-that-be are ready for the challenge. We have seen some great moves by the Government and banks to restore liquidity to the system, and it's my bet that credit will get moving again before the New Year. At least that should help to shake off some of the deflationary pressure, and we can start to focus on other problems like "de-leveraging" and good-old-fashioned inflation... War... Etc...
Ahhh... This may be like waking up from a long drawn-out, bad dream; Only to find a pile of cash under your pillow where you recently placed all your teeth after the knock out punch the markets delivered in Fall of 2008... (Put a steak on it.)
Thursday, November 13, 2008
Charting Ideas...
When in doubt, I like to pull out the ol' ANDEX charts. The detail is exceptional when comparing past recessions and bear markets to inflation, GDP growth, price of oil, Presidential cycles, currency, and various unsystemic "shocks" that have occured throughout history (war, etc...).
It truly helps when trying to visualize and maintain mental positivity during times when Global Markets as a whole are cascading downwards... Seemingly endless...
SIDE NOTE:
Strategy - Don Cox
INVESTMENT RECOMMENDATIONS
1. It is definitely too late to sell stocks, and it is still too early to do more than nibble at bargains. Investors should be opportunistic buyers, because today’s prices for quality stocks will look ridiculously cheap within two years—or less.
2. When the time comes to begin re-accumulating equities, buy banks and diversified financials. If there is going to be a global economicrecovery, these former pariahs should perform well—under mostly newmanagement.
3. At the same time, buy commodity-oriented stocks. They are oversold to depths we could not have imagined. When, not if, there is a global economic recovery, these stocks will once again be the winning asset class.
4. While you are waiting, you should be beginning to accumulate the bonds—convertible and otherwise—of quality corporations. What could be the trigger for a major equity rally would be a sharp contraction in the near-record yield spread between investment-quality corporates and Treasurys.
5. Buy Emerging Market bonds from the fundamentally sound economies,such as China, India, and Brazil. Avoid Eastern European debt.
6. Another group to be included when you are once again accumulating stocks is the leading business-oriented tech stocks. These companies will participate in a global recovery, whereas the consumer-oriented techs may have to wait quite a while.
7. This is also a good time to be looking at the railroad stocks. They benefit from lower energy costs, which may offset a significant percentage of the cutback in top-line revenues during the recession. Coming out the other side, they should be core investments.
8. Gold has been a disappointment. It has outperformed stocks since the S&P’s peaks, but not enough to be profitable. As deflation fears ebb, it will once again be lustrous.
G'Luck!
Monday, November 10, 2008
November musings...
Well... There are many things that come to mind when sifting through the daily onslaught of information sent my way. At a pace of about a mile-a-minute, I scrounge through endless positives and negatives on the markets going forward. Establishing a solid stance is not easily attainable... There are "bulls" and "bears" out there... People whom are able to take a stubborn stance either on the daily trend, or counter intuitively to that trend, defiant in the face of individual and media driven adversity. How can one truly address the markets as "black or white"? As an Investment Professional, I must follow an unwritten doctrine to "buy low/sell high", and leave all personal feelings and emotions at the door. To follow a strict discipline and not get enticed into the "hype" of the masses. After all, that is how the few make money and the rest "donate" to the cause. But where to begin? 1. The Markets are Cheap: Buffett's buying... This sale is not going to come again for a life time. But, as a fellow colleague put it; "Sure the P/E of the markets are being touted as "cheap", but those ratios are not truly reflecting their actual values. Currently based on company earnings priced in "before" the full effects of credit-tightening, we must then discount the shorter-term, future earning of many of these companies, thus "increasing" the true P/E ratios of the Markets that we must consider at this point in time." So "cheap" is arguably a possible overstatement.
2. However, from an advisory standpoint, we must be the champions of positivity, and any immediate source of strength to our argument will act as catalyst to encourage sentiment going forward. After all, is it not the "ripple in the pond" effect we are looking to advocate in times of uncertainty and media sponsored negativity?
3. History. History. History. Like Law, the best of what we have is based on "precedence". And amazingly how often history does tend to repeat itself. The movie playing on the TV may be set in a different place or time (in this case maybe Mars), but the underlying story is the same. Most cannot see past that, and in turn buy into the school of catastrophe and unwarranted discern. We must be a student of the markets. We must also have the capacity to check emotions at the door to be able to see clearly the lines in history that prepare us for what's to come. (It's the best "crystal ball" we've got. And a conscious part of my developmental path as an advisor)
There was a great line from an interview with Nick Murray on defining a "Bear Market" that I would like to share: "A Bear Market is an extended period of time during which people who think this time is different, hastily sell their equity to people who know there is no difference.”
It seems like the "baby has been thrown out with the bath water" as masses of people flee the markets to the false safety of "cash". And in this I do agree that this "sale" will be one of the greatest opportunities of a life time.
Now... To only check those emotions at the door...
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