KASMAN: THE GLOBAL RECOVERY WILL BE SYNCHRONIZED
4 August 2009 by Cullen Roche
24 Comments
The strategists at JP Morgan have been VERY right and are VERY bullish going forward. Well worth a listen:
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Comments
You know TPC; it’s statements like these that make Reader Rob crazy. Can we stop with the “six of these and half a dozen of the other” and finally take a position?
A manly position will help.
Statements like what Dean? I’m not sure I follow. Are you implying that you’re confused about my position on the market?
Reader Rob hasn’t listened yet, but he is going crazy.
I have assumed since the S&P 500 hit 800 at the end of March that it might rise to about 1,000 or a bit more over the summer, but I didn’t jump on except in my trading account on where I was already on board from the beginning. The crap stock rally was amazing with doubles, triples, quadruples. I more or less jumped off at about 930 thinking that was more or less fair value and wanting to lock in gains (which I didn’t do so well in January). I expected some level of retest of of the November and March lows to maybe 750 or 800 before the market moved higher. On July 10, I still had that hope as all the talk was of technicals more than earnings. Then my hope was shattered by Merideth Whitney (even though she only really recommended one stock GS and other banks as trading plays, she was otherwise rather negative) and I moved too slow to react. Now I sit here dazed and confused.
Earnings really weren’t much better than expected overall and sales were in general worse than expected and no better than Q1. I still don’t believe that market really looks forward, it extrapolates the past (relative changes) on the future. Fair market value still lies in a broad range depending on the multiple and how rapid the recovery. I see upside potential of 1,200 and downside risk of 800 (possibly lower but settling there). We are now right in the middle, but that after a huge jump and at extreme levels of relative strength (+75). Nevertheless the directional bias still seems to be UP. Relative strength now is the inverse of what it was at the bottom of the September/October and February/March crashes (about 25). Are we about to take an express train to the summit or make an unexpected cliff dive? I believe the current assumption is that the trade will be between 950 to 1050 for a while.
My trading account is doing fine. My big concern is maintaining the purchasing power of the bigger slower moving stash and getting a reasonable return (say 3% to 4% on top of inflation while limiting unnecessary risk). After jumping out of equities in 2007, jumping in with both feet at the March lows seemed awfully risky, but in hindsight it sure looks like a low risk proposition compared to now. (I think I would have been willing to take more risk if I had had loses to make up.)
Will commodities continue to climb or crash once again? Will the dollar suddenly weaken (more than it did since the GDP report on Friday)? Back to 1.50 or even 1.60 EUR? Prices are all over the place. Some prices are rising rapidly, some have fallen to levels I haven’t seen in more than 10 years (for example, pork and beef). Are we near another inflection point?
Rob, what is your time horizon in these accounts? You keep referring to a retirement account….If that’s the case and you have 15 years + you should really just dollar cost average into a broadly diversified portfolio of stocks, bonds, commodities, and alternative assets.
If you’re timing the market then that changes things a bit, however, most investors aren’t cut out for timing….
TPC, Rob:
TPC, havent “we” been discussing this very issue of timing the market vs. dollar cost averaging and buy and hold? There was the one paper posted here on using the 200 day moving average as a timing mechanism. That paper looked quite strong. The draw down experienced by many of us even in our long term retirement accounts (20-30 yrs for me) was very large. Prevention of these draw downs is what we are after. As you have been pointing out TPC, true portfolio diversification should limit the draw downs, but does this mean timing, in some capacity, should be ignored? I’ll also suggest here that true diversification is nearly impossible in many employer retirement accounts even ones run my the Vanguards and Fidelity’s of the world.
-tyler
Rob,
Your feelings are quite understandable. We are at a phase in the market which from a technical perspective is referred to as a P2 move. It started at the March low of the infamous 666 and is projected to top anywhere between SPX 950 – 1150. As we stand today the minimum area of this retracement (let’s not forget we are in a bear market rally so the secular trend is down) has been satisfied. Most analysts expect a final push which will resemble the parabolic rise of the July 13th mini rally that would result in a “blow off” top.
Your concerns, if you allow my summary, are as follows:
. How do we know that this rally will come to an end and that this is not the beginning of a brand new bull phase sustained by easy money Fed policy or a resort to equities stemming from inflationary pressures?
. What is the best time to get on board before the train leaves the station for good?
. Is “buy the dips” the appropriate strategy?
. What if the market heads south instead?
These are all good questions and very similar to the general investor mindset of today.
