http://online.wsj.com/article/SB122714126820842751.html THE WALL STREET JOURNAL NOVEMBER 20, 2008 Ignore the Stock Market Until February The current volatility is less about fundamentals than forced selling. By ANDY KESSLER Down in the morning, up in the afternoon. Or is it the other way around? The topsy-turvy stock market is tough to read. In the last year, the Dow Jones Industrial Average has briefly been over 13,000 and below 8,000. The past month has felt like the Cyclone roller coaster on Brooklyn's Coney Island -- lots of ups and downs, the whole rickety thing feeling like it's going to crash at any minute. Great investors are taught to listen to the market. Each tick of the tape has something to say about expectations for growth, inflation, policy changes and looming recessions. The stock market is like a giant mass of pulsing plasma doing price discovery and a game of hot potato, getting stocks into the correct hands with the right risk profile. It's way too big for any one person to manipulate, let alone touch directly. Instead, millions of us provide input with our buying and selling decisions. When it's at its most efficient, with buyers and sellers neatly matched up at the right price, it's a pretty good predictor. The Crash of 1929 announced a recession, and the wake-up call unheeded might have caused many of the bad policies leading to the Great Depression. The Crash of 1987? Not so much. You see, the market is a great manipulator. In September, the Dow dropped 700 points intraday after the House of Representatives voted down the Treasury's TARP bank-rescue bill. Spooked, the House passed the bill the next week. Or how about this? The Dow was up 300 points on Election Day applauding an Obama victory and then down 1,600 points since. The market can also be a bold-faced liar. On Jan. 22, the Fed announced an emergency 75-basis-point rate cut in response to huge drops in European markets. A few days later, it came out that a rogue trader at Société Générale lost them $7 billion and the bank was unwinding his positions. Oops. So which is it now: an efficient mechanism or a manipulating liar? Should you listen to it warning of doom or anticipating renewal? I'd say stick wax in your ears and don't listen to the market until February. Don't get me wrong. The freezing of the credit markets is wreaking havoc on the world economy. Corporate profits are dropping. Central banks are fighting off deflation and may not turn off the spigots fast enough -- which could ignite runaway inflation. But because of the credit mess, I am convinced the stock market is at its least efficient today. Don't read too much into any move. Here are the five biggest dislocations taking place: - Tax-loss selling: Whenever you have a loss in a stock -- and who doesn't -- it's always tax smart to sell it, take a tax loss and either buy something similar or wait 30 days and buy the original one back. December can be an ugly month of indiscriminate selling. The December effect will be huge this year. - Mutual-fund redemptions: Mutual funds are also dumped for tax losses. When the stock market is down in the morning, it's usually because of mutual-fund redemptions. Fidelity's giant Magellan fund, down 56%, is one of many in the $6 trillion stock-fund business having an awful year. As investors call or click to get out of these funds, Fidelity and the others have to unload shares the next morning to raise cash. This forced-selling overwhelms the system. New York Stock Exchange specialists, who are supposed to maintain an orderly market, stop buying and back away. You get huge drops, which can unnerve even more investors and cause them to redeem. - Mutual fund cap-gain distributions: To make matters worse, in December mutual funds do capital-gains distributions. In a down year like 2008, you would think there are no taxes to pay. Think again. Legg Mason's Value Trust, run by Bill Miller, outperformed the market for 15 years by buying many "unvalue" names like Amazon. As investors redeem, he is forced to sell many of these stocks originally purchased at very low prices, triggering huge capital gains in a year his fund is down 62%. You can almost guarantee investors also will sell more of these funds to pay their unexpected tax bill. - Hedge-fund redemptions: Instead of overnight selling like mutual funds, hedge funds typically require 45 days' notice for investors to get out of a fund. They've been furiously selling since September to raise cash to pay investors. This usually shows up as a set of stocks that just go down and down and down with no obvious explanation. Rubbing salt in hedge-fund wounds is the fact that Lehman Brothers was a prime broker to many hedge funds, holding their shares. While Lehman's bankruptcy was not a problem in the U.S., in England the policy is to freeze accounts until the mess can be sorted out. There are billions in assets locked in this bankruptcy, and hedge funds are forced to sell positions in the U.S. and elsewhere to raise cash, exacerbating the downside here. By the way, when hedge funds are down for the year, they work practically for free until they make up the loss. We'll see hedge funds close and stocks liquidated as -- no surprise -- hedge-fund managers like to get paid. - Margin calls: Whenever stocks go down sharply, you quickly find who owns them with debt. We have seen spectacular margin calls, a requirement for more capital to cover share losses. Chesapeake Energy CEO Aubrey McClendon unloaded 33 million shares to cover losses. Viacom CEO Sumner Redstone had a forced sale of $400 million in Viacom and CBS shares because of a margin call on other stocks. You can bet many not-so-public margin calls are behind many huge price drops. These usually take place in the last 30 minutes of trading. So won't January be alright once these dislocations weighing on the market are lifted? The January effect is supposed to be positive. Well, often money managers are fired at the end of disastrous years. A new manager comes in, looks at the existing positions and dumps them all and remakes the portfolio with new stocks that he likes, thus generating more selling. My favorite Wall Street adage suggests that the stock market trades to inflict the maximum amount of pain. Remember, you can only ignore the stock market for so long. Once everyone thinks it can only go down . . . it might go up. Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).
