Earlie from Earlie:
Strategy time. Here are some thoughts from the cold dank den of the Darth Vader Society. (g)
While we may get a short term bottom over the next few days, and I hope to be on the sidelines when it occurs, there is no way this bear market is going to be short circuited. There is now just too much negative global economic activity and momentum for the pendulum to be stopped. The proverbial left nipple of the N. American economy is fully engaged in the wringer and the physics of that situation will engender much, much more pain. Yes, we will have potent bear market rallies, but the bear has established more than squatter's rights
Daily, the evidence of an accelerating negative spiral in N. America increases (lay-offs, lousy reported numbers, messy guidance, shrinking shipping, exploding inventories, a Fed in panic mode, etc.), even as the global economic scene unravels (Japan's expanding problems, China's burgeoning unemployment and deflation, Korea's expanding banking crisis, etc.). And there is little on the horizon, save wishful thinking, to suggest that any of this is likely to change near term.
While we will of course still have to endure a plethora of silly discourses on CNBS as to why we are "at the bottom", this should be seen for what it is, the bleatings of an increasingly worried Wall Street/fund manager fraternity, who desperately need to maintain the confidence of the sheep to provide buyers for their hoped-for stealthy exits. Be that as it may, the bear is here and his picnic blanket is spread. Only those with their heads deep in the sand and their butts exposed to the winds (and other dangers) don't seem to be able to see this, which equates with their having to pay a terrible price for their self inflicted blindness. None of us want the party to end, but we are well past sun rise now and the booze has long since been exhausted. What is left is the hangover and the need to clean up the mess.
Can the vaunted Greenspan turn the "super tanker" from its appointment with the field of icebergs dead ahead? Hardly. The machinations of an elderly one-trick-pony will do little more than delay the inevitable collision at this stage of the game. Aside from the fact that the rate cuts provided to date have had next-to-nil impact and aside from the fact that any new cuts will have even less influence, Allan is now completely hand-cuffed and beholden to the other central bankers of the world. If, for whatever reason, his foreign counterparts decide that they do not need or want domestic rate cuts, then "Big Al" is snookered. It amazes me how few investors understand that Greenspan must maintain an interest rate differential or watch an already endangered buck evaporate.
Nor should investors place any value in the argument that Greenspan might sacrifice the buck or the bond market to save the stock market. That is just "clear stupid" thinking. It is the other way around. The U.S. needs a strong buck to maintain the foreign capital flows that support the mind-numbing trade deficit, the staggering current account deficit, the bloated bond market, the treasury market, and the stock market. If the buck weakens significantly, the trickle of "repatriation" already in evidence, will become a torrent in a heart beat and there goes the balloon. Offshore investors have demanded an increasing premium to lend to the U.S. (and for obvious reasons) and they have no reason to take less. Allan is between a rock and a hard place and knows it.
Can the market be realistically expected to move heavenward in this environment? Not likely. To do so, it would have to hump a dreadful load up a very steep hill, to wit:
- The consumer is debted out now, and more importantly is being forced to come to terms with this reality as he watches a blizzard of pink slips inundate his neighbours. Nothing impacts Joe Five-pack's spending plans like lay-offs and he is increasingly deciding that a new gas-guzzling SUV is not going to be a part of his future, irrespective of the pleadings of dim-bulb Fed governors. Joe is finally starting to curtail his borrowing, which guarantees a consumer spending implosion (recall that he has no savings). This trend is just starting to accelerate and will quickly get worse.
- Stock market losses have already severely damaged the "wealth effect" that supported both unusually widespread stock market participation as well as rampant consumer borrowing and overspending. A diminished "wealth effect" will have nasty impact on every aspect of the economy and the stock market.
- Equity Funds are just beginning to experience outflows. This trend is likely to accelerate as investors get around to reading their year-end mutual fund report cards. Some will require redemption just to meet increasingly costly (inflation) daily needs.
- Margin levels are still historic. Margins always extract a terrible toll on "investors".
- Reported results will get much worse, which will require reduced earnings estimates. PEs will endure double jeopardy. The contraction of growth PEs is always painful.
There are many strategies that make sense in such a nasty environment, with most obviously based on being relatively clear of long positions and biased towards shorts and puts. But of course experienced investors recognize that bear market rallies can be violent and "stressful" if one is short. Unfortunately, puts have become increasingly expensive.
At this end, the strategy has been to short small into the rallies and clear all on the nasty down days. The downside of such an approach relates to mistiming (which is hideously easy to manage) and the risk that an out-of-the-blue "black hole day" arrives and one has no short/put exposure. It is probably well worth considering that as the negative spiral tightens, and as the pressure on the buck increases, it will make increasing sense to slowly but surely accumulate small short positions that are viewed as "core holdings". Candidates for me are the companies that are massively debt encumbered and increasingly unable to service the debt. Typically, these situations guarantee a date with chapter 11 proceedings which can be quite harsh with respect to market caps. Obviously the normal cautions remain in effect,.... avoid situations where large short positions invite short squeezes, keep track of the unfolding story and "box" quickly if it starts to move against one.
A final thought. Very few market players recognize that as a bear market intensifies, the costs of puts increase dramatically even as the always large risks of shorting mildly diminish. Just as a bull market erases long entry timing errors, so too do bear markets erase short entry timing errors (so long as one boxes or has the capital to endure). A few SMALL short positions on well chosen debt-wounded targets, may be a useful adjunct to one's approach to the oncoming difficulties.
Best, Earlie |
