Why Only Fools Think the Bottom Is In

[Master Shake]

From EJ's good buddy Rick Ackerman.

The back-of-the-napkin numbers sketched out below are the handiwork of our good friend Doug B., a stockbroker who not only helped his clients dodge the bullet of recession/depression, but who also brought them some tidy returns on their portfolios last year. Doug got his clients out of stocks and heavily into Treasurys before the latter took off in 2008, and he has since redeployed the proceeds aggressively in municipal bonds. During our lunch together on Wednesday, he presented a very persuasive case as to why only an imbecile or someone enthralled by Larry Kudlow could possibly think the stock market has seen its ultimate lows. The fatal problem for that kind of optimism, he says, is, in a word, capitulation — or rather, the absence of capitulation in a bear market that so far has been marked by more or less orderly declines the whole way down. Indeed, we should ask: How could the stock market have hit bottom if everyone who was on board at the top is still on board?

And everyone is on board, for sure, if you parse some of the key numbers circled in red on Doug’s tablecloth pastiche (which, incidentally, he drew and labeled upside down). The first number notes that in January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse, domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline.

So, do we infer that guys like Kudlow, Suze Orman and CNBC’s talking heads actually believe this bear market will somehow be different from all others before it, with no exhaustion selling to carve out a durable low?

We do not merely doubt this, we view such an outcome as very nearly impossible. This bear market will end, like every other bear market in history, with a wholesale dumping of stocks at prices that will make current values seem exorbitant in comparison.

http://www.rickackerman.com/2009/04/...-in/#more-5115

[nero3]

Re: Why Only Fools Think the Bottom Is In

From EJ's good buddy Rick Ackerman.

The back-of-the-napkin numbers sketched out below are the handiwork of our good friend Doug B., a stockbroker who not only helped his clients dodge the bullet of recession/depression, but who also brought them some tidy returns on their portfolios last year. Doug got his clients out of stocks and heavily into Treasurys before the latter took off in 2008, and he has since redeployed the proceeds aggressively in municipal bonds. During our lunch together on Wednesday, he presented a very persuasive case as to why only an imbecile or someone enthralled by Larry Kudlow could possibly think the stock market has seen its ultimate lows. The fatal problem for that kind of optimism, he says, is, in a word, capitulation — or rather, the absence of capitulation in a bear market that so far has been marked by more or less orderly declines the whole way down. Indeed, we should ask: How could the stock market have hit bottom if everyone who was on board at the top is still on board?

And everyone is on board, for sure, if you parse some of the key numbers circled in red on Doug’s tablecloth pastiche (which, incidentally, he drew and labeled upside down). The first number notes that in January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse, domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline.

So, do we infer that guys like Kudlow, Suze Orman and CNBC’s talking heads actually believe this bear market will somehow be different from all others before it, with no exhaustion selling to carve out a durable low?

We do not merely doubt this, we view such an outcome as very nearly impossible. This bear market will end, like every other bear market in history, with a wholesale dumping of stocks at prices that will make current values seem exorbitant in comparison.

http://www.rickackerman.com/2009/04/...-in/#more-5115

He is wrong, as always, his stuff are not worth 30 seconds of my time.

[ax]

Re: Why Only Fools Think the Bottom Is In

He is wrong, as always, his stuff are not worth 30 seconds of my time.

I wouldn't say always wrong, turned out shorting MBIA and Ambac were pretty good ideas....we'll see how he does with Target and Arby's.

[nero3]

Re: Why Only Fools Think the Bottom Is In

I wouldn't say always wrong, turned out shorting MBIA and Ambac were pretty good ideas....we'll see how he does with Target and Arby's.

By low and sell high have always appealed to me. I suspect he is one of those stressed out trader types that concern themselves to much with timing and technical charts. Maybe that's why he can't see that stocks are cheap. I never have much interest in what they are saying.

[ax]

Re: Why Only Fools Think the Bottom Is In

The latter are long positions.

[Munger]

Re: Why Only Fools Think the Bottom Is In

By low and sell high have always appealed to me. I suspect he is one of those stressed out trader types that concern themselves to much with timing and technical charts. Maybe that's why he can't see that stocks are cheap. I never have much interest in what they are saying.

Stocks are not "cheap." Using Schiller's P/E10 metric, a metric highly correlated with long terms gains, stocks are priced at about their long term averages. That is, with a P/E10 of almost exactly 14. Which means, all things being equal, it's probably not a terribly bad idea to dip in the market. With the current debt levels continuing to deflate, though, I will keep most of my powder dry. I have lost count of the number of "Bull Market Recovery is Here" calls that have come and gone in the past year.

http://en.wikipedia.org/wiki/File:Price-Earnings_Ratios_as_a_Predictor_of_Twenty-Year_Returns_(Shiller_Data).png

[nero3]

Re: Why Only Fools Think the Bottom Is In

Stocks are not "cheap." Using Schiller's P/E10 metric, a metric highly correlated with long terms gains, stocks are priced at about their long term averages. That is, with a P/E10 of almost exactly 14. Which means, all things being equal, it's probably not a terribly bad idea to dip in the market. With the current debt levels continuing to deflate, though, I will keep most of my powder dry. I have lost count of the number of "Bull Market Recovery is Here" calls that have come and gone in the past year.