it is advice for bagholders. KESSLER himself is a bagholder. What does he know about the market? If he did he would be making money in the market not writing bearish articles on Nov 20 which was the bottom for those who use mutual funds. RFT announced it was a bottom on Nov 20 for those who can buy at close. And this Kessler moron has get his readers out of the market at the exact bottom! RFT's readers were told to buy for their retirement fund on close of Nov. 20, 2008. The exact opposite of what Kessler says. People such as Kessler are the reason why people lose money and stay dumb. I bet you few weeks from now, he would tell his readers it is better to stay the course. They would then come back to the market. After they would back in, it will sell out. He will then come back after that selloff (at the bottom of course) to write a story similar to the above. Rinse and repeat.
"So which is it now: an efficient mechanism or a manipulating liar?" Efficient when it's going up, a liar when it's going down?
'why people lose money and stay dumb.' that's because they elect Traitor Republicans time and again. Ronald Reagan started it all with throwing economy into debt cycles. Then Bush-Sr did not seize opportunities of the Cold War victory to cut various budgets. Slick Willy ran the office like a very conservative democrat riding with tail high on the internet bull. His policies responsible for Sept 11 attacks and Sub Prime Mortgage deregulation and resulting toxification of the US economy. No need to mention about the crimes that Bush-Jr committed on bringing the mightest power in the last 1000 years.....to it's knees and doors of bankruptcy. US goes down, and it will be a very chaotic world run by militias and mafia gangsters. I wish instead of Obama it was Collin Powell as the President Elect. He has military discipline and professionalism, authoritative posture and ability to grab 'bastards' by the hair and keep on jolting till the time they are permanently cured of their psychological ills.
I don't like Kessler and he has been very wrong in the past but he makes some solid points. One piece of info that I heard about this week on NPR was that many of the states unemployment offices are so swamped that they can not keep up with benefits claims, For example here in MA the relevant dept. director was saying that people were waiting up to 8 weeks + to get on the rolls. The are adding 34 new staff to deal with all these new applicants and expect the number seeking unemployment bennies to increase. Just like in the mortgage crisis the foreclosure flood started when the banks added staff to deal with the huge load of properties it looks like we will see a sharp rise in unemployment and claims numbers reported as states bring staffing levels up to deal with all these people. Is this factored in by the market? Who knows, but don't look for an improvement in these numbers any time soon (2-3 months at least). The big question in my mind is how much of what we are seeing as far as pricing of equities is based upon forced liquidation combined with the sidelining of investors waiting to see how things play out both in terms of the credit crisis and the newly elected? I see V recovery mentioned a lot, on a daily basis in the indexes possibly but longer than a few days or weeks unlikely given the destruction of leverage. We got to where we were based on leverage and that is not coming back any time soon so it will be a long slow grind back up to new highs in equities (unless the $ is collapsed again), many years. Commodities should recover much faster so for investment purposes $ cost averaging in to a basket of commodities makes more sense than buying equities (though things like DRYS which I started nibbling at this week in my investment portfolio, only equity in there right now, should also outperform). Another reason I like commodities is that I see countries around the world, Obama now too, all talking about massive investment in infrastructure as part of stimulus, and this should support commodity prices. The debt that will be taken on to fund these things and the crash in worldwide rates is likely to end up being inflationary and commodities again should benefit. I wouldn't be buying individual commodities here but if you can allow yourself a 2-3 year time frame a basket of commodities should outperform. Basically Jim Rogers has it right, not saying anything that he hasn't already. http://online.wsj.com/article/SB122731446627649731.html I think Lewis encapsulates the arguement against holding equities for all but the longest term value investor for some time to come:"It will be a while until greed gets comfortable again."
I really like your reasoning, but am not convinced commodities will recover as fast as conventional wisdom seems to believe at the moment.
As always-I'd pay to read your thoughts MVIC. I agree strongly with the commodity angle. I'd rather be in food than energy or materials. At this moment at least. As far as the economy. I'm as bearish as one can be but as we both know we're not trading economy futures but instead a basket of stocks. The market may improve as the economy further deteriorates. In the ST/IT even. I have really decent support here and although I'm doing my best to mismanage the trade I see these lows as a major inflection point. Because Obama seems to be more about business as usual rather than "change" the markets may do better. For months. Of course better may be nothing more than the most feeble of recoveries. From a trading perpsective I don't see the choice of doing anything else at this point except trying to be a buyer.
I agree with you food vs. others as people will always need to eat. However those betting on inflation for a commodity rise maybe wrong as a world of low interest rates cannot lead to inflation. Zero interest rates lead to zero inflation (check Japan). In addition the deleveraging and the fear of leveraging again will not make prices rise as in the past. I think that stocks of trusts that invest in things such food storage, processing, etc, should do well as an investment in the next few years. PS: best "Investment" is: run an insurance bussiness in option premium to hyper buyers.