I firmly believe that a vicious cyclical bear (within the context of an ongoing secular bear) began in July 2007 and will last the typical 3 – 4 years and bottom in mid- to late 2010, with a target of a mind-numbing S&P 500 target of 700 – 900 or so.
I realize this all sounds terribly bearish, but flip it around and what we are really facing is an exciting, opportunistic period for those that understand the big picture and are willing to adapt to the world around us.
What if I told you that I thought a 2010 low in the 700 – 900 range would be one of the best buying opportunities you will see for quite some time? For those that have been “long only” since 2000, it would be just another rally back to my break-even point from 2000. But I fully expect this secular bear to end 15 – 18 years after 2000 at around the same levels of the 2000 high in the S&P 500 in the 1500 – 1600 range, which would be quite a nice move from 800, no?
This is why we must admit where we are, do not hide from it, work twice as hard as our competition and be ready for almost everything in between.
What can happen between today and “tomorrow”?
ANYTHING. The Federal Reserve, ECB, etc., have pulled out nearly every stop to help the dying patient, which is our economy and markets. I wake up every morning wondering what intervention I will face. I made the comment today that “if you would have given me this Tuesday’s newspaper on Monday night, I would have lost money on Tuesday”. Trust me that I am NOT proud of that statement but the markets have taken on a bit of a random, surreal tone of late as the authorities intervene in their vain attempt to attack short-sellers or as we like to say, “Get Shorty”.
The problem with “getting Shorty” is that the shorts are a source of demand as they eventually need to buy back their shares sold short. So while the SEC and friends have lots of fun squeezing folks while changing the rules on shorting Fannie Mae, Freddie Mac and 17 other important entities, they are rather myopic. No matter how much intervention, markets and stocks eventually find the correct level. I suppose you can slow it down but eventually, if companies are mismanaged and act with incredible hubris, they will eventually fail or be merged into a stronger and well-managed entity as we fully expect will happen by 2010 in the financial space.
What other surprises could lie on the horizon for investors as the authorities attempt to prop up markets? I have the distinct privilege of knowing and interacting with some of the best minds on Wall Street. Everyone seems to be “playing close to the vest” as we have no idea what we will wake up to tomorrow morning. Will short selling be changed backed to the “up-tick rule” where stocks can only be shorted on a plus tick? Will short selling be outlawed? Will FAS 157 be revoked? Will the Federal Reserve become federal and not privately owned by member banks? Will margin requirements be loosened? Will the Treasury tell us they will buy S&P futures every day to support the markets? Will Sovereign Wealth Funds be allowed to gobble up all of our ailing investment banks and regional banks? I could go on and on …
The key takeaway is that any and all of the aforementioned band-aids are indeed possible, but a tourniquet is needed for this patient. The party went on for too long and, like they say, “payback is hell”.
Summary – How to be positioned for “tomorrow”
I believe the correct posture is one of caution, not to be confused with being bearish. I believe that every bet one makes must be measured and have considerable thought behind it. It is truly okay to miss opportunities, but the big cyclical moves, even within secular bear markets, must be had. The same is true for cyclical bear moves within secular bull markets, which I believe could be a result of a combination of both time and price. Time could take us to 2014 – 2018, and price could take us back to the 1500 – 1600 area in the S&P 500 over the next decade or so with lots of opportunity in between.
One thing I feel is true is that long-only investing and blindly trusting the authorities, governing bodies and even many financial advisors that don’t understand and can’t articulate the “big picture”, could be a problem. I say all of this with respect to others in our profession, but this is not a market for newbies. In a nutshell, there is no substitute for experience and gray hair.
I do believe one thing for sure. The sun will definitely come out tomorrow. I just have to be around with my capital and my investors’ capital to take advantage of the sunshine.
One last note, and then I welcome feedback. I have been speaking with my son lately about our industry and what classes to take as he is a rising junior in college and has aspirations in our industry in some capacity. Without further ado, below is “Bennet’s Curriculum” for rising money managers and traders:
1. Macro-economics. The big picture is key.
2. History. Investors make the same mistakes over and over again.
3. Accounting. Know how to read a balance sheet. Don’t rely on analysts.
4. Sociology. Learn “behavioralism”. It’s not about being right, it’s about making money.
5. Psychology. Fear and Greed rule. Always and forevermore.
6. Mathematics. This is not a game for children.
The rest, as they say, is history.
