Jan

14

Consider that:

1. Sharp market downturns from highs are more often false positives than signs of impending meltdown.

2. Timing matters in making a market or economic prediction. If you miss a relief rally you miss the biggest gains. A relief rally is a stock rally from the foresight that fear, often of a recession, is abating.

3. Recessions do not always yield large, long term stock meltdowns. Big and long; pre- and post- recession meltdowns are not a given, just because that's what happened last recession. A paradoxical corollary: If most people think it will happen, it won't, it is already anticipated.

4. Wealth, if measured by real assets and growth of real assets (including human capital), makes the USA a very hard long term bet to beat.

5. Conspiracy and market manipulations are two-way streets. Just as stock market cheerleaders may have ulterior motives, so do the prophets of doom. Except, alarmists and media have a symbotic relationship. And journalists don't have worry about geting sued for causing you to worry too much. "Smart money" has a way of becoming "dumb money" when everybody is following the same guru and strategy. What are those strategies and who are the gurus?

6. The Fed's increasing money and Fed's decrease money may cause credit cycles but the Fed's diverting the normal flow destroys wealth. In a credit crisis few real assets are destroyed; only values are reassessed. Money, eventually, will flow to what is valued, not just what is safest, if the government does not divert that flow.

7. When you hear politicians talk of "change" the first thing you should ask is whether they are talking about downsizing or increasing government's power.

8. These topics will not be highlighted by the media.

Lon Evans asks:

Toe TagAre you possibly one of those who reassured the herd that the NASDAQ meltdown of 2001 was merely a “correction,” and that smart money would hold for the rebound? My opinion differs. This market is nowhere near its bottom.

I’m personally holding 1460-strike S&P 500 puts. I plan to ride them all the way down to 1200. With all the fraud and chicanery relative to the sub-prime mess, this is not the moment for optimism.

Russell Sears replies:

I did fine in 2001, but it may have been beginner's luck as this was my first year of running an S&P options portfolio, professionally. 2002 was not as good but OK.

I would agree that the market will get hit on those days where market senses “chicanery relative to the sub-prime mess” but we may disagree on how much of it is “fraud” and how much of it is uncertainty of the outcome, at least on the part of the banks. And note, the title was for all of 2008, not the next quarter.

Congrats on the 1460 puts. You sound like you did better than I in 2007. But I no longer run an options portfolio — perhaps this kept me out of too much trouble.

John White writes:

1 - Define sharp. -9.5% from 10/9/07 to 1/14/08 took three times longer than -9.4% from 7/19/07 to 8/15/07. Sharp upturns in a bear market are more often false positives than the start of the next bull market.

2 - Timing does matter, but how much depends on your investment horizon. Timing strategies differ significantly with investment objectives, e.g. retirement funding vs. meeting quarterly numbers on the trading desk at Golden Slacks vs. putting food on the table for your family every night. If you miss a bear market you miss most of the losses. A bear market is a re-pricing of equities from the foresight that growth in corporate profits will slow/go negative in the near term.

3 - Recessions never yield large long-term stock meltdowns, depending of course on your definition of large and long-term. Depressions do and I sincerely hope we never have enough depressions to develop a statistically significant correlation. One was plenty enough. A question for your corollary: Most people think the market will return an average annual compound growth rate of around 10% over the next 20 years. Does that mean it won’t happen?

4 - And? What’s your investment/trading horizon? Q1, 2008, 2028?

5 - Exactly why I’m responding with the “other side of the coin.” And anyone who listens to journalists for advice on trading or investing has already lost regardless of the bear or bull.

6 - Agreed with the added comment that the government often does divert the flow, the anticipation of the diversion can be profitable, and being oblivious to the diversion can be destructive.

7 - When you hear politicians talk, the first thing you should ask yourself is, “Are they a soggy #### sandwich, or just a #### sandwich?”

8 - The mainstream media are often a contrary indicator. By the time it is reported on the front page of non-financial publications, or parroted by talking heads on non-financial news shows, everyone always knows and a reversal is often around the corner.

Personally I think the S&P will have a greater return in ‘08 than it did in ‘07, but I thought I’d play devil’s advocate.


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