Opinion: Current view of the market
I have been writing some personal posts lately, mostly touching on situations impacting me. I'm sure the professionals and successful investors reading my stuff would find it boring and useless but newbies and others hopefully find something to think about. My next post, on net worth, will be another such one.
Part of the reason for these posts is because I don't find anything interesting to write about regarding the stock market or the world economy. In terms of the market, I get a really bad feeling—it's just a hunch and I could be wrong. I would put the present in a period similar to the August to October of 2008 time frame (this was just before the bottom fell out with the Lehman bankruptcy, seizure of Washington Mutual, etc.) Of course, I do not expect anything remotely like what happened back then—I definitely do not expect a sell-off on a similar scale. However, the mood of the market makes me nervous. Everyone is euphoric, just like back then, even though there were serious problems in the banking system. Back then we had Warren Buffett's "Buy American", just before the final plunge; now we have someone like Nouriel Roubini turning somewhat bullish. Commodities were also strong back then and, similarly, they seem to be rallying without much reason in my eyes (industrial production is contracting almost everywhere, except a few like in China, yet the commodity complex is projecting very rosy scenarios—oil and copper are up to roughly half of their 2008 peak.)
In terms of stocks, I have taken preliminary looks at some companies but I don't find anything attractive enough to purchase (except for a special situation that I'm trying to purchase.) Since I'm a concentrated investor, I sometimes go a long period without doing anything. I may have missed the bottom—it could very well be multi-decade or, even, a century bottom (if US markets climb up for the next 100 years)—but I am still not bullish enough to do anything. My main problem is that I can't judge future profit margins (I have been trying to write a post on this and trying to figure out what will be the new norm is very complicated.) Since I rely on P/Es to value companies, I don't know what is normalized earnings for the next 10 years. Given some confidence to my bearish stance is the fact that Warren Buffett didn't really purchase any straight equities throughout the crisis. There were a lot of companies that were beaten up (although not Buffett's favourite industries such as branded consumer packaged goods or insurance (clean ones that is ;) )) yet he was mostly investing in convertible debt and convertible preferred shares. Yes, Buffett only buys things cheaply but many looked cheap 6 months ago.
The other thing that is clouding everything is the heavy government intervention. Like most liberals, I'm ok with it but, as an investor, I think it complicates matters. Many don't seem to realize how badly companies are being propped up by government. The worst, of course, are the banks. We had stories within the last week speculating that Lloyds Bank, in Britain, may be insolvent (one analyst thinks Lloyds will post, in total, $80+ billion in losses by 2010.) To the super-bears this may not be news ;) but to others it should be. Imagine how the situation would be if the British government wasn't backing them. We also had a story saying that Hypo Real Estate in Germany may need more money (although Hypo doesn't seem big in the grand scheme of things.) What happens when the governments stop supporting companies? Funnelling money from taxpayers to shareholders and bondholders of these companies won't go on for much longer. For instance, the US government is backing the debt of GE Capital but what if decides not to do that? It chose not to guarantee CIT's debt and if losses at GE Capital mount, especially in some foreign region such as Eastern Europe, I can see the US govt drawing a line in the sand and calling for GE to be broken up. Now, I'm not expecting any of this. All I'm saying is that it is difficult to say how strong reality is.
Having said all this, do keep in mind that the stock market is not correlated with the economy. I have pointed out numerous times that we had the biggest stock market rally in history from 1932 to 1933, in the thick of the recession, with a so-called quasi-socialist becoming US President, with no seriously positive news anywhere in sight, and all around doom & gloom everywhere.
