With economic woes dominating the headlines, we sometimes forget about all we have. As you sit down with your families tomorrow to celebrate Thanksgiving, try to put aside talk of recession/depression/deleveraging/credit crisis/reduced bonuses and recall all of the gifts in our lives.
On balance, most of us are fortunate to have what we have. We live in the best country in the world, where we are free to dissent with those in power and which just experienced a historical election. Most of us have decent jobs that allow us to provide shelter, food and a pretty nice lifestyle. We may not be making a ga-zillion bucks, but we are blessed. My advice for you as we enter the heart of the holiday season is to remember all that is good in your life, not what is lacking.
My Aunt H likes to recount the following prayer: "Thank you God (you can replace with goddess, energy force or just say thanks to the universe) for giving us every single thing we need and most of what we could ever want."
Believe me, it's how I feel on a daily basis.
Thanksgiving Blessings to you and all your loved ones.
This will be the last daily “StrategicPoint of View” column. Going forward we will be consolidating our written communications into a weekly investment analysis each Monday, which will be supplemented by special articles and updates as necessary.
Wednesday, November 26, 2008
Tuesday, November 25, 2008
Crying Like It’s 1931
Despite the last two trading days and the gains seen in stocks, here is a bit of sobering news: according to the Wall Street Journal’s Jason Zweig, over the last two weeks ending November 20, the Dow Jones Industrial Average fell 16%. Over the two weeks ended November 20, 1931, the Dow fell 16%. Over in the broader S&P 500, the news is worse: only twice before this year has the S&P 500 lost more than a third of its value in calendar year—both of those previous instances occurred during the Great Depression, down 41.9% in 1931 (there’s that year again!) and 38.6% in 1937.
With these kinds of statistics, it’s hard not to think that we are once again facing a Depression. More rational heads will point out that in 1931, the US economy, as measured by gross national product, plunged by 14.7%, while this year, the economy contracted by 0.5% in Q3 and then probably by something in the range of 3-4% in Q4, which is not good, but it sure is a far cry from losses in the teens. In 1931, one of every six Americans was unemployed, while today one out of sixteen is unemployed.
This is not to say that all is well. This is shaping up to be the worst recession since the nasty bugger in 1981-2. More jobs will be lost, companies will go out of business and some families will lose their homes. For those who look to capital markets to find a clue about the future, the news is not much better. The US bond market now expects that the world’s largest economy will suffer deflation for the next decade; as noted above, the S&P 500 is on pace to suffer its worst decline since 1931; and for the first time in 50 years, the dividend yield on the S&P 500 now exceeds the yield on the 10-year Treasury bonds. Of course, if you have a strong constitution and an even tougher stomach, you might note that when fear trumps greed to the extent that we can see at present, it often provides opportunities for contrarian investors to buy cheap.
Perhaps you do not trust global markets to guide you. If that’s the case, you may try a different indicator: a psychic. According to the New York Times (11/23/08), many investors are eschewing trading cards for tarot cards. “Psychics say their business is robust, as do astrologers and people who channel spirits, read palms and otherwise predict the future…after all, the nation’s supposed experts on the economy…have not exactly been reliable.”
Maybe the psychic won’t be able to tell you whether it’s 1931 all over again or not. Even without tarot cards the end of year period is likely to see more “deleveraging”, “disintermediation” and “forced selling”, meaning that as losses mount, investors or institutions that have borrowed money will sell to avoid further losses or even bankruptcy. Unfortunately, unleveraged, long-term investors (like most of the sane world) will continue to be forced to suffer through further mark-to-market losses, but will likely be rewarded over time as markets return to more normal behavior. 1931 may or may not come back to haunt us, but one factoid that drew my attention from the year: Frankenstein, starring Boris Karloff was the top grossing film of the year. Now that seems appropriate.
With these kinds of statistics, it’s hard not to think that we are once again facing a Depression. More rational heads will point out that in 1931, the US economy, as measured by gross national product, plunged by 14.7%, while this year, the economy contracted by 0.5% in Q3 and then probably by something in the range of 3-4% in Q4, which is not good, but it sure is a far cry from losses in the teens. In 1931, one of every six Americans was unemployed, while today one out of sixteen is unemployed.
This is not to say that all is well. This is shaping up to be the worst recession since the nasty bugger in 1981-2. More jobs will be lost, companies will go out of business and some families will lose their homes. For those who look to capital markets to find a clue about the future, the news is not much better. The US bond market now expects that the world’s largest economy will suffer deflation for the next decade; as noted above, the S&P 500 is on pace to suffer its worst decline since 1931; and for the first time in 50 years, the dividend yield on the S&P 500 now exceeds the yield on the 10-year Treasury bonds. Of course, if you have a strong constitution and an even tougher stomach, you might note that when fear trumps greed to the extent that we can see at present, it often provides opportunities for contrarian investors to buy cheap.
