As the investor roller coaster ride continues, some are wondering if they can just get off the dizzying ride. For those who can’t deal with the pain any more, no amount of data that is trotted out about going to cash will change their minds. With that said, there are a bunch of investors who are hunkering down and making peace with the bear market.
Let’s start with yesterday’s dismal performance. Now that investors are not consumed with the melt-down of the entire financial system, they are turning their attention to the economy. Given the past year, you can’t blame people for fearing the worst—and the worst would be a lengthy and deep recession accompanied by massive job losses (unemployment rate is projected to reach at least 7.5-8%). As a result, the Dow Jones Industrial Average posted its seventh-biggest point drop in history, plummeting 514.45 points, or 5.7%, to close at 8519.2, a level not seen in nearly five years. The Dow re-tested previous lows, but rallied before the bell. Still, the index has given back 746 points over the last two sessions. The day followed steep losses overseas, as many emerging markets tumbled 10%.
The recession fears spilled into commodities markets, led on the downside by crude oil. The reasoning is simple: if economic growth is going to slow, then the demand for raw commodities will fall. Crude dropped $5.43, or 7.5% a barrel to $66.75, its lowest point since June 2007 and drop of 54% since July 3. Gold futures declined sharply on the back of a strengthening dollar. Gold dropped below important technical chart levels, which accelerated selling pressure. December gold fell $32.80, or 4.2%, to settle at $735.20 an ounce. Other metals that are more sensitive to economic cycles—copper fell to its lowest level since 2005.
So where does that leave those who are still on the investment roller coaster? Well a bit nauseous, but still breathing. This tireless bunch is able to look to the future and recognize that when the government puts massive dollars into the system, it will eventually help out. The two trillion plus dollars (the bailout plus AIG, Bear Stearns and the commercial paper facility) as well as rate cuts should resuscitate the system -- eventually. Once banks are revived from their lending comas, they will actually lend again. Long term investors know that stimulus takes six to 18 months to have its effect on the economy. Additionally, there is a bunch of cash (estimates run over $10 trillion) sitting on the sidelines as investors take comfort in money market funds and T-bills. This money needs to grow and in a zero interest rate environment the money is likely to find itself back into the stock market.
None of this will happen immediately, but as we become more accustomed to the daily gyrations and the Dow Jones Industrial Average firmly ensconced below that 10,000 level, long term investors are bearing down and hunkering down for a long haul. They are likely to be rewarded for their patience.
Thursday, October 23, 2008
Wednesday, October 22, 2008
Get Over It
Question: Who is happy about the travails that have swept through Wall Street and Main Street? Answer: Absolutely nobody. And while we need to review how we got to this place so that we do not return any time soon, the blame game does not serve our national interest at this critical point.
Yet there seems to be a need to point fingers: it’s the government’s fault-why is homeownership inextricably linked to the American Dream anyway?; it’s the Democrats’ fault for empowering Fannie Mae and Freddie Mac to act imprudently and getting too big; it’s the Republicans’ fault for easing the regulatory environment; it’s Wall Street banks’ fault for creating highly complex securities that utilize massive leverage; it’s the lender’s fault-under what system is it a good idea to hand over piles of money to folks who have low/no income and no asset base?; it’s the borrowers’ fault-these folks could not manage to buy a house that they could afford. Bottom line: there is plenty of blame to go around.
One group that feels highly indignant is those Americans that acted responsibly throughout the boom period. These good eggs were forced to listen to their neighbors’ crow about rising real estate values of their Florida condos. They are probably the same group that did not purchase internet stocks in a big way, but instead trudged along with good, but not over-the-top returns. These are the silent majority of taxpayers – they also seem to be seething about the current crisis facing the financial system.
