WRFest 23Feb08(Markets/Investing): Time to Go Bottom-Fishing ?
That is the question, isn't it ? Depending on who you believe we may have a bit to go but it's time
to start doing some valuation and fair value pricing and taking some risk. Or it's time to really batten down the hatches. A large part of the answer to that question boils down to where's the economy going and with it, profits and earnings. We'll pick that up next post or so. So in the meantime let's focus on the Markets & Investing topics. Start by taking a look at the chart on the right. Take a good, long look and we'll come back to it.
There was another flood of markets news this week, so much in fact that we yet again put up some interim readfest postings, largely with accumulating news on the credit markets, which these days are the market news. Pulling a little self-referencing (my techie friends call it recursive or strange loops) our final collection for the week not only includes those earlier posts summarized but we also pulled one or two of the key articles out that really think you ought to pay attention to. In fact we'll call out two. Jim Jubak's tracing the very recent history of the credit crisis since ~ Jan. 22nd and the Economist article looking at the long-term outlook for the securitization industry - the short and the long of it as it were.
While all this sturm und drang is swirling around us the talking heads are talking about getting back in. We'll further draw your attention to two other summaries. One, again from Jubak, that is as good an explanation of estimating a stock's fair value as we've seen. Which is the tool you should be using to bottom-fish rather than arm-waving. Speaking of which the next summary is one of ours which lays some alternative investment strategies and how to adjust them given your level of aggressiveness, time & energy and risk tolerances and so forth. Worth every penny - for which you're paying nothing we remind you :) !
Take another look at the chart now and let's talk a bit about it. But first if you'd like another break try this:
Charting the Market Discussing todays market action, with Robert Balentine, Wilmington Trust Investment Management; Randy Lert, Russell Investments; and CNBCs Maria Bartiromo.
We've been repeatedly contrasting our view that we're on the lip of the business cycle curve with the street's apparent consensus that this will be a mild downturn. Which is now fully priced into valuations and earnings outlooks ! The difference between those two views lies at the heart of the dilemmas and given all the conflicting advice and comment you're hearing probably helps the confusion. And, IOHO, shows up in the chart. Beautiful looking chart isn't it ? Borrowed from our friends at Stockcharts.com of course.
The middle is the SP500 1YR daily chart with 50- and 200-day MA plus the volume in the background. The top is something called the MACD Histogram and the bottom another fun stat called the Accumulation/Distribution Line. Now it's not clear that we understand all this but we'll take a shot - always bearing in mind that man's mind is a pattern-seeking tool and the technicians are the worst. So what we try to notice first is that over most of '07 we really got a sideways market with some fairly wild and wide swings - which got wilder and wider as the year wore on and the agita factor got bigger. Then along about Oct/Nov those swings started to turn into a downtrend though it was hard to see that for a while. But in your minds eye draw a line connecting the highs and see what you get (we didn't because the chart's already too busy). Now if you try that one more time you'll notice that all of a sudden at the change of the year it really tipped over. If you draw another top-top line it gets pretty steep and scary. Now here's the interesting thing - if you draw a line in the last few weeks connecting the lows they look to be flattening out - in fact the lows & highs almost look like a high-school penant or one of those state-fair flags, right ?
Which we take to mean that the "smart" money think we're consolidating around this level on the markets. Now the MACD stuff is just the difference between two short-term moving averages on the stock price so it kinda tells you what the momentum is in a certain direction. Notice that while the state fair pennant is narrowing down that the momentum is moving up. Yet at the same time the 50-day MA is still diving away from the 200-day. Another take is the A/D Accumulation which is really price move X volumen (not quite but close). It's, in our simple minds, an indicator of the force behind the momentum, really mixing metaphors. Put another way Mr. Market and the "Smart" money really....really...really want this to be all over and done. Just fix it as they say. But the bad news just keeps trotting out. In fact the last 20 mins of Fri. market was perfect - down pretty seriously all day as earlier euphorias faded and the news that there might be a rescue plan for AMBAC saved the day. The DOW for example reversed almost 200 pts ! Whew glad that's over.
Here's one more fun little fact (from tables in the investment planning post) that's worth pondering. Between Jan00 and Dec07 the return with reinvestment on the SP500 was 3.5%. And adjusting for inflation it was 0.7% ! Stop and think about that...let's see..99,00,01,02,03,04,05,06 & 07, but not 08 to date. That's NINE years. Let me try that one more time:
FOR THE BETTER PART OF A DECADE STOCK MARKET RETURNS HAVE BEEN FLAT, i.e. ~ 0 !
Investing
How to bottom-fish for stocks Here are some calculations to help you decide when the risk of buying a stock is worth it. If you'd rather not attempt the math, don't worry -- I'll do some of it for you. Tired of trying to figure out if the Jan. 22 low was the bottom for stocks? Whether the recent rally will hold or turn into a massive bear trap? Whether to buy now or wait until, well, until who knows when? Today, I'm going to put you out of your misery and tell you when it's time to buy. No, I'm not going to call a bottom for the stock market as a whole. (Cue the boo birds.) I don't think anyone is in a position to do that. What I'm going to do instead is show you how to calculate a fair-value price for an individual stock and how to use that to figure out when to buy. This method won't tell you when a stock has hit its absolute bottom, but it will tell you when the price is low enough and the potential return high enough to justify the risk of getting in too early. It's not about calling a bottom but learning how to bottom-fish.
