Nov

8

As you may be aware, shock and awe is a military doctrine based on the use of overwhelming power and "spectacular displays of force to paralyze an adversary's perception of the battlefield and destroy its will to fight". After the second consecutive day plunge in the markets with more than 10% lost, this was the feeling I had yesterday looking at the closing prices: shock and awe.  Your perception is paralyzed, you are not able to fully understand the context in which you are operating and therefore to make rational and informed decisions. Your will to fight is destroyed and you are simply brought to turn away your account statements in disgust.

Is this the result of a campaign built to shake weak hands (and minds)?   Most of us are vaccinated by many other bear markets and crashes, such as 1987 and 2001-2002.  Something really spectacular was needed this time to shake the resolve not to give away stocks at these ridiculous prices.  Well, "they" are doing it.  The public is shaken, hit by bad news on all sides and sudden panics in the markets. The public is selling at any price, stocks, mutual funds, bonds. The average investor cannot see the big picture, overwhelmed by negative information campaigns and catastrophic predictions.

It is difficult to resist, but I will try not to fall victim of this "shock and awe" campaign.  I will not put my stocks "for sale" at these levels.  On the contrary, I will buy new dips. Markets forces are already at work to adapt to the new situation, economies will find eventually a way to deal with the recession. It will be painful, but it will not be the end of the world and capitalism.  We will continue on the secular path of growth. On a different note, I hope that the governments' intervention to deal with dysfunctional markets and the collapse experienced in the past weeks will not kill the patient instead of curing it.   

Vincent Andres asks:

You wrote "the public is shaken". I'm wondering how much of the market is actually in "public" hands ?

If I compare what people (the public) save on their own willingly, and what the public must save in pension funds in mandatory way, I guess the public's direct participation in the markets is much lower than e.g. pension funds. So, I doubt public is now shaken, public has probably gotten out since already several weeks. Of course, this may vary from country to country.

Riz Din notes:

One public, on the other side of the world, seem to be buying with abandon as prices flirt with their lowest levels in a couple of decades. From Bloomberg .

'Nov. 7 (Bloomberg) — Japan's individual investors, armed with more than $7 trillion in cash, piled into shares trading at their cheapest valuations ever last month, even as the global credit crisis prompted overseas fund managers to sell out.'

I'm not sure about the choice of quotes in the article though:

'Individuals are the most clever out of any investor group, in my opinion'

'…they're not the kind of investors who get carried away with optimism and keep buying'
 


Comments

Name

Email

Website

Speak your mind

6 Comments so far

  1. Rocky Humbert on November 8, 2008 8:55 pm

    For a market participant who was short on October 28th, the “shock and awe” was an equally brutal 17.6% rally which ensued over a six-day period!

    Much has been written in these pages about valuation and the Fed Model. The Value Line Appreciation Potential Model, over time periods suitable to unleveraged INVESTORS, has also done an admirable job of warning of expensive markets and highlighting undervalued markets.

    Right now, the Value Line Estimated Median Price Appreciation Potential of all 1700 stocks in their hypothesized economic environment 3 to 5 years hence is 160%. On 10/09/02, the model forecast 115%; and on 7/13/07, the model forecast a comparatively meager 35%. Over the past 20 years, I have never seen such a large appreciation potential.

    Obviously, with weekly price swings exceeding 10%, it’s easy to lose one’s bearings — however, I share Mr. Pezzutti’s bias to buy weakness — or as I told my wife the other day, “we are going to buy ALL THE WAY TO ZERO in the S&P, and we will then own 100% of American Enterprise.” She responded: “I think you will have competition at zero.”

  2. George Parkanyi on November 8, 2008 11:34 pm

    David M. Smick’s book “The World is Curved - Hidden Dangers to the Global Economy” is an excellent inside view of the global economy by a consultant whose clientele included central bankers and heads of state. In it there is a chapter called “Housewives Take the Commanding Heights”.