The questions/comments that I have heard from this group are: “Why should I bail out Wall Street fat cats who earn millions of dollars?”, “Why does my tax money have to help a stupid borrower refinance his loan when nobody cares about the rate that I have for my loan?”, “we have to stop saving everyone. Only when the careless risk takers pay the price will they learn the hard lessons that will prevent stupid behavior in the future.” The last sentiment is the “moral hazard” argument, which strict ideologues trot out to underscore that “the free market system will take care of everything in the end.”
I understand and even identify with these core beliefs, but not enough to watch our gorgeous, flawed system end up in the toilet for a decade. We have seen the results of the free market in the aftermath of Lehman Brothers’ failure—a crippled financial system and a stock market in free fall: is this what we want or need? I don’t think so.
And for all of the prudent folks out here—you know, the ones that live within their means, put down at least 20% when we purchase real estate and diligently maximize their retirement contributions, as Joe Nocera pointed out in the New York Times, these people “need to get over themselves. If housing prices keep falling, many millions of additional homeowners will find themselves, through no fault of their own, with underwater mortgages. Besides, foreclosures damage property values for everyone, not just those losing their homes.” Finally, the best part is that those who have lived their lives responsibly will be the ones who can profit when the recovery occurs.
Yet there seems to be a need to point fingers: it’s the government’s fault-why is homeownership inextricably linked to the American Dream anyway?; it’s the Democrats’ fault for empowering Fannie Mae and Freddie Mac to act imprudently and getting too big; it’s the Republicans’ fault for easing the regulatory environment; it’s Wall Street banks’ fault for creating highly complex securities that utilize massive leverage; it’s the lender’s fault-under what system is it a good idea to hand over piles of money to folks who have low/no income and no asset base?; it’s the borrowers’ fault-these folks could not manage to buy a house that they could afford. Bottom line: there is plenty of blame to go around.
One group that feels highly indignant is those Americans that acted responsibly throughout the boom period. These good eggs were forced to listen to their neighbors’ crow about rising real estate values of their Florida condos. They are probably the same group that did not purchase internet stocks in a big way, but instead trudged along with good, but not over-the-top returns. These are the silent majority of taxpayers – they also seem to be seething about the current crisis facing the financial system.
The questions/comments that I have heard from this group are: “Why should I bail out Wall Street fat cats who earn millions of dollars?”, “Why does my tax money have to help a stupid borrower refinance his loan when nobody cares about the rate that I have for my loan?”, “we have to stop saving everyone. Only when the careless risk takers pay the price will they learn the hard lessons that will prevent stupid behavior in the future.” The last sentiment is the “moral hazard” argument, which strict ideologues trot out to underscore that “the free market system will take care of everything in the end.”
I understand and even identify with these core beliefs, but not enough to watch our gorgeous, flawed system end up in the toilet for a decade. We have seen the results of the free market in the aftermath of Lehman Brothers’ failure—a crippled financial system and a stock market in free fall: is this what we want or need? I don’t think so.
And for all of the prudent folks out here—you know, the ones that live within their means, put down at least 20% when we purchase real estate and diligently maximize their retirement contributions, as Joe Nocera pointed out in the New York Times, these people “need to get over themselves. If housing prices keep falling, many millions of additional homeowners will find themselves, through no fault of their own, with underwater mortgages. Besides, foreclosures damage property values for everyone, not just those losing their homes.” Finally, the best part is that those who have lived their lives responsibly will be the ones who can profit when the recovery occurs.
Tuesday, October 21, 2008
Buffett Bounce
Just because the stock market rises on any given day does not mean that the bad times are done. In fact, I will be the first to point out that one day does not amount to a trend, but these are trying times, so we’ll take it! Chalk it up to sheer exhaustion, more buyers than sellers or perhaps a “Buffett Bounce,” but stocks actually increased in value yesterday without the government announcing a new zillion dollar rescue plan.
