Aug

12

Mr. Brooks has regaled us with a litany of bad things about the current state of affairs versus the late 30s. Yes. however, the question is whether this is bullish or bearish? The market does move to levels consistent with the state of affairs so that the anticipated rate of return takes into account the constellation of current events and future cognizables and reasonable unknowables taking account of randomness in the process.

Mr. Brooks responds: 

To be more clear, I am bearish. I don't see the market doing well, now, or in the near term. My money is where my mouth is. I'm short Europe, NAZ and long long gold with a large cash position to take advantage of opportunities that will arise.

I work closely with insurance companies, insurance brokers, TPA's, and small businesses. There is universal pessimism amongst these organizations (and these are quality proven businessmen/women). They are NOT hiring. They are hording cash and not spending on capital expenditures. They are fearful that their lines of credit will be cut. They don't like the onerous regulatory environment that metastasizing around them.

I am not a bear, but I am a realist. But I am not a trader like most of this list. I have, historically held positions for well over a year (on average), but that isn't working anymore. Therefore, I search out short term opportunities where I can find them (and they are few and far between), and I am looking at PE opportunities in businesses that produce cash and do well in hard economic times (I wrote about that on this list in the recent past).

I don't care whether the market is up, down or sideways, with either low or high volatility. The bottom line is that I have to make money for me, my family and my clients. If I'm wrong, I'll be a man, fess up to my errors take my lumps and move on…but I'd rather be right! 

If you want what I think is a real good indicator for what is really happening in our country economically, look at Workers Compensation insurance. Look at the numbers of employees that are employers are paying for (i.e. that are covered under a corporate WC plan), and look at the total premium dollars being spent on WC. Both are down substantially.

The total # of employees covered by WC are down substantially, and the total WC premiums are down (proportionally) even more.

Look at the money that companies are spending on things like liability insurance. They are cutting their premiums, and cutting their coverage.

There are many things that you can learn from this information.

Now, where to find this data? Well, I get mine from my insurance clients via conversations. I don't know where to find it out in the real world, so I can't supply a link….my anecdotal data will have to suffice. Sorry I can't give more than that.

Rocky Humbert adds:

Alan AbelsonFurther to the chair's comment and just to shake things up a bit, I will confess that I am bullish on stocks over the next decade, and believe that they will substantially outperform cash and bonds (from these yields ). From these prices, I expect returns in the order of 6ish percent. I also have a ton of cash right now because I want to exploit the volatility of the markets which will probably dwarf that 6% drift.

yet, other than valuation (which got me out of stocks prematurely and into bonds prematurely) in 1997, the single best reason to be bullish is that none of the really smart people on this list can articulate any reason to be bullish.

For example, I owned Intel pre-internet-bubble at a 10-12x p/e … and sold it in the 2nd inning of the bubble, and felt like a fool as it rose to 70+ times earnings. As of this afternoon, Intel is back to 11x earnings and it's a stronger company today than ten years ago and it has a 3.1% dividend yield to boot. With all due respect for my bearish speclisters who see a permanent lack of prosperity (and who may indeed be right), the single most important thing to an investor is the price you pay for an asset. To think that you see things that the rest of the world doesn't see over the next decade is repeating the same mistake that people made in 1999.

I have no clue what the market will do over the next month or six months. But when no one can spin a bullish story, it's important information…. And if you look back to 1958, you'll discover that an entire generation of investors had been turned off the stock market by the great depression and who swore that they'd never buy stocks again…only to miss wonderful opportunities always looking into the abyss for the next shoe to drop. We're all Alan Abelson's now!
 

Jeff Sasmor writes:

I could buy into Rocky's thoughts but I have the conviction that humans have less and less to do with what's going on; and market makers aint what they used to be.

Indexing, etfs, double etfs, double inverse etfs, commodity & metal etfs have changed the landscape quite a bit in ways I needn't elaborate for this group. For sure, Jeff is in the bearish camp, for the (intermediate) time being. But not really on emotion as on observation. One can't be married to these concepts as we all recall the ever changing cycles.

That said, I agree with Rocky that cash is a good thing to have right now, and wait for some real panic as we wait to see whether the various indices' "death cross" is actually a predictive thing or not.

What will it be this time? China dumping Treasuries? Some new allegedly pandemic disease? Radioactive ash from fires near Chernobyl? Eddorians or some other intergalactic baddies?

There'll be something…

For what it's worth from a lowly daytrader.

Ken Drees comments:

I am bullish since the dollar is no store of value and stocks at least promise a share in profits. How that anti dollar hedge plays out is a whole other can of worms.

But you must consider equities at some point when they are finally puked up and sworn off by the public if that time does come. The gov will probably force treasury purchases for retirement on the masses during their exodus from risky stocks.