Let me try to address them indirectly by punctuating what we know from previous experience:
1. During a P2 rally there will be an emotional recognition that “this is it”; the greatest rally ever and that “we have to participate”. Once you recognize this propensity in others then this is a very strong signal that you must exit and disengage from the “wisdom of the majority”.
2. The majority of the rally is behind us not ahead of us. Whether there is another 15%-20% to go and whether it is worth for you to participate in the frothy top is up to you(judging from your reasoned responses to economic data and the quality of your analyses, I would venture to say that this final phase is perhaps better avoided).
3. Inflation or deflation? Even though this summer has fueled some inflationary fears as reflected in commodities and resource based companies, at least for the next six months to a year deflation most likely will prevail. It is conceivable that further stimulae might be introduced (fanning inflation fears) but not likely. Government receipts are at an all time low and our deficits will need to be managed carefully from this point on. Don’t forget that the cover for the last stimulus package was an economy falling off the cliff. Since now we know this is not happening, politicians will be less eager to approve further expenditures (not as easy anyway as with the urgency of the first package).
4. A synchronized global recovery. To achieve such we need to revert become to a rigorous consumption society capable of absorbing the trade exports of other nations. This attempt will fail because the American consumer is no more nor we will be able to recreate an economy based on 70%+ consumption.
Therefore, treat the present reality as a period of adjustment with the end product emerging as a transformed economic reality. No one knows what such reality would be, however, I can attest with some certainty that it is not going to be familiar.
Nice thoughts Dean.
TCP:
My opening statement was supposed to be humorous and thus avoid your wrath(at all cost).
By the way of illustration to Rob, this is a potential road map of where we are headed:
http://4.bp.blogspot.com/_TwUS3GyHKsQ/SnjbYsEvXAI/AAAAAAAABS8/0J0yhfWDtXk/s1600-h/DOW.png
TPC,
I have multiple time horizons. I have a trading account with which I have been simply trying to take advantage of the volatility. That has been going fine but it is a small portion of my liquid net worth. (It started out at 3% and is now about 10%)
I have taxable accounts which. I will some of that need those if I lose my job for some reason, decide to retire or partially retire early (i.e. before 59 1/2) and I have a 401K which I can’t touch for 15 years. (i.e. 59 1/2). (The mutual funds available to me in my 401K are quite limited. They basically mirror the markets – but are style based – growth, international, emerging markets, large cap, value.)
I went from an overall asset allocation of about 80% stocks, 10% bond and 10% cash to 5% high quality stocks, 25% bonds (mostly short to intermediate term) and 70% cash in 2007. I live in the housing crisis central so it seemed obvious to me that this crisis was (and still is) underestimated. I liquidated my stock mutual funds in my 401K because they are were full of financial stocks.)
Getting out was easy. Capital preservation at all cost became my goal. Getting back in has been tough as hell. I watched the portfolio of stocks (taxable accounts) and mutual funds (401K) that I previously had drop in half by March versus when I sold. I saw the great buying opportunity in late 2008 and early 2009, but became very risk averse. At the same time, I know my large cash position is risky in and of itself.
I have been trying to time the entry point to build up my stock portfolio again. My timing has been terrible. I watched the market drop and drop until the week of March 9, but when the market shot up on March 10, I got cold feet. I have been buying tentitively waiting for pullbacks and a potential retests of the lows – in vain. Now I am almost panicking.
My intention had been to dollar average in but I have stupidly been trying to time the market. I felt stupid buying after the market was up 15%, then 30%, now I feel stupider after the market is up 50%. At the same time, I realize that by the time the markets reaches their level of late 2007 again, even if I invest now I will see a 55% capital appreciation plus dividends.
My fear now is that if I don’t make a big plunge soon, the market will run up further. At the same time, if I buy now (after the big run-up), the market will pullback and I will feel stupid for having bought. So I have been buying but still very tentitively (too slowly), still convinced that there must be a pullback, a correction, a better opportunity than today.
Dollar cost averaging and periodic asset reallocation is easy in a gently upward sloping market with mild ups and downs, but is much harder to stick to in a market with wild manic depressive swings.
I can’t figure out which is greater my fear of loss or fear of lost opportunity.
Not only do I have paralysis by analysis but I have a damn hard time admitting I made a mistake.
Rob,
I have some more thoughts for you in a second, but first:
Dean, can you please try to justify why Elliott Wave works (that is what you’re using right?). I have never quite been able to have anyone explain why Elliot Wave works…..
I’m sincerely curious….