http://en.wikipedia.org/wiki/File:Price-Earnings_Ratios_as_a_Predictor_of_Twenty-Year_Returns_(Shiller_Data).png

I suspect the valuations must be seen in light of the ton of liquidity we have, as some signs of life show, and the carry trades and everything revert back to their ugly and insane "normal". It's sort of the 1998 event on steroids, more than the biggest crisis in 100 years I think. The valuations must be seen in terms of if this is a game changer or not. Norwegian stocks is around 0,5 times GDP, that is very low. Some emerging market's was even at the 1932 levels in the US. US stocks was as low as around 0,6-0,7 times GDP, that to is low. Now that the blame game have started, and the Prime Minister in Norway says he have opened his old school books to read about the liquidity trap and Keynes, I suppose the worst is over.

[Munger]

Re: Why Only Fools Think the Bottom Is In

I suspect the valuations must be seen in light of the ton of liquidity we have, as some signs of life show, and the carry trades and everything revert back to their ugly and insane "normal". It's sort of the 1998 event on steroids, more than the biggest crisis in 100 years I think. The valuations must be seen in terms of if this is a game changer or not. Norwegian stocks is around 0,5 times GDP, that is very low. Some emerging market's was even at the 1932 levels in the US. US stocks was as low as around 0,6-0,7 times GDP, that to is low. Now that the blame game have started, and the Prime Minister in Norway says he have opened his old school books to read about the liquidity trap and Keynes, I suppose the worst is over.

The question is, how much of that liquidity is going to be sucked into financial deleverage? The IMF threw out $4 trillion of estimated bank losses last week. I've seen higher. If banks suck the liquidity out faster than the Feds pump it in, the outlook won't be good for stocks. It's a fine line the Fed is trying to walk - not to kill treasuries and inflate at the same time.

[nero3]

Re: Why Only Fools Think the Bottom Is In

The question is, how much of that liquidity is going to be sucked into financial deleverage? The IMF threw out $4 trillion of estimated bank losses last week. I've seen higher. If banks suck the liquidity out faster than the Feds pump it in, the outlook won't be good for stocks. It's a fine line the Fed is trying to walk - not to kill treasuries and inflate at the same time.

I think there is a pattern,like in the brain of a person, that exists in the market's, that's all connected to how the liquidity bubble that have been lasting from Greenspan in 1987 operates. All the fed have to do is to reach a certain point in their money printing at the same time there is enough good signals from the market. I think we already are there. When this tipping point is reached. The patient will just go back to his old ways (carry trades, cheap money, stocks on margin etc). Then perceptions about recovery turns into reality. It's the perceptions that controls the fundamentals.

[karim0028]

Re: Why Only Fools Think the Bottom Is In

I think there is a pattern,like in the brain of a person, that exists in the market's, that's all connected to how the liquidity bubble that have been lasting from Greenspan in 1987 operates. All the fed have to do is to reach a certain point in their money printing at the same time there is enough good signals from the market. I think we already are there. When this tipping point is reached. The patient will just go back to his old ways (carry trades, cheap money, stocks on margin etc). Then perceptions about recovery turns into reality. It's the perceptions that controls the fundamentals.

Nero, curious, what is your background? You sound so sure with regard to your theory, would just like to understand what the training/experience is behind that conviction.

Your input seems very logical. I personally wont be entering the market in equities as a long term investment just yet bc with all the new rules of FASB for banks its all BS at this point as far as im concerned.... The banks are trying to frantically push down their skirts in an f'in hurricane... A rising tide raises all ships, whether its a lie or not; until eventually the rest of the market knows its a lie. But, i am convinced Its pure and simple lies. Lies can push the inevitable but in the end, i just wont put any money into a scam...

Another reason i feel that its tough to believe a rally like this is essentially everything depends on income... The FED can inflate to high heaven, but if your income/salary doesn't inflate along with it, then you wont go out and buy as everything is more expensive (you've just become poorer).... Do that to 80% of the country and either salaries have to go up or prices and debt have to come down... My salary hasn't gone up this year and alot of others are getting laid off; so, i dont see it yet...

Technically, I too think that we can go up higher from here based on lies, damn lies, and inflated company/bank earnings.... But, i feel that the bigger potential is to the downside.... The stock market has to eventually reflect the state of the economy and its not looking good; other than that its trader heaven....

Trading is one thing; i will trade this up, down and sideways.... I will not invest in it.

[Penguin]

Re: Why Only Fools Think the Bottom Is In

I disagree wholeheartedly.

The banks may have successfully completed their heist of taxpayer money, the elites that run them may have emerged unscathed, and the system may well go into a form of equilibrium...

But this patient ain't going back to normal.

Perception does not overrule fundamentals as regards the average consumer. And see this is the thing I don't see you getting: the entire financial apparatus was selling good news and stocks way past the tipping point of this mess. Perception was great even as the ground gave way. Hell, most people who are supposed to be experts were taken aback when we entered a recession in the US if you can believe that.

