Financial Logic Fails

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This weekend I talked to several people regarding the current state of the markets. They all remembered that I had called for this correction and advised moving their money into fixed income. Most didn’t take my warning and lost a lot of money in their 401k account. But that was yesterday, let’s talk about today.

In this post I want to respond to the most common responses I’ve heard to the current market correction.

It’s Over Now, It Can’t Go Lower

Yes it can and I believe it will. My S&P 500 target is 600. The forward P/E as of last Friday was 20.2. This is not a good start for a market bottom. Historically, a good bottom should see P/E rations between 8-12. I’ll take 15. But 20? No way. Every day another company comes out and lowers estimates. Stocks are coming down.

It Doesn’t Matter Since I’m Not Near Retirement

There are really two goals for retirement. The first is to retire with as much money as possible and the second is to retire as soon as possible. Being fully invested in stocks during a secular bear markets is not a smart way to achieve retirement goals. Every few years Wall Street plays its shenanigans, you don’t need to play during these periods. Fixed income is the best defensive move.

I Can’t Sell Now

Yes you can. The ONLY reason to hold stocks now is you believe they are going higher. Not higher in 30 years, but higher now.

Stock Will Go Higher, The Bottom Is In

To this crowd I ask them to tell me what their 1 year target on the S&P 500 is. They usually don’t have a target. If they do, I ask them how they arrive at that number with estimates being revised downward weekly and dividends in free fall.

12 thoughts on “Financial Logic Fails

  1. Nick

    I don’t really disagree, except to say that selling makes no sense unless you need the money right now, even if you believe we haven’t bottomed. Find me someone who can truly time the market, and I’ll show you a savant.

    Also, while I agree that earnings are down, etc., much of this sell-off is because people are doing exactly what you say, and moving their money out of the market. Again, I’m not saying that this isn’t a valid correction, but panic selling on fears of a free fall generally begets a free fall.

  2. I don’t agree with you. It’s not about timing a bottom. It is about figuring out if the market is undervalued or overvalued. There is no reason NOT to sell if you think the market is overvalued. Why hold onto to a position that you can buy back cheaper in the future?

  3. Matt

    I agree with Nick on this one. Only Lemmings are selling everything off right now (unless it’s part of an options strategy, which I don’t really understand and certainly don’t claim to be an expert on). The best investors are buying up a storm right now as they should be.

  4. Matt

    Better yet, get out of the stock market and invest in something different for a change. Commercial real estate is doing well (we’ve never lost 5% in one day in any of OUR holdings) or how about a private placement investment. I’m working on a great one right now.

  5. Jim

    Hmmmm …several thoughts:

    – You can time the market well enough. MAS has had several posts on when bear markets start and end. Technical Analysis also provides clues.

    – I generally agree with MAS’s PE comment, but your 600 target might be 6-9 months away with a huge rally in the middle. Then again we might hit 600 next week and the final low could be 450. Don’t laugh, Japan is at a 24 year low as I write this …and the S&P futures are at 831 (6 year low) and dropping.

    – Due to the volatility, timing the market right now is dangerous though (VIX at 70!!). I think we are going to break down from here …but I have only about 20% in short right now. I don’t want to wake up and find myself 100 points on the wrong side of the trade with 100% of my money.

    – Remember, in a bear it is return OF equity (versus return ON…). If the market loses 50%, you have to gain 100% to replace it. The S&P may easily end up like the NASDAQ in 1999 …when do you think we will see 5200 again… 2050? The S&P had a double top …it could go flat for decades. If it levels out at 500 how long do you think it will take until it reaches 1500 again?

    – Most people treat thier 401k like Monopoly money …this is REAL money people. It’s even better than real money …it’s tax deferred. Would you take your paycheck and set it on fire? Why flush retirement money down the toilet because of what CNBS or a bunch of other nitwits tell you?

    – One recommendation is that once we do bounce you should get in long …as a trade. It should be a HUGE bounce simply based on the distance we fell. When it starts to flatten out though …get out! It could easily set a new lower low on the next roll over.

  6. Great comment Jim, especially your point about how people seem to treat their 401K money like it is Monopoly money.

    What tickers would you go long into trades with? I still want to avoid counter party risk and I’m not interested in reading balance sheets at this time.

  7. Jim

    Hey MAS – That is a great question …I have not actually thought that far ahead.

    I tend to suck when it comes to picking individual stocks …I generally just buy/sell indices.

    I guess the safest thing to completely avoid counter-party risk would be to short double-short ETFs …as perverse as that sounds.

    Have you given this any thought? Probably a great topic!

    “How to make alot of money on a counter-trend rally in a bear market …and ensure you actually keep it!” 🙂

  8. I agree about there being less risk shorting the 2x ETFs. Going long into anything right now doesn’t feel right to me. I guess I’m not a trader. I have respect for Technical Analysis, but I also recognize that is not my style of investing.

  9. Matt

    Jim said:

    “Why flush retirement money down the toilet because of what CNBS or a bunch of other nitwits tell you?”

    That’s probably the wisest thing I’ve ever seen posted here.

    What I really don’t get is why are we having a conversation just about stock investing? How about investing across the board? How about investing in your OWN business? How about investing in a private placement where you have direct access to the managers/promoters and have some influence on the outcome of your investment versus just throwing it out into the abyss that is the stock market and paying fees to someone who knows far less about investing than you do (especially Jim and MAS – I bet you both know far more than 90% of all brokers/fund managers out there)?

    Just some things to think about.

    Matt

  10. Thanks for the compliment Matt.

    I discuss the stock market, because it is interesting to me. I’m fascinated by the numbers, the psychology and the history. And because I guessed right on the direction of the market, I’m able to free myself from salaried employment.

  11. Matt

    No, I understand. It’s your blog after all, right.

    There’s just way more out there in terms of investment options that have much more upside potential with risk management triggers in place than just the stock market.

    Matt

  12. Jim

    Thanks also Matt. “The MAS Fund” has a nice ring to it ! Seriosuly though, I think we do better than most, but with the volatility lately and so much uncertainty out there it’s more luck than skill.

    Today is Exhibit A …10% move on the S&P in 2 hours is frankly insane. I had a bad feeling this morning and took my short positions down before taking my son to the doctor …I breathed a sigh of relief that I was safely in cash again when I turned Bloomberg on the radio an hour ago on the way home.

    Stocks normally are pretty good if you can pick the right trend though (either up or down). And they are much more liquid than most investments. Lately though the volatility and counter-party risk are huge drawbacks. Technical analysis seems to be the only thing that works in this emotional environment …and even that is questionable with all the government interventions lately.

    From a technical perspective the big question yesterday was do we break up or down …unfortunately that is still the big question. We are now at the top of a triangle that started to form about 3 weeks ago. If we break up thru the top trendline tomorrow it’s probably a bear rally underway …if we head back down, it will be the third touch of the top of the triangle and we may still be headed down to 650 (or lower). Maybe…

    I guess the thing that disgusts me to no end is the fact that a couple of software guys had a better handle on the future of the US economy than Bernanke, Paulson and a majority of economists. If these clowns were in any other profession they would be sued into bankruptcy.

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