This One's for Jay: Investing Strategies for a Dicey Market Obviously our view is that there's a long way to go to bring valuations into line with the business cycle and enterprise performance outlooks but we've been wrong, or at least badly timed, before; and surprised of course that the Universe didn't fit our "model" :). But all in all it seemed like a good time to translate the thrust of our arguments into some investing strategies (bearing in mind that blind advice on the web is potentially worth what we're paying for, this is intended as a representative exercise for you to go do your own homework and any negative consequences are on your own head. A suprise upturn of course we expect to get a cut :) ). In the process we'll point you to PoliticalCalculations SP500 return calculator which you ought to have handy. Now take a careful look at the inflation adjusted returns, either with or without dividend re-investments. The period '95-'07 was o.k. but when you break it down that was all pretty much in the boom years. Returns in the '99-'07 period only virtue was they were positive, barely. Of course if you'd gone in '04 you'd have done reasonably well. And there's our arguments in a nutshell.
Find Bargains in Agriculture Agriculture is now the focus of the commodities boom, sending prices of items such as bread and beef higher. But bargains can be found among agriculture stocks, and they belong in every long-term investor's portfolio.
Markets
WRFest 24Feb08(Credit Markets): More Fear, Loathing & Writedowns The Readings section below starts off with a diagnosis of whey the rescue attempts for the credit market breakdowns are failing, coupled with several of our prior posts worth reviewing. Not least because they're turning out to be more right than we anticipated. Which naturall leads into another more recent post on the failures of securitization and the long-term outlook for the instruments and the industry. Coupled with several interesting stories not least of which is David Faber of CNBC arguing that the credit markets a) aren't recovering and b) are badly broken. THIS...on CNBC ???? Wow ! All of which ripples forward to pressures on corporate loans and related debt instruments which are facing rising risks of default and will likely also metastasize into big time down pressures on the many weak companies out there. Which is now spreading across the private equity markets and down to the mid-size deal. While that may not sound like much to you - who cares if they have to drink less expensive cigars after all ? - but is actually both a major symptom and diagnostic as well as indicator of accelerating future troubles.
Fear and loathing, and a hint of hope Not all is lost for the structured-finance business. But it faces further discomfort before it can start to recover some of its past sheen. Securitisation has greatly enhanced the secondary market for loans, giving originators, mainly banks, more balance-sheet flexibility and investors of all sorts greater access to credit risk. Both have embraced it. By 2006 the volume of outstanding securitised loans had reached $28 trillion. Last year three-fifths of America's mortgages and one-quarter of consumer debt were bundled up and sold on. Though few bankers worked in structured finance, it was a huge earner, accounting for 20-30% of big investment banks' profits before the crisis … Alongside the banks, the “gatekeepers” who were supposed to lend stability and credibility to the new originate-and-distribute model of finance have also been found wanting. Rating agencies' models underplayed the risk that loans from different lenders and regions could turn sour at the same time. Bond insurers, too, misjudged the risks lurking in CDOs. That failing has undermined the worth of their guarantees and strained their own credit ratings—and hence financial markets.
A painful fix for the credit crisis Splitting the debt insurers in two -- an idea the banks hate -- would be drastic medicine. But for the financial markets, it's the only relatively fast-acting antidote available. It's the end of the beginning for the credit crisis: There are now plans to split up the companies that insure bonds and derivatives based on mortgages and buyout loans. What that means for you and me is that the credit crunch -- which has hobbled the stock and bond markets and is causing the U.S. economy to grind to a halt -- would be over in 2008 rather than producing a Japanese-style lost decade. The breakup plans also would lead to tens of billions more in write-downs from banks and other investment companies that have already written down tens of billions. And I'd expect the likely losers from these plans would fight them tooth and nail in the courts. It could be years before all the litigation was settled. But confirmation that a big insurer like Ambac Financial Group (ABK, news, msgs) is well along in talks to pursue this kind of breakup will provoke a rush to the exits by investors and institutions. They know prices for risky debt aren't going to get any better and could indeed get a whole lot worse. That giant whoosh you'll hear is the sound of somewhere between $50 billion and $125 billion in losses getting flushed down the toilet by the end of 2008. And that's a good thing. This drastic medicine is the only remedy that would put the financial markets on a relatively quick path to health. Anything else promises to stretch this crisis out for years and years and keep the U.S. economy grinding along in low gear.
Equity Trading Defies Bum Economy as Wall Street Transformers Proliferate The biggest surprise on Wall Street this year is proving to be the record $16.3 trillion of shares traded in the U.S. as stocks show no sign of rebounding from the first bear market since 2002 and the economy teeters on the brink of a recession. Daily trading in December and January averaged 7.44 billion shares, 13 percent more than the previous quarterly peak, New York Stock Exchange data show. The pace is a boon to Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos., whose equity- trading revenue will slip just 6.1 percent in 2008 from last year's record $36.7 billion, according to Sanford Bernstein & Co. The same income-stream shrank almost 40 percent in 2001 and 2002, after the Internet bubble burst. Hedge fund customers who thrive on market swings will buttress the results while the brokerages' increasing use of electronic systems rather than human traders will keep costs down, exchange officials and bank executives say. The growth in equity derivatives and the firms' international expansion may also sustain revenue in a way not seen in prior market declines. For the biggest U.S. securities firms, stock trading may cushion the blow of subprime writedowns and credit losses.