Sit up and take notice!

From time to time, you get a piece of longer-term thinking that initially seems interesting, is then forgotten in the pell-mell of daily life, and finally haunts you with its truth years or decades later. For example, I remember one TV discussion back in the 70s where terrorism was flagged as the theme for the future; and another, criticising commercial advertising, where one ad honcho said the worrying thing was the increasing importance of the government as an advertising client.

This post by Edward Harrison seems to me one of those keep-it-by-your-desk pieces. He says too many things for me to summarise easily, but it has "secular bear market" written all over it, and Harrison goes further (into the territory recently explored by Michael Panzer in "When Giants Fall"):

... Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.

Principles of investing

Bob Farrell’s Ten Market Rules to Remember

1) Markets tend to return to the mean over time. This is especially noteworthy now, for the housing market is returning to its mean by plunging, as are equity market, the dollar, the Yen, et al.

2) Excesses in one direction will lead to an opposite excess in the other direction. They always do, and the excesses of the housing bubble and excessive, lenient bank lending, are giving way to the housing collapse and inordinately tight lending practices.

3) There are no new eras — excesses are never permanent. And how strongly does that speak to us now, for the supposed era of unending housing price increases and of globalisation has given way to weak housing and growing protectionism.

4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. Markets correct by going in the opposite direction, falling sharply after sustained, broad rallies, and rallying after sustained broad weakness. The world ebbs and the world flows; it has always been thus, and shall always be thus.

5) The public buys the most at the top and the least at the bottom. Of course they do; they always have and they always shall. The public buys when euphoria reigns, and it sells when depression does years later.

6) Fear and greed are stronger than long-term resolve. We are human beings dealing with rational and irrational markets; to believe that "fear" and "greed" can ever be lost is naive for they are the most fundamental of human traits.

7) Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names. Just as volume must follow the trend, so too must good markets have broad support and weak markets have broad weakness... and at the moment, the market is very, very broadly weak.

8) Bear markets have three stages — sharp down — reflexive rebound —a drawn-out fundamental downtrend. This really is how this bear market shall end; not with a hoped for "V" bottom, but with a great washing-out... a capitulation... and then months, or even years, of base building.

9) When all the experts and forecasts agree – something else is going to happen.... or as we like to say, "When they are yellin', you should be sellin,' and when they are cryin,' you should be buyin.' "

10) Bull markets are more fun than bear markets.... or as a friend of ours from Raleigh, N. Carolina used to say many years ago, "Bears don't eat; bulls party!"

Running out of bigger fools?

What's been powering the market? Max Keiser recently opined that the rich have been moving their wealth out of the USA since 9/11, Jesse has alerted us to insider selling, Mr & Mrs Average have been selling their holding and paying down debt, so...?

According to FT Alphaville (htp: Michael Panzner) it's technical/leveraged buying/betting:

Very likely it is still a combination of program trading, short coverings and portfolio managers desperately trying to make up for last year’s epic losses.

And when it becomes painfully clear that there are no more mugs to buy the rubbish off you?

Dow now, and then - "Brief Encounter"

Discussing the Dow, I have previously suggested that instead of looking back to 1929, we might use the period 1966 - 1982 as a comparator. I've adjusted January 1966 and December 1999 to = 100 and oddly enough, the beginning of September 2009 sees the Dow past and present at a fairly similar point.

Is it too fanciful to say that we're now in the equivalent of about 1976?

Signs of a tipping point in the market again?

Jesse alerts us to this piece about current insider selling, a possible sign that the stockmarket is going to tank.

Housing (and the stockmarket) bear rally

For more, see Smith's redoubtable blog.

The market is going to tank

How do I know? I don't.

But I read this piece in the Grumbler.

Picture it. You are a rich broker - floated your company in May 2007 (how's that for timing?). Predicting good times ahead, you... sell £47m of your shares.

You say it's for "private projects", and throw the Mail journalist a tidbit about your beloved foopball club. The Mail journalist writing down your copy at least thinks to ask you how much of this cash will go towards the new stadium. You "decline to say".

Meanwhile, Charles Hugh Smith describes (April 18) the thinking that has led him to punt on a financial bear fund.