Yes the stock market continues to be oversold on a technical basis, but this article is about Mr. Buffett, a guy who is used to putting his money where his mouth is. In Friday’s New York Times, Buffett wrote an Op-Ed entitled “Buy American. I Am.” Although the title seems patriotic at first glance, country is not what prompted Buffett to pen this article—greed was his motivator. As Buffett likes to say “Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
Buffett was not suggesting that buying in this particular moment would amount to instant riches. Indeed, the stock market actually fell on the day that Buffett’s article was published, so my “Buffet Bounce” is a stretch. Additionally, his two recent investments in Goldman Sachs and GE are under water, which may be why he admitted that he “can’t predict the short-term movements of the stock market.” But in his personal account (not Berkshire Hathaway), where he has been parking money in government treasury bonds, he is now selectively adding to his stock position. Buffett anticipates that his non-Berkshire net worth will “soon be 100 percent in United States equities.”
What would prompt someone like Buffett to encourage the masses in such a way? My guess is that he sees himself as a teacher, a market Yoda, if you will. Buffett is a cool head that is prevailing amid panicky investors, both individual and professional. He sees green in a sea of red: “fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.” There is a disclosure that accompanies Buffett’s advice: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over…bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price…over the long term, the stock market news will be good.”
OK, so maybe we can’t all be Warren Buffett—we don’t have billions, nor do we have a perpetual time horizon. But he does make valid points about valuation and emotions surrounding the current period. He specifically calls out those who have succumbed to the pressure and bailed out of the market all together. Buffett notes that “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.” A billionaire who invokes the Great One? It sure is hard to argue with that!
Yes the stock market continues to be oversold on a technical basis, but this article is about Mr. Buffett, a guy who is used to putting his money where his mouth is. In Friday’s New York Times, Buffett wrote an Op-Ed entitled “Buy American. I Am.” Although the title seems patriotic at first glance, country is not what prompted Buffett to pen this article—greed was his motivator. As Buffett likes to say “Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”
Buffett was not suggesting that buying in this particular moment would amount to instant riches. Indeed, the stock market actually fell on the day that Buffett’s article was published, so my “Buffet Bounce” is a stretch. Additionally, his two recent investments in Goldman Sachs and GE are under water, which may be why he admitted that he “can’t predict the short-term movements of the stock market.” But in his personal account (not Berkshire Hathaway), where he has been parking money in government treasury bonds, he is now selectively adding to his stock position. Buffett anticipates that his non-Berkshire net worth will “soon be 100 percent in United States equities.”
What would prompt someone like Buffett to encourage the masses in such a way? My guess is that he sees himself as a teacher, a market Yoda, if you will. Buffett is a cool head that is prevailing amid panicky investors, both individual and professional. He sees green in a sea of red: “fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.” There is a disclosure that accompanies Buffett’s advice: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over…bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price…over the long term, the stock market news will be good.”
OK, so maybe we can’t all be Warren Buffett—we don’t have billions, nor do we have a perpetual time horizon. But he does make valid points about valuation and emotions surrounding the current period. He specifically calls out those who have succumbed to the pressure and bailed out of the market all together. Buffett notes that “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.” A billionaire who invokes the Great One? It sure is hard to argue with that!
Monday, October 20, 2008
A Superlative Week
It was the best of times, it was the worst of times…it was simply a superlative week. Highs, lows, record moves and of course a healthy dose of hope, fear and dashed expectations were the highlights. It is indeed understandable if you are a bit unnerved by the roller coaster action of the week.
Last Monday, US stocks saw their biggest one-day percentage gain (11-12%, depending on the index) since the Great Depression on the heels of the government’s historic plan to restore confidence and strengthen the US banking system. By Wednesday, the plan lost luster as investors quickly shifted from systemic fear to the problems that exist in the core economy. As a result, stocks had the biggest one-day percentage loss since the Crash of 1987. In between, volatility, as measured by the VIX, reached its highest level EVER. By the end of the week, most were happy that it was just over and some may have noticed that stocks were higher for the first week in five. In fact, it was the Dow’s best weekly gain since March, 2003 and the first weekly gain since Lehman Brothers collapsed, but that is tempered by the fact that it followed the worst week ever for the Dow, which ended the previous Friday (Oct 10) with the lowest close since April 2003.
