Monday, March 9, 2009 0 comments ++[ CLICK TO COMMENT ]++

Marc Faber turning slightly bullish

Marc Faber is turning bullish from what I could gather, although it should be noted that he is more of trader than many others I mention on this blog (check out the Bloomberg video interview here).

Government spending will spur gains in the Standard & Poor’s 500 Index after it fell 56 percent from an October 2007 record, investor Marc Faber said.

“Equities could rally between here and the end of April,” Faber said in an interview with Bloomberg Television. “The government’s efforts will fail to boost economic activity. They can boost stocks. Stocks have adjusted meaningfully.”

Faber said that although the S&P 500 may drop 27 percent to below 500 before the bear market ends, investors will make money over the next 10 years.


Industrial commodities are more attractive than gold, Faber said, after bullion rallied 6.3 percent this year, compared with a 9.1 percent decline for the Reuters/Jefferies CRB Index of 19 materials.

I don't like what Marc Fabers is suggesting here. He is basically playing the re-flation trade but it is extremely risky. Industrial metals can easily blow up here. There is huge potential in commodities and cyclicals in general but they can also keep falling a lot more. I mean, one just needs to look at how Cemex (CX), what most commodity bulls would have considered as a high quality company two years ago, is having trouble with its debt. If you are a trader and can time it well, taking a superbullish position might make sense; otherwise, I think it's better to wait for a rally and then do something.

I also find it dangerous to bet on something on the hope that the government will bail them out. Sure it could happen; but it also may not. Quite a number of macro investors bet on government actions but I stay away from that. It's totally unpredictable and I'm the type that believes that the free market is stronger than the government.

I think there is a potential for a huge rally but I'm not sure if it's sustainable. If you are a long-term investor, missing the rally is an acceptable price to pay if you don't think the rally is sustainable. Another way of saying this is, if you can't find anything cheap to invest in then waiting is fine.

The downside to missing a rally is that bear market bottoms are sometimes marked with a humongous rallies. Some of these rallies account for most of the gain for several years. I think that's one reason people are tempted to jump in.

My belief is that the absolute worst thing one can do is to fall for a sucker rally. Recall how people have been buying all the way down for the last year. In fact, we had a rally from November and quite a few invested heavily late last year and early this year, and ended up paying a huge price with the sell-off in the last 3 months. All these losses, which follow a geometric pattern, will be hard to overcome. For instance, if the market falls 33%, which is quite possible this year (we are already down 25%,) then you need it to go back up 50% from the new price just to break even*. Fifty percent rallies are possible in bear markets but they are still massive and unusual.

I have been doubting myself several times over the year but have kept away from buying anything (other than special situations.) I wondered early this year if I had missed the bottom in November but that clearly wasn't the bottom. Although I made a huge mistake with Ambac, which was my only purchase in the last year and a half, I am satisfied with myself for accomplishing one of my goals. Anyone reading this blog around 2 years ago may recall how I said that one of my goals was to be more patient. Well, being patient has saved me this year.

I am not suggesting that one should stay away just for the sake of it. Rather, what I am saying is that you should only invest if you are confident with your asset for the long term. Basically, make sure that your asset is cheap on a normalized basis, or even possibly under a severe recession. Otherwise, you may pay a huge price by (i) buying early, or (ii) suffering huge losses during a sucker rally.

(* If you don't get how returns are geometric, consider a simple example. If something falls from 15 to 10, that's a 33% drop (basically 1/3 decline). But to go back to 15, it needs a 50% gain from 10 (50% of 10 = 5.))


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