Straws in the wind, I'm thinking.

Alle aussteigen!, Part Two

Karl Denninger opines that the seeming rally is a little game by traders to keep the ball in the air; but in his view, it's going to come down when they stop puffing. A chance to get out and salvage something from the investment wreckage, he thinks - as I've felt for a while too.

River deep, mountain high

How long do bear markets last?

There's how long the market takes to bottom-out, and then also how long it takes to match its previous peak. In real terms (adjusted for CPI), here's the last two Dow bears:

1929: 3 years to hit bottom, lost 86% of its peak value, in all took over 29 years (i.e. in 1958) to match its 1929 high; then a further 8 years to reach a new record top

1966: 16 years to hit bottom, lost 73% of its peak value, in all took over 29 years (i.e. in 1995) to match its 1966 high; then a further 4 years to reach a new record top

1999: ...

See you back on the high slopes in 2029?

Investment challenges in a bear market

If you don't believe me, believe a sophisticated investor like Karl Denninger:

One thing to remember folks - the test of your prowess as an investor does not come in a bull market. It's easy to make money in a bull market - you just buy the index.

No, the test is whether you keep your money in a Bear market. Note that I didn't say "make money". I said keep your money.

If you have the same amount of money now in your investment accounts as you did at SPX 1576 in October, you are doing better than 90% of all institutional money managers and 95% of all individual investors. This puts you in the top 5% - and that's just by going to cash in October and sitting on your hands.

If you've actually made money since then, you're in the top 1%.

Why equities should go down

I'm breaking radio silence because of a brilliantly lucid article (from the subscription-only Barron's site) found for us by Michael Panzner.

Vitaliy Katsenelson explains that the current average price-earnings ratio may seem cheap, but that's because recent profit margins have been well above the 8.5% trend. Even allowing for a shift since 1980 away from industry towards the higher-margin service sector, the present 11.9% profit margin should be seen against a longer-term background figure of around 8.9 - 9.2%, which if current p/e ratios continue would imply a downward stock price correction of 22 -25%.

This chimes with Robert McHugh's "Dow 9,000" prediction from last July. And in many fields it's usual for overshoot to occur in the process of regression to a mean, so if it holds true in this case we could see even deeper temporary lows.

Day traders, be warned: this piste is a Black Run.

Another bearish opinion

"The Contrarian Investor" (on Saturday - see sidebar) says sell, too:

"Anyway, we believe that Friday’s stock market rally (in the US) is a good opportunity to liquidate any existing holdings of stocks."

More on Marc Faber and the bear market

From Friday's Daily Reckoning:

"Excerpts from CNBC-TV18's exclusive interview with Marc Faber:

Q: How do you read the events as they have unfolded in the past fortnight? How do you think this might shape up?

A: Basically as you know, the US market went up until July 16. The Dow peaked out on July 17 above 14,000 and then it started to slide, mainly driven by financial stocks and by what people call a crisis in the subprime lending sector and the CDO and the BS markets. The question obviously is where do we go from here? Is it like 1998, where we dropped first and then recovered strongly towards the end of the year or is it something more serious? I think it's something more serious.

Q: If you had to predict - since your view is bearish, what percentage fall would you expect in emerging market equities over the next foreseeable period?

A: The S&P has a very good chance to decline by 20-30% and the emerging economy stock markets could drop by 40%. That may not mean that the bull market in emerging markets is over for good, because in 1987 we had drops in Taiwan of 50% and then the market went up another four times, so you can have a big correction and still be in the bull market.

But if someone came to me and said what is the upside on the S&P? We had 1,452 where the high was 1,555. I would say the upside and the big resistance in the market is between 1,520 and 1,530 so the upside is limited. But what about the risk?

What I noticed is investors are far more concerned about missing the next leg in the bull market on the upside, than about the risk of losing a lot of money. And I think, gradually this will change and that would mean lower equity prices and also prices of other assets such as commodities can go down substantially and obviously home prices around the world.

Dear Daily Reckoning readers should be aware...this is a downturn that COULD be extremely long and severe."