Perhaps you do not trust global markets to guide you. If that’s the case, you may try a different indicator: a psychic. According to the New York Times (11/23/08), many investors are eschewing trading cards for tarot cards. “Psychics say their business is robust, as do astrologers and people who channel spirits, read palms and otherwise predict the future…after all, the nation’s supposed experts on the economy…have not exactly been reliable.”
Maybe the psychic won’t be able to tell you whether it’s 1931 all over again or not. Even without tarot cards the end of year period is likely to see more “deleveraging”, “disintermediation” and “forced selling”, meaning that as losses mount, investors or institutions that have borrowed money will sell to avoid further losses or even bankruptcy. Unfortunately, unleveraged, long-term investors (like most of the sane world) will continue to be forced to suffer through further mark-to-market losses, but will likely be rewarded over time as markets return to more normal behavior. 1931 may or may not come back to haunt us, but one factoid that drew my attention from the year: Frankenstein, starring Boris Karloff was the top grossing film of the year. Now that seems appropriate.
Monday, November 24, 2008
A Rally for Andy
My friend Andy used to be completely obsessed with the stock market. He rode the dot-com bubble all the way up and felt the crushing blows on the way down. He found himself right back in the fray until a little over two years ago, when his 40 year old wife died suddenly. Since then Andy admits that he has become a much better investor.
How could such a tragedy transform his financial acumen? The answer lies in the deep emotional current that swirls in every investor’s mind and belly. In the past, Andy would watch each position, tick for tick. He would often experience a kind of euphoria when a trade went well, only to second-guess himself when it went sour. He knew that it was a debilitating cycle, but he could not get out of it.
Then the unimaginable occurred, putting him and his whole family through a nightmare. After his wife’s death, Andy did not have the same passion for investing. He stopped watching CNBC every day and monitoring his accounts on a minute-by-minute basis. Instead, he would call me every quarter or so to discuss the overall economy and asked for advice about general market trends. He no longer purchased individual securities, turning instead to index funds and even began to use bonds and commodities in the portfolio to help diversify some of the risk. Interestingly enough, his performance improved, both on the upside and the downside.
When we met for lunch on Friday, he said that he was not worried about the stock market or even the economy. “Of course it’s terrible for people to lose jobs and for families to suffer, but I am convinced that we’ll get through this period. This country has been through worse—heck, I have been through much worse and you know what I found out? That I can survive the worst and still wake up the next morning to see the sun shining and the world turning. Tell your blog readers, radio listeners and everyone on TV that Andy says that everything is going to be OK.”
It seemed fitting that when Andy and I were having lunch, the stock market was down a touch, but by the end of the day, it reversed course and experienced a powerful rally. The Dow closed 494.13 points higher, up 6.5%, at 8046.42 and the S&P 500 was up 6.3% to 800.03. Yes, it was a terrible week, but for at least one day, Andy was right: everything was OK. It’s not a bad lesson for the rest of us: a little distance might help everyone get through this with more of our wits about us.
How could such a tragedy transform his financial acumen? The answer lies in the deep emotional current that swirls in every investor’s mind and belly. In the past, Andy would watch each position, tick for tick. He would often experience a kind of euphoria when a trade went well, only to second-guess himself when it went sour. He knew that it was a debilitating cycle, but he could not get out of it.
Then the unimaginable occurred, putting him and his whole family through a nightmare. After his wife’s death, Andy did not have the same passion for investing. He stopped watching CNBC every day and monitoring his accounts on a minute-by-minute basis. Instead, he would call me every quarter or so to discuss the overall economy and asked for advice about general market trends. He no longer purchased individual securities, turning instead to index funds and even began to use bonds and commodities in the portfolio to help diversify some of the risk. Interestingly enough, his performance improved, both on the upside and the downside.
When we met for lunch on Friday, he said that he was not worried about the stock market or even the economy. “Of course it’s terrible for people to lose jobs and for families to suffer, but I am convinced that we’ll get through this period. This country has been through worse—heck, I have been through much worse and you know what I found out? That I can survive the worst and still wake up the next morning to see the sun shining and the world turning. Tell your blog readers, radio listeners and everyone on TV that Andy says that everything is going to be OK.”
It seemed fitting that when Andy and I were having lunch, the stock market was down a touch, but by the end of the day, it reversed course and experienced a powerful rally. The Dow closed 494.13 points higher, up 6.5%, at 8046.42 and the S&P 500 was up 6.3% to 800.03. Yes, it was a terrible week, but for at least one day, Andy was right: everything was OK. It’s not a bad lesson for the rest of us: a little distance might help everyone get through this with more of our wits about us.
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