Part of the reason for these posts is because I don't find anything interesting to write about regarding the stock market or the world economy. In terms of the market, I get a really bad feeling—it's just a hunch and I could be wrong. I would put the present in a period similar to the August to October of 2008 time frame (this was just before the bottom fell out with the Lehman bankruptcy, seizure of Washington Mutual, etc.) Of course, I do not expect anything remotely like what happened back then—I definitely do not expect a sell-off on a similar scale. However, the mood of the market makes me nervous. Everyone is euphoric, just like back then, even though there were serious problems in the banking system. Back then we had Warren Buffett's "Buy American", just before the final plunge; now we have someone like Nouriel Roubini turning somewhat bullish. Commodities were also strong back then and, similarly, they seem to be rallying without much reason in my eyes (industrial production is contracting almost everywhere, except a few like in China, yet the commodity complex is projecting very rosy scenarios—oil and copper are up to roughly half of their 2008 peak.)
In terms of stocks, I have taken preliminary looks at some companies but I don't find anything attractive enough to purchase (except for a special situation that I'm trying to purchase.) Since I'm a concentrated investor, I sometimes go a long period without doing anything. I may have missed the bottom—it could very well be multi-decade or, even, a century bottom (if US markets climb up for the next 100 years)—but I am still not bullish enough to do anything. My main problem is that I can't judge future profit margins (I have been trying to write a post on this and trying to figure out what will be the new norm is very complicated.) Since I rely on P/Es to value companies, I don't know what is normalized earnings for the next 10 years. Given some confidence to my bearish stance is the fact that Warren Buffett didn't really purchase any straight equities throughout the crisis. There were a lot of companies that were beaten up (although not Buffett's favourite industries such as branded consumer packaged goods or insurance (clean ones that is ;) )) yet he was mostly investing in convertible debt and convertible preferred shares. Yes, Buffett only buys things cheaply but many looked cheap 6 months ago.
The other thing that is clouding everything is the heavy government intervention. Like most liberals, I'm ok with it but, as an investor, I think it complicates matters. Many don't seem to realize how badly companies are being propped up by government. The worst, of course, are the banks. We had stories within the last week speculating that Lloyds Bank, in Britain, may be insolvent (one analyst thinks Lloyds will post, in total, $80+ billion in losses by 2010.) To the super-bears this may not be news ;) but to others it should be. Imagine how the situation would be if the British government wasn't backing them. We also had a story saying that Hypo Real Estate in Germany may need more money (although Hypo doesn't seem big in the grand scheme of things.) What happens when the governments stop supporting companies? Funnelling money from taxpayers to shareholders and bondholders of these companies won't go on for much longer. For instance, the US government is backing the debt of GE Capital but what if decides not to do that? It chose not to guarantee CIT's debt and if losses at GE Capital mount, especially in some foreign region such as Eastern Europe, I can see the US govt drawing a line in the sand and calling for GE to be broken up. Now, I'm not expecting any of this. All I'm saying is that it is difficult to say how strong reality is.
Having said all this, do keep in mind that the stock market is not correlated with the economy. I have pointed out numerous times that we had the biggest stock market rally in history from 1932 to 1933, in the thick of the recession, with a so-called quasi-socialist becoming US President, with no seriously positive news anywhere in sight, and all around doom & gloom everywhere.
I know someone who'd been involved with the market for decades, and is skittish right now. He's waiting for the "ides of October" to see what things are like then.
ReplyDeleteAs a concentrated investor, what the general market does shouldn't matter much to you, would it?
ReplyDeleteAt the end of the day, the only way markets are going to affect a concentrated portfolio is by limiting how many opportunities are available. However, you don't need to gauge this by using market as a proxy, imo.
Dev: "As a concentrated investor, what the general market does shouldn't matter much to you, would it? "
ReplyDeleteI think whether the market matters depends on your investing strategy rather than whether you are concentrated or not. I would say that bottom-up investors (value investors) would not care about the market. But if you were macro-oriented, which is what I am, the market does matter. Either style can be concentrated or not...
"At the end of the day, the only way markets are going to affect a concentrated portfolio is by limiting how many opportunities are available."
If you are a concentrated investor that is influenced by macro then market valuations will dictate potential returns. Let's say you think stock will return 8% per year for the next 10 years. If you were influenced by macro and actually felt that prices can drop then your returns can be 10% if you buy at future lower prices (assuming your outlook is correct.)