    What it speaks to is the problem that Japanese households faced after the 1989 economic collapse in Japan. Interest rates went to nearly 0 and have remained there since. For the average Japanese, a notorious saver, this was a big dilemma. In Japan, traditionally the women take care of the family finances, and after finally becoming collectively fed up with poor savings returns, took matters into their own hands and began to hunt for better returns - around the world. In early 2000, they discovered foreign bonds, and have since become astute investors in same - and also a tremendous force in the foreign exchange market that is out of the reach of central bank contol.

    According to Smick, roughly 20% of all currency trading worldwide during trading hours in Tokyo involves Japanese private individuals, most of them women. (A sobering thought for a professional currency trader getting his butt kicked in the overnights.) And they bypass the major financial institutions, preferring to invest directly through the Internet.

    Apparently the amount of liquid assets involved is $11 trillion. This is a huge pool of money that can now turn on a dime, and apparently it did in early 2008, when the “housewives” abruptly began returning back to domestic assets. And what’s is everyone’s favourite go-to currency these days? (It rhymes with Zen)

    So when you say that Japanese savings are pouring into stocks at these levels, then that is truly significant. It means the risk-reward for stock yields is better than bonds - at least in Japan. Hats off to the ladies for leading the way.

  3. Matt Johnson on November 9, 2008 12:45 am

    You’re emotions seem high and volatile, not a good combination for traders (IMO), you’re comparing trading to war, you’re trading while you feel ’shock and awe’. You say “Your will to fight is destroyed and you are simply brought to turn away your account statements in disgust.”, and “I will not put my stocks “for sale” at these levels. On the contrary, I will buy new dips.”

    I recommend you stop trading and liquidate your current positions. It’s clear your trading plan has no ‘plan’ for this type of trading environment, and until it does, you shouldn’t be risking capital. I know I may sound harsh, but what I say is true - I mean no offense. Get a clear plan together. Don’t average losers. Bet smaller, and be cool…

  4. Nigel Davies on November 9, 2008 4:54 am

    "Crashes, such as 1987 and 2001-2002. Something really spectacular was needed this time to shake the resolve not to give away stocks at these ridiculous prices…"

    Well, that's got me worried. From March 2000 through to July 2002, the S&P declined from a high of 1,552 to 775. Our recent decline has been from a high of 1,576 to a low of 839, which seems rather ho hum by comparison.

    What would we need to be spectacular?

  5. Jay on November 9, 2008 2:27 pm

    Hate to nitpick, but “Shock and Awe” is not the term naming the doctrine. The proper term is a “rapid dominance”. Or, at any rate, that’s what I remember from my military training. Shock and awe is a soundbite. Rapid dominance is a carefully planned program of attack, requiring deep and broad intelligence for targeting, robust logisitics for sustainment, and of course deliberate and disciplined coordination and execution in area of operations. I saw nothing of the sort in the financial halls of power these past few months — or even last year, for that matter.

    A force is a force,
    Of course,
    Of course….

    I think what happened in the markets — as visceral as it was for some — is NOTHING in comparison to what a campaign of rapid dominance does to a target regime/military/population. Had we seen the metaphorical equivalent of rapid dominance in the markets, none of us would be concerned much with our finances. Perhaps I make this point if only to say things really aren’t all that bad…yet. We just have to keep cool heads.

    I agree — we should not succumb to panic. I think in a few quarters we’ll all look back and realize the worst was behind us in September/October…from a stock market perspective. The contraction will continue, the FED and USG will throw everything they have at mitigating deflation and preserving key industries, and American labor politics (not to mention it’s capitalists) will be forced to wake up to the realities of globalization. These are good things. The underbrush is being cleared for new growth and innovation.

    I also agree with the view that the US will lead the recovery.
    I’ll tell you who I would NOT want to be right now, and that’s China.

  6. nim on November 9, 2008 4:42 pm

    The strategy of buying the entire market when prices go to zero may fail when factoring in the probably infinite transaction costs at that time.

Archives

Resources & Links

Search