TPC:
Let me first say that I am not an EW proponent; at least not yet. In some of the technical blogs I frequent (most prominent among them Daneric and Kenny’s technical blogs), I pose as a skeptic advancing the position that EWT is not a predictive art rather a post-dictive pattern recognition, meaning that after the fact there is always a recognizable wave count that applies (before the fact there are more than one alternate counts).
My skepticism aside, the whole theory is based on nature’s patterns that are everywhere from plants, animals and the human body. The ancient Greeks used it as the Golden ratio (the dimensions of Athenian Acropolis/Parthenon) and then the theory was further expanded in the Middle Ages by an Italian mathematician called Fibonacci. Today; we label the various waves as the Fibonacci sequence and it’s part of the accepted technical analysis tools.
PBS’s Nova dedicated an hourly program to this phenomenon calling it the “Hidden Dimension”. I think after watching this program one should at least accept its universal existence:
http://www.pbs.org/wgbh/nova/fractals/
How do we apply this in the stock market moves, this is a bigger question albeit for some an answer exists. I am still searching.
The reason I posted the graph for Rob was to show an illustration of the most likely market move based on the theory of fractals. Even if you don’t believe in them, they are based on a mathematical model worthy of some respect.
TPC:
It works because it measures well the ebbs and flows of sentiment and social moods, which as you surely know are the movers behind the markets. Anyone who tells you it’s a crystal ball in and of itself is full of $hit. It’s a useful tool, but by no means a perfect road map.
HT
Dean,
You scare the $@%#@ out of me….with your technical chart. I can see S&P500 at 550, but such a collapse would almost require very high interest rates or a further collapse of the financial system.
Once we reached the end of March and I realized that I missed the first 15%, I started searching for where this might be headed (history of other bear markets, techicals, valuation of the S&P 500). I figured that we might see a rally of 30%-35% before some sort of correction. But I saw that many predicted a rally over the summer to 1,000 or a bit higher (even David Rosenberg).
I got very hopeful in mid June as markets world-wide started to fall slowly until July 10. I listened to the crap about the broken neckline on the head and shoulders formation and the difficulty that the S&P had getting over its 200 day EMA. The top-down estimates for Q2 earnings of $11.05 (not updated with changes in index composition).
I saw that in the other major bear markets there was a successful retest of the lows. Tyically a 75% to 80% retracing of the rally off the lows regardless of the magnitude. (example 1932: low at 41, rally to 80 – almost 100%, retest to 50.)
A JPM Morgan strategist wrote in April that they expected a retest of the lows and that they would be major buyers into the retest.
I was just looking for a low risk time to buy. A sweet spot.
Now there seems to be euphoria on Wall Street and the market is on a tear, but I still ask based on what? What is the real difference between July 10 and July 13? I just don’t see it in earnings. I am still convinced that the markets are trading on liquidity and technicals more than fundamentals. The lack of doubters in the rally is starting to worry me although it seems like the bullishness and relative strength might a good contrarian indicator.
After having saved my net worth, by avoiding the bear market beginning in 2007 (as well as not buying a house when I moved to California in 2006), I have become afraid to jump in again. I am in the process of buying a house (even though I think prices will probably continue to fall, because I just can’t wait anymore.) Rebuilding the stock portfolio in such an environment makes me even more apprehensive even though I have it in the back of my head that I need a diversified portfolio including a sizable proportion of stocks. Warren Buffet pops up in my dreams. Cash will ultimately be trash.
At the same time, I truly believe that recovery will not be swift and lasting and will be frought with setbacks. Like a title from yesterday, deleveraging is a freight train. I don’t believe that demand from China and emerging markets will pull the developed world out of a slide into a deeper recession. The foreclosure crisis may be more in front of us than behind. The commercial real estate crisis is definitely more in front of us. The effects of the large increase in long-term unemployment have not even begun to be felt.
It seems we will move from bubble to bubble. Last year, commodities, then treasuries, now commodities and stocks. Gold is in its own mini-bubble on worries of future inflation. Waves of inflation worries, then deflation worries, then inflation/deflation worries. Decoupling, recoupling, decoupling, now recoupling in recovery…….
Rob, I think a lot of people are in your position. I also think that basing your decisions on fear usually makes you lose. Remember, there are always opportunities in the stock market. If you are too confused right now, then just look around. Don’t feel OBLIGATED to buy stocks just because you feel left out. YOu could also try some option strategies that work in volatile markets such as straddles and strangles which can allow you to profit if the markets move up or down…
Make sure you watch the video:
http://www.pbs.org/wgbh/nova/programs/ht/tm/3514.html?site=34&pl=wmp&rate=hi&ch=1
Nice discussion. Does EW work in an asset bubble scenario?