A Victorian commentator once noted that “Every genuine business panic springs from the same root, which is rank speculation.” Add to that idea that every panic is marked by a sense that the financial system is close to complete collapse and you can guess that the unwinding of speculation becomes super-charged when fear is added to the equation. These are times when loss aversion supplants profit potential as the dominant investor motivator.
In other words, the inverse of a speculative boom is a fear-driven panic, when as Edward Chancellor in the Financial Times, (10/14/08) noted that “excessive confidence is replaced by extreme fearfulness and a nervous distrust takes the place of blind trust.” Or as James Stewart noted in the Wall Street Journal, a panic resembles a bubble: “Just as in a bubble, price/earnings ratios were now irrelevant, because earnings were going to be so much lower than forecast. (In a bubble they're going to be higher.) People were saying confidently that the Dow Jones Industrial Average was going to 6000. (It was 20000 in the bubble.)”
In times of extreme price action, I always come back to the same theme: there are two dominant emotions in this business: fear and greed. For the sane investor, the challenge is to avoid getting caught up in either extreme. On the way up, you need to shut down the cheerleaders, stick to your game plan and not get sucked into buying the speculative top of any asset class. Conversely, on the way down, you need drown out the Cassandras, adhere to your long-term strategy and not get suckered into selling the fear-based lows. This does not mean that you should not adjust your portfolio as conditions change, but not succumbing to extreme emotions is likely to keep you out of trouble, especially during superlative weeks.
Last Monday, US stocks saw their biggest one-day percentage gain (11-12%, depending on the index) since the Great Depression on the heels of the government’s historic plan to restore confidence and strengthen the US banking system. By Wednesday, the plan lost luster as investors quickly shifted from systemic fear to the problems that exist in the core economy. As a result, stocks had the biggest one-day percentage loss since the Crash of 1987. In between, volatility, as measured by the VIX, reached its highest level EVER. By the end of the week, most were happy that it was just over and some may have noticed that stocks were higher for the first week in five. In fact, it was the Dow’s best weekly gain since March, 2003 and the first weekly gain since Lehman Brothers collapsed, but that is tempered by the fact that it followed the worst week ever for the Dow, which ended the previous Friday (Oct 10) with the lowest close since April 2003.
A Victorian commentator once noted that “Every genuine business panic springs from the same root, which is rank speculation.” Add to that idea that every panic is marked by a sense that the financial system is close to complete collapse and you can guess that the unwinding of speculation becomes super-charged when fear is added to the equation. These are times when loss aversion supplants profit potential as the dominant investor motivator.
In other words, the inverse of a speculative boom is a fear-driven panic, when as Edward Chancellor in the Financial Times, (10/14/08) noted that “excessive confidence is replaced by extreme fearfulness and a nervous distrust takes the place of blind trust.” Or as James Stewart noted in the Wall Street Journal, a panic resembles a bubble: “Just as in a bubble, price/earnings ratios were now irrelevant, because earnings were going to be so much lower than forecast. (In a bubble they're going to be higher.) People were saying confidently that the Dow Jones Industrial Average was going to 6000. (It was 20000 in the bubble.)”
In times of extreme price action, I always come back to the same theme: there are two dominant emotions in this business: fear and greed. For the sane investor, the challenge is to avoid getting caught up in either extreme. On the way up, you need to shut down the cheerleaders, stick to your game plan and not get sucked into buying the speculative top of any asset class. Conversely, on the way down, you need drown out the Cassandras, adhere to your long-term strategy and not get suckered into selling the fear-based lows. This does not mean that you should not adjust your portfolio as conditions change, but not succumbing to extreme emotions is likely to keep you out of trouble, especially during superlative weeks.
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