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The Good Old Days
Years ago I used to write a daily – sometimes twice a day - commentary on the markets. My approach when researching/writing these commentaries was straight forward: 1) Warn investors of impending financial destruction 2) Attack 99% of the Wall Street community and/or 3) Highlight the latest ponzi scheme sweeping the street. Along with writing I found time to own and talk about some undervalued stocks.
Needless to say, my smoldering hope was that once 1929 finally repeated itself the fools would be burned, and that more quality long-term investments would be found.
Flash Forward To Today
Lately I am lucky to churn out a couple commentaries a week. Moreover, sometimes my conclusions are vague and/or meandering. Not to belabor this self critique, but the point is that my money is finding it difficult to put itself where my mouth is -- the sound that is most often heard is that of silence or waffling.
Ironically, the overdue bear market that arrived in 2000 is partially to blame for my current state of indecision. Why? Because even though some money moved out of stocks during the bear (2002), most of the money in the markets simply fanned out (in an effort to become more risk adverse?) For an overly simplified example, as capital began to fear owning technology and large cap stocks it at the same time began to embrace owning REITs and smaller cap stocks. In short, the impact to the value investor because of this fanning out of capital since 2000 has been severe: usually capital does not fan out during notable bear markets, it instead it just leaves.
Reality Has Sunk In
The reality, of course, is that no one really knows what is going on in the markets today. To be sure, many well regarded investors – including Russell, Buffett, and Gross – have either made poor calls this year or are waiting to do something noteworthy with their capital. As for Wall Street, in a recent article entitled ‘2005 could be winner’, analysts arrived at the conclusion that 2004 is a ‘nothing year’. For Wall Street not to be talking about the imminent rally ahead – especially with elections and what is historically the most seasonally bullish period for the markets around the corning - is shocking.
That very few, myself included, have failed to possess the Midas Touch in 2004 isn’t what is really irking me. Rather, what is annoying is the constant let downs. Take Mergent’s list of dividend achievers, which is the best place I know of to hunt for quality companies (PDF Packet). Having gone over this list countless times in the last year I have started having dreams about cash flows and dividends, and the dreams turn to nightmares everyday stock prices remain at lofty levels. I tried to remedy this cycle of dream/disappointment by promising not to investigate the dividend elite again until the markets break lower. I’ll probably punch up the list in my screener tomorrow…
Then there is Thomson Financial’s insider ‘buying’ value stocks (also a good source for opportunities - PDF). One recent report noted only 3 stocks: two of the stocks were bloated with intangibles while the other (BBA) is dealing with financials that are in free fall. Waiting for the dust to settle on these non gems seems like a hapless option.
I could go on and on about the disappointments – water utilities (high PEs low divs) being the latest – but one thing is for sure: The reality is that no one is in their element in this type of market.
“I can only repeat that in the past, periods of divergence (parting of the ways in the Averages) plus a series of non-confirmations have tended to be ominous signs for the stock market. The action of the Averages since February of this year has been historic in that this is the LONGEST period of divergence accompanied by a series of non-confirmations that I have ever seen." Russell
Strange Days Indeed
Who could have predicted that after 3 Fed rate hikes (and another probably on the way) mortgage rates would be down on the year? Who could have predicted that the US dollar would be up on the year even as the US current account deficit approaches not 5, but 6% of GDP? Lastly, who could have known that following what is being argued as one of the most vicious bear markets in history that barely anyone would leave the markets?
The answer to these questions is no one.
Reality In The Marketplace
Leaving the waffle iron on standby for the moment, I think that yesterdays decline was more important than it appeared on the surface. Why? Because in 2002 a 250 point drop in the Dow was 137% above the average decline in the Dow that year, and in 2004 a 135 point drop is 141% greater than the average decline in the Dow this year. What this type of comparison highlights is that seemingly mild swings in stock prices today are equally important – at least from the perspective of investor psychology - as the larger declines yesterday.
Taken another way, in 2001 the Dow Jones Industrial Average fell by more than 135 points on 33 different occasions, in 2002 the Dow slid by more than 135 points on 39 different occasions, and even in the year 2003 – a bull year – the Dow managed to slide by 135+ points 13 different times. Before yesterdays decline Dow had slid by more than 135 only 7 times this year.
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Dow History
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2004
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2003
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2002
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2001
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“The American public's fascination with making money on Wall Street has clearly ended.” Crudele
Is the lack of movement/returns in stocks this year giving investors new and old pause? Is the reality that stock prices can languish for multiple years starting to creep into the market’s psyche? Is the bear finally beginning to reassert itself?
My answer to all of these questions is yes! I believe that the unsustainable US recovery is near its end and that a real consumer led recession is near. I also believe that years like 2004 will serve to dampen the cult’s belief that stocks are trusting form of savings.
However – and yes the iron has reheated – unless you know exactly what is going to happen in oil, interest rates, and terrorism this year, you don’t have a clue what stock prices are going to do over the next 3-months.
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