TCP:
This is a synopsis of patterns re: Stock market moves based on EWT:
http://www.elliott-wave-theory.com/elliott2.html
P.S.I am not good at pattern recognition.
Rob,
I think there are tons of folks feeling the same as you – me being one of them. I dont have near as much to add compared to you or others here. I tend to do more reading than digging on my own. Like you though, I tend to read the more conservative educated material – TPC, Rosenberg, Hussman, etc. Sometimes I wonder if I ought to be reading the opposite! Like you, Ive been waiting for the pullback, but fear I will be waiting for another 25%. It is hard to not say screw it and jump in. After all, it appears that the market can do no wrong right now. And .. all this talk about fund managers jumping in so as not to miss it all … On the last couple of small pullbacks I have not bought simply because I feared or was waiting for a more significant pullback than what was being observed. The whole thing has got be distressed as well.
On this audio, I don’t think this guy is overly bullish long term. He is very uncertain about the future, but he has a lot of faith that these initiatives that are being thrown at the economy are going to do a lot for the economy and even push it to HIGHER than expected growth. Hmmm…that’s a big gamble. I think either way is a big gamble. But, the trend is clearly up. There probably needs to be something like a 5% correction based on some technicals and then more rallying. I actually hope he is wrong that the economy grows more than expected because I know it will be in all of the wrong areas (like commodity prices rather than employment). The biggest gamble of all is being taken by the Fed that inflating the markets (equities, commodities, foreign exchange, credit, bonds) will make things better in the real economy.
Rob,
I share your anxiety. I’ve been ever so slowly selling into the market each time when it reach a new high the last two week. I still has an equity position in case it gets higher still. But I am so risk adverse that I don’t care if I miss 10-15%. I try to focus on the macro view that I’ll be able to get back in at a much lower price in fall, the end of this year or next year. I am very scare of inflation because I am a saver. My current stragegy to fight inflation is to take a vacation with love ones since it will certainly cost me more in the future. In the mean time I lock in the current cost of my vacation and have a wonderful time and invaluable memory with my family. We went hiking in the Easten Sierra and Point Reyes National Seashore and live in the moment and ponder how happy and lucky we are to see such incredible breath taking beauty that can not be duplicate by man and it’s free minus the gas and legwork. Nature has a way to calm and restore my soul and gives me perspective.
Thank you for all your comments. I felt like I get to ear-drops on an investment club with readers that’s so much more knowledgible than me and I get to steal good ideas.
Dean,
Thank you for the explanation of the elliott wave. I have always wonder what that means. I watched the PBS program about the hidden dimension also. They say that Leonando DeVinci use that ratio for his drawing of the perfectly proportion man.
Jenny,
I think you have the best idea of all. I should take a vacation.
Sometimes it feels like a giant poker game. Mr.Market is bidding up the pot and the rest of us are trying to read him for clues. Trendlines, economic data, volume, indicators – these are all clues – does he have the cards or is he bluffing.
Also remember, with any poker player history is key. Things maybe different now than in 1930 & Japan circa 1990, however, are they that different. Are we doing the same things? – is behavior the same (QE, zombie banks). In those instances, the markets fell, rose, fell and continued down. Like a saw blade rising and falling except the tip was pointed down.
So, can we use Mr. Market’s past behavior in similar situations (1930,Japan) plus current indicators (over confidence, continuing to raise the pot) as clues.
At some point, the cards have to be played and to me it looks like a bluff. But then again he has all my chips so there you go.
Jeff, great analogy of the poker game. A real run above S&P 1000 would feel like a total bluff to me, especially if we don’t find our way back to 900 first. I wouldn’t go all in but I’d definitely call. But, if Mr. Market is the house, he has significant advantages.
Jenny, that’s terrific. For those of us who can afford it, a low-cost family vacation is a genuinely fine response to intermediate to long term inflation fears. My (expecting) wife and I are taking Amtrak from Oakland, CA to Denver, CO to visit my family – with stops in Reno and Aspen (only a 30 minute bus ride from Glenwood Springs). I haven’t booked the hotel yet because Priceline isn’t finding takers for my bid for the middle of the week before labor day. I wonder if they would for a week after labor day?
Rob, yeah, maybe you do need a vacation. I can’t imagine that you’ve missed an extended bull here or that you’re going to still dwell on missing this run five years from now. On the other hand, I would bet on you being more than pleased that you still had the capital you got out in 2007. And that by then you will have invested at better prices than the moment.
One and done here? Now? I’m not gonna bet on that…