Mortgage equity withdrawls were the lifeblood of the 'big purchase' American consumer. As the available MEWs level crashed you could watch consumer spending follow it right down. As unemployment picked up, and more and more mortgages went Elmo as housing prices crashed, consumer spending nosedived. And last but not least the credit card industry crashed as unemployed and underwater consumers hit the wall. And THIS is what caused the big pain in the real economy. And this is the feedback loop that caused it.

Perception lagged the event by almost a year. This was a phase change, a step event. We will reach equilbrium, you cannot crash forever. But that is a far cry from Goldilocks coming back from the dead.

Will

[kartius919]

Re: Why Only Fools Think the Bottom Is In

What happens to the real economy? Collapsing global trade will rebound how? Unemployment will turn around how?

After the '01 tech crash, we had money pouring into housing. This created a boom in the construction industry and state/fed revenue. The money being poured in did help the real economy even though it was a massive misallocation of capital. The money pouring in now has kept the banks alive and some still employed, but they are not driving up employment. You can lie all you want and try to alter the public perception, but the real economy is broken. Labor is slowly dieing off. How will consumers find the income to continue their spending binge? What happens to all the deserted malls and shopping centers? What happens to the commercial loans that can't be repaid?

This last bubble was too massive to fix with a new bubble. Can we even comprehend the size of such a new bubble? I still see no recovery. Only deflation or hyperinflation if the gov't continues their current policies of propping up failed banks.

[rjwjr]

Re: Why Only Fools Think the Bottom Is In

I think there is a pattern,like in the brain of a person, that exists in the market's, that's all connected to how the liquidity bubble that have been lasting from Greenspan in 1987 operates. All the fed have to do is to reach a certain point in their money printing at the same time there is enough good signals from the market. I think we already are there. When this tipping point is reached. The patient will just go back to his old ways (carry trades, cheap money, stocks on margin etc). Then perceptions about recovery turns into reality. It's the perceptions that controls the fundamentals.

Snap out of it, man!

[nero3]

Re: Why Only Fools Think the Bottom Is In

What happens to the real economy? Collapsing global trade will rebound how? Unemployment will turn around how?

After the '01 tech crash, we had money pouring into housing. This created a boom in the construction industry and state/fed revenue. The money being poured in did help the real economy even though it was a massive misallocation of capital. The money pouring in now has kept the banks alive and some still employed, but they are not driving up employment. You can lie all you want and try to alter the public perception, but the real economy is broken. Labor is slowly dieing off. How will consumers find the income to continue their spending binge? What happens to all the deserted malls and shopping centers? What happens to the commercial loans that can't be repaid?

This last bubble was too massive to fix with a new bubble. Can we even comprehend the size of such a new bubble? I still see no recovery. Only deflation or hyperinflation if the gov't continues their current policies of propping up failed banks.

I'm pretty confident that once the market starts to anticipate recovery, as I think the market already are, (we are mirroring one month after the second leg on the double bottom formation in the 73-74 bear market, in other words March 2009 = Desember 1974, or early Mid 1938) the carry trades, and the full spectrum of shadow banking will return to their old levels, in other words the tide will come back, that in turn will probably raise yields on the 10 and 30 year, and weaken the dollar as the federal reserve won't raise short term rates to halt inflation, at least not before inflation becomes a bigger concern than deflation. It's a bit like the seventies now, only that it's the market's that control it, not the fed in the way it was in the seventies. The return of the tide and it's effect on the dollar and long term interest rates is what will cause a return to inflation is what they want, and I think they will accept more than before, 5 % I think is welcome, and I think double digit is likely from around 2011. I think it will be a sluggish recovery in the US, and a very strong recovery in emerging markets.

There will be a trend of course, from the service economy, towards secondary things as industrial production, and the primary things such as agriculture. That shift will be supported by a weak dollar. Another trend, that will be seen at the Berkshire H shareholder meeting, is the trend towards environmental construction, solar heater, solar panels, lifestyle with a small space to grow vegetables, maybe small farming. Things will move away from the city lifestyle, and back to more country side life. The railroad will be more important to communities, and there will be a strong move towards commuter rail. I could go on and on about this. In a sense all the developments that will come are healthy.

[metalman]

Re: Why Only Fools Think the Bottom Is In

I think there is a pattern,like in the brain of a person, that exists in the market's, that's all connected to how the liquidity bubble that have been lasting from Greenspan in 1987 operates. All the fed have to do is to reach a certain point in their money printing at the same time there is enough good signals from the market. I think we already are there. When this tipping point is reached. The patient will just go back to his old ways (carry trades, cheap money, stocks on margin etc). Then perceptions about recovery turns into reality. It's the perceptions that controls the fundamentals.

you can't have a recovery without an economy, and the economy (fire) is a wreck... with no obvious way to get better.

did you read the next bubble? it's gotta be $20 trillion+ to stop the debt deflation. where's it gonna to come from?