You have been consistent in presenting your view for quite some time here, probably before I started reading this thread. The logic of your position is persuasive, assuming that the low of Supply and Demand is, or will soon again become a driving force in this market. I expect that one day it will, and you will be rewarded for your perseverance. I'm not convinced that day is in the near future, because while supply may be limited it is not clear the demand side of the equation is intact.
In spite of how popular the notion that "nothing ever changes" has become since the collapse of the "new economy" yada yada yada, I see signs that things are not as they were. Today's market is dramatically different than it was even 5 years ago, let alone 20 to 50 years ago. People are still people, and probably will not change in any fundamental way, but the mechanism by which people can now participate in the market is very different than it used to be, and the magnitude and duration of the destruction of wealth that has been experienced in this decade is a stimulus never before experienced by most. To assume they are going to respond to rising stock prices in the same way they did in the 90s is a leap of faith. The bull market corrections experienced in the 80s and 90s were often swift and powerful, but they were localized events followed by sustained periods of recovery that breathed hope into the lungs and hearts of what was for the most part passive public participants.
This market is nothing like that. There has been no sustained recovery for more than three years. The decline was not an abrupt, isolated event of a few weeks or few months duration followed swiftly by "better times". Instead, this has been a long sequence of abrupt false starts on the road to recovery followed by sustained periods of decline that have shaken the confidence of the masses. Some here assume people will be easily drawn back in when the market "launches". I'm not so sure. A lot of people have resigned themselves to the demise of their retirement accounts, and are holding onto their funds out of a sense that there is too little left to make it worth “protecting” by pulling out of the market now and potentially missing a return to its former glory. If all you have is 6 months or a year of money put away, and you are fortunate to have a decent job, the only consequence of losing that money is that you have to keep working longer, a situation most of them have already accepted. But leaving existing investments in place in the hope that the market might some day yield a decent return is a whole different thing from throwing new good money after bad.
People who have been optimistic about recovery have been badly bruised by the apparent launches that have fizzled the last several years, and many “people of means” have found other places to put their money to work. One of the "professional services" (doctors, lawyers, etc.) people whose services I use is building a big new house, not because he needs a new house, but because it is his replacement vehicle for the money he was able to salvage from his equity investments. This is not money "sitting on the sidelines" waiting to rush back into the market. It is money that he says will never come back. Is this a typical example? I don't know how common this is, but I do know the housing market has been about the strongest thing going during the collapse of the equity market. I wonder how much money has been moved out of the market into real property that will never come back to equities unless and until the real estate market collapses, which in itself would probably be very detrimental to the equities market initially. Since January 2000, the average monthly rate of new home sales is about 900,000. In my part of the country, much of the home construction has been at the higher end. Taking a wild guess that the average new home is priced at around $250,000 that represents a commitment of about $9 trillion to new housing in 3 1/3 years. How much of the “idle cash” that is supposed to come back to equities is committed elsewhere as down payments on new homes, or diverted to some other “safe” investment for a rainy day in case needed to keep up with the big mortgage payments.
If the diverted money hypothesis proves correct, there will be no launch. That does not mean the market is doomed, but without the flood of undisciplined money the market absorbed during the bubble the best scenario I can see is a return to a “normal” growth rate, which will no doubt include several steep rallies that afford the nimble opportunities to profit above the index rates, but in every case the rockets will burn out long before orbit is achieved and prices will sink back to the long term mean. For longer term investors, the opportunity appears far more limited, and there are masses of people out there now who know it.
I just amused myself looking back at something I posted here several months ago
Message 18295599
Since I posted that, the market has made four or five (depending on how you count peaks) significant moves to the upside, and as of Friday all the major indices are still below the levels they were at when I posted. Dow has broken below a recent daily uptrend line that has already been pushed lower three times. The S&P 500 touched a weekly downtrend line originating in September 2000 and was repelled. Who knows if and when the money that has lately rushed to the buy side to prevent a flush will back off and let it happen? If it does, the recently dormant sellers might very well jump on board and drive this thing back to the March or even the October lows. I’m not predicting it will happen, or claiming it has to happen, but I see growing evidence of that possibility.
The growth of hedge funds you mentioned is another indication of the change of landscape of the market. It may well be true that the managers of these funds are no smarter than anyone else, but the fact is they now control a lot of money that comes from (supposedly) more sophisticated and wealthy investors who have pooled their wealth into blocks that are big enough to move the market. Extrapolating the most recent data I could find there is now in excess of $700B controlled by these funds, compared to approximately $3,3000B in traditional mutual funds. Considering that the HFs can leverage their assets with options and futures, and play both sides of the market, this represents a powerful force to bend the market to their will, and potentially to the detriment of the long-term long-side positions of traditional MFs. Being smart is not a requirement for wielding power. Being part of the herd is the right place to be when the herd is mowing down everything standing in its way.
I don’t know what goes on behind the scenes, but my experience suggests there are a significant number of devious minds at work in the market. Just suppose, hypothetically, that not all of these funds are acting independently, or that one of the bigger ones has targeted some of these attractive (based on the metrics you believe in) issues for obscurity because they know the metrics will lure value buyers into taking the other side of their shorts. How far down will they drive prices before they decide its time to accumulate, or the company is destroyed because depressed prices trigger some creditors to call in their loans? Of the few issues on your watch list you have chosen to disclose here, I have been following ESST. The metrics all look good to me, in spite of a couple of weaker quarters recently, but I expect that you as well as I am appalled at the price decline of this stock in the last year. Maybe this is now a great buying opportunity. Maybe so much of this low float is under the control of big money with a short term horizon that it is doomed to languish as a sub $10 stock for many more years, whipping back and forth until the power money has bled all of the value investors dry.
I’d like to believe in some fundamental laws of market behavior that would ensure that well run publicly owned companies will flourish and their investors will be rewarded. I’d like to have a set of metrics that are reliable in identifying the companies that will emerge from the ashes of this market as the leaders of the next decade, but I have learned for sure that my wishing it will not make it so, that my activity in the market is inconsequential compared to the large blocks of money at work, and that the goals of the big money that is at work are not necessarily the same as the goals of traditional equity investment. In the near term, this market has been destroyed for investors. It is now the play thing of a growing number of traders, including many of the big traditional broker dealers and a growing number of unconstrained funds who want a lot of market movement in either direction in a way that is predictable (or perhaps caused) by themselves and obscured to the people who have been feeding their machine for the last few decades.
Perhaps this too shall pass, and one day we will all look back and conclude that when all was said and done, nothing has changed on the scale of decades, that the mid nineties to mid two-thousands were just an anomaly in an otherwise steady progression of market cycles. Many of us who have been damaged by this “anomaly” do not have the luxury of waiting a couple of decades for everything to balance out. We had better learn to benefit from the market as it is, or resign ourselves to being permanent casualties of the mantra still being espoused by financial advisors based on what once was, but may not be again for a very long time, if ever. |