And I like the idea of cash to a degree –relating to that Buffet comment from a while back–in that you have the ability to buy panic.

Jim Sogi writes:

I am of the 60-70's persuasion: 40 % up 40 % down multiple times. That would mess up the most people. We've seen one pump already. 

Charles Pennington coments:

I agree with Rocky. Every week I lazily read Barron's, and they'll have an article about some solid growth company at 12 times earnings, paying a big dividend, and holding a lot of cash in the bank. J&J is a good example, but there was even an article about Ebay recently, and the stock valuation sounded like it was Bethlehem Steel. If you step back and look, though, there's never anything special about the stock that Barron's is covering, it's just that the market as a whole is offering all this pretty much everywhere you look. And if these companies can earn money now, when can't they?
 


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3 Comments so far

  1. andre wallin on August 13, 2010 12:12 am

    this is efficient market theory BS. isn’t the market always wrong as the participants are trying to understand the whole and the parts cannot understand the whole? isn’t there constant manipulation by government to conceal the truth in order to keep order? everything is a manipulation besides the existence of movement. there is no justice or truth to where the market is. i don’t understand why people persist in arguing efficient market theory.

  2. douglas roberts dimick on August 13, 2010 9:04 am

    EMH — Weak, Semi-Strong, Strong, or Just Wrong

    One states that “[t]he market does move to levels consistent with the state of affairs…”

    Quantitative Relativity indicates that markets do so but not in absolute terms, which is where EMH as a popularized theory appears to fail in its proof.

    How can “all information” be filtered or assimilated or correlated into some collective pricing function or series of indicators? AW’s opening statement seems apropos as a response.

    Regardless of indicators and functions one may develop, adapt, promote, or swear by for purposes of pricing markets and their listings, what appears most elusive among industry know-it-alls and the smart-boys (as Truman called them) is understanding the relativity of information to pricing.

    For instance, “On October 3 [2008] it was reported that Wachovia had rejected the previous offer from Citigroup in favor of acquisition by Wells Fargo, resulting in a legal dispute with Citigroup… On Wednesday night, October 8, the Central Bank of Iceland abandoned its attempt to peg the Icelandic króna at 131 króna to the euro after trying to set this peg on Monday, October 6… By Thursday October 9, the Icelandic króna was trading at 340 to the euro when the government suspended all trade in the currency… On Friday, October 24, stock markets plummeted worldwide amidst growing fears among investors that a deep global recession is imminent if not already settled in.”

    Are those October 3-9 information events invariant references that correlated to October 24 price action? As the chair likes to query, “how does one quantify it?”

    The answer is that, yes, one can so quantify. The problem becomes a matter of conversion, whereby information is equated (to include discounted) into the currency of any given bid and ask.

    Why a problem? Because electronic market exchanges are sanctioned, to wit: they are rules-based constructs. EMH is theory, and existing sanctioning paradigms do not formulate substantive (or objectified for that matter) informational parametrics into exchange systematics.

    Designing FSM logic for order execution protocol, one can see how EMH is irrelevant for quantitative purposes due to its lack of invariance — see conservation laws in physics.

    Actually, electronic exchange systematics provide that property of remaining unchanged regardless of changes in the conditions of measurement, not any given (weak, semi-strong, or strong) degree informational reference. With evolution of electronic information and exchange systematics a la the Internet, evidence supporting this relativity unremarkable yet popularized phenomenon (EMH) appears to be frequently if not increasingly rebutted or disproven.

    In that price action represents a form of energy, informational invariance does not exist; therefore, the conservation of (non)directional indicators and functions is a fallacy… what the chair reduces as being “the constellation of current events and future cognizables and reasonable unknowables taking account of randomness in the process.”

    Could not have said it better…

    dr

    See http://en.wikipedia.org/wiki/Global_financial_crisis_in_October_2008 for cited references.

  3. Gregory Rehmke on August 13, 2010 2:06 pm

    When market analysts claim firms are “hoarding cash” my question is: “compared to what?”

    Until the financial meltdown, major corporations relied on sophisticated financial tools and institutions for quick and cheap access to vast amounts of cash for day-to-day operations. And they loaned their excess cash through similar financial intermediaries.

    How much cash did firms “hoard” for working capital 10, 20 and 30 years ago? How much cash should firms have on hand for day-to-day operations, and to cover unexpected changes in market conditions?

    During the meltdown, corporations learned that the nifty financial instruments they had come to rely upon for both borrowing and lending cash short-term didn’t always function. It seems reasonable that firms would hold much larger amounts of cash until they gained confidence in various “new and improved” financial instruments.

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