September 16, 2008
Maybe I'm wrong, and stuck on "Sell", but I think the worst may still be in front of us...
I cannot escape the sense that the majority of investors everywhere feel like a low cannot be far off in the world's stock markets...As somewhat of a contrarian by nature, I can easily understand the current widely held (I believe) mentality of, "The news is so bad. This must be the bottom", but, again as a contrarian, I know from MANY miserable experiences how awfully wrong you can be, no matter HOW bearish everybody seems, when you are trying to predict when a falling market will finally stop falling and turn back up.
Along these same lines, I have recently seen a number of professional forecasters pointing to various "sentiment" and/or "oversold" indicators as being so bearish as to almost conclusively call for an upturn in the equity markets any day now...All I can say to this, after easily spending a decade using those same sort of tools, and then discarding them years ago, is there are times when those indicators can be a guide, but just as often than can be essentially worthless, i.e., there are occasions when these indicators are screaming, "buy!", and there is still 25% of the move, or more, immediately to come, when you can later look back and say, "Look how close (timewise) it was to calling the bottom"...but in real money, in invested dollars, it was off by miles and miles...I'd also say one of the reasons I abandoned using those sort of indicators was they too often gave bad signals precisely when the biggest moves were taking place, which is what I believe we are seeing over and over all over the markets.
I KNOW it's bearish out there, but I also can't get away from the idea we are dealing with an environment which none of us (and this includes economists, investors, Fed governors, etc.) has ever personally encountered...Aside from the debilitating aspects of crippling energy prices and the worst declines in housing prices since the Depression (!!!), what worries me more is how this financial institutions debacle keeps getting worse...It may be an oversimplification, but isn't the realization that seemingly all of the major banks and brokerage houses (the people who hold all your financial assets and lend everybody money) are really, really in trouble a bit frightening?
Six months ago there were five major Broker-Dealers here in the United States, all of them "ancient" names in the investment banking and securities business. In March, Bear Stearns disappeared, and we now have the news that Lehman Brothers is declaring bankruptcy, with Merrill Lynch being so close to the same it is being soaked up by Bank of America...In other words, three of those five major securities firms have essentially now gone belly up...When I then recall that the brokerage firms are sometimes considered to be a lead indicator of where the stock market is headed, I can't get away from the idea there may be a lot more pain coming in equities...And what does it mean when AIG, the largest insurance company in the USA (or so I've seen it described), "loans itself" 20 billion dollars to prevent bankruptcy?
You've certainly heard and read about all of these companies...Here's what the devastation looks like on a chart...whether it be Broker-Dealers, Insurers or Mortgage Guarantors...THREE MIGHTY IMPORTANT FACETS OF THE FINANCIAL WORLD...No, all of the corporations in these areas are in as bad a condition as but I would guess there are plenty more out there...some we know about, some we don't.
I think those are SCARY pictures, especially when you consider these are just a few examples...
And here are some nasty historical statistics...
The table below notes every bear market or bearish correction in the Dow going back to 1900, with the most significant figure being the percent lost from bull market to top to bear market bottom. While it might be argued, "It's different now", during this 107 year period, I count 23 bearish phases in the Dow, of which 12 have seen at least a 30% decline before the market turned back up. As we are now in what may be the worst economic condition since the Depression, with the fact today's bear market has only declined roughly 24%, it therefore seems likely there could be a LOT more ground to cover on the downside before the equities markets find their lows...
Bear Markets - Dow Jones since 1901
Yes, these are just statistics and easily may be meaningless...but I'd guess that many of those 40% declines came under circumstances that were no where near as serious as the economic situation we are now facing...This leads me to believe, at a MINIMUM, we could be looking at another 10-15 % decline in stocks, if not worse...I obviously don't know if this will be the case (just because I've been "right" for the past 3-4 months absolutely does not mean I know anything at all about the future), and I may be jaded after too many years in this business, but I do not think the markets exist to make the general public rich and happy. In the end, whether it's every few years, or every decade, or even every generation, there are periodic episodes when the public gets reamed...when the markets slam everybody hard enough to generate those "SELL everything I own!" phone calls to their brokerage house (if any are still there?)...Here we have the markets, I believe, teetering on the brink, and do you really hear any of the "experts" screaming, "GET OUT NOW!"? Isn't all the media dialogue about "when it will turn"?...Nothing is absolute in this stuff, but when I see a market dead on its lows and seemingly every analyst there is talking about "good values", "and tons of cash on the sidelines", and/or "the bottom is close at hand", too, too often it means you ought to be selling with both hands.
I know nobody wants to read negative crap like this but my job is to call it as I see it...I am, by nature, one of the most positive people you'll ever meet (how else could I survive 28 years in this stupid business?), but I do believe the economy and markets are in serious and snowballing trouble, and it may just mean stocks, as measured by the Dow, could have another 1500-2000 points to go...Which will continue to mean falling commodity prices and sharply higher bond prices (lower long term interest rates).
Here are some charts and brief comments....
Still Buying Bonds
Bonds have made a stunning run during the last month or so...We unloaded the majority of our position into today's upsurge...and with the immediate (blind luck) 3 point sell off that followed are already re-establishing long positions into the weakness...Having traded this market more than any other, I AM SURE just about every bond trader there is will be seeing today's action as a big reversal, that is, they will all be predicting the end of the bull move which none of them have been on anyway...Maybe I'm wrong...I assure you I'm not overconfident, but I still think we're headed for 128-130 (at least).
Still see Soybean complex going lower
Booked some profits on our short Soybean Oil today...but still short.
Still see Cattle as extremely overpriced in this economy
Still shorting both Live and Feeder Cattle