Recession Summary from Kelpie Capital
What a fantastic summary.
The only thing missing is the list of over-leveraged banks in Europe that Hussman included in his most recent weekly write-up. Found here.
Wednesday, October 19, 2011
Tuesday, October 18, 2011
Another Day in the Grind
I currently have a ~8% short against the S&P and another 6% of the portfolio is in puts that offset long-positions (CA / SWY / WFC). My net exposure is 4%.
Holding my shorts / hedges are brutal. They've been wearing on me and I've been sleeping less. My wife says I'm not stressed, just tense. And of course, she's right.
I've been trying (poorly) to trade the S&P short, but I think I may be falling into the pot committed stage where I just push my S&P short and hold it. How much higher does the market go on speculation of an all encompassing European solution?
Just look at how this crisis has evolved. Greece was the focus. Now the focus is on saving the banks because, whoops, it's very likely that Greece will default. So then the European regulators run some bank tests and say all banks are fine with Dexia at the top of the list for clean health. Then, whoops, a few weeks later, Belgium and France race to save Dexia.
The world I look at (not my personal world, but the world at large) is filled with unhappy people, high unemployment, a government looking to tighten its belt (U.S.), and an entire continent with a financial bomb waiting to implode (Europe). This is depressing, so I short and I'd like to gain from when the market eventually implode.
I'm only down 1.7% YTD, but gosh, waiting for the next great time to swing for the fences is a grind.
Holding my shorts / hedges are brutal. They've been wearing on me and I've been sleeping less. My wife says I'm not stressed, just tense. And of course, she's right.
I've been trying (poorly) to trade the S&P short, but I think I may be falling into the pot committed stage where I just push my S&P short and hold it. How much higher does the market go on speculation of an all encompassing European solution?
Just look at how this crisis has evolved. Greece was the focus. Now the focus is on saving the banks because, whoops, it's very likely that Greece will default. So then the European regulators run some bank tests and say all banks are fine with Dexia at the top of the list for clean health. Then, whoops, a few weeks later, Belgium and France race to save Dexia.
The world I look at (not my personal world, but the world at large) is filled with unhappy people, high unemployment, a government looking to tighten its belt (U.S.), and an entire continent with a financial bomb waiting to implode (Europe). This is depressing, so I short and I'd like to gain from when the market eventually implode.
I'm only down 1.7% YTD, but gosh, waiting for the next great time to swing for the fences is a grind.
Monday, October 17, 2011
Occupy Wall Street and other Protests
I figured it's only a matter of time before a friend or family member asks me about the protest, so I wanted to sum up my thoughts:
While I think the group is largely unfocused, misguided and uninformed, I'm actually mixed on the whole thing. This is due to the fact that I have no idea what the secondary effects will be. And, I believe like most things, it should be judged by the secondary effects.
If protesting helps future college students choose engineering over economics, it's a positive for society. More doctors and engineers and fewer hedge fund managers is good.
If massive protests prevents excess corporate greed (however unlikely). Another plus.
If, however, a major financial institution collapses because it doesn't receive the government support it needs because politicians are too concerned about their next election and appeasing the loud voices of a protest, then this is clearly not good.
So net, I'm not sure. If another major bank collapses we'll all be out of work - doctors, engineers and hedge fund managers.
While I think the group is largely unfocused, misguided and uninformed, I'm actually mixed on the whole thing. This is due to the fact that I have no idea what the secondary effects will be. And, I believe like most things, it should be judged by the secondary effects.
If protesting helps future college students choose engineering over economics, it's a positive for society. More doctors and engineers and fewer hedge fund managers is good.
If massive protests prevents excess corporate greed (however unlikely). Another plus.
If, however, a major financial institution collapses because it doesn't receive the government support it needs because politicians are too concerned about their next election and appeasing the loud voices of a protest, then this is clearly not good.
So net, I'm not sure. If another major bank collapses we'll all be out of work - doctors, engineers and hedge fund managers.
Sunday, October 16, 2011
Buy on the Rumor, Sell on the News
There's an old Wall St. adage that says "buy on the rumor, sell on the news."
Since 10/3/11, the market has rebounded over 11% on the prospect of a European solution that will both fix the sovereign debt crisis as well as the over-leveraged nature of their banking system. I suspect that this rally is largely a head-fake and my attention is better spent focusing on what companies to buy when the market ultimately reverses.
Despite my efforts to maintain emotional tranquility, this rally irritates me. It irritates me because it wears on my discipline in remaining mostly not invested. It's hard to watch a market rebound 11% and not think, "great I just missed a buying opportunity," or "if this rally keeps going, I'm going to
look like a fool." That's the hard part of investing, the value grind. Maintaining your discipline and sticking to your guns on what prices to pay for different companies is one of the hardest parts of investing (and I would argue, even harder then watching a stock you own drop in value).
This is where the value philosophy is so helpful. Instead of getting annoyed over the markets ability to pump up stocks on speculation of a European panacea, I should just smile and say, Mr. Market is here to serve me. Today he is not offering me anything I want, but maybe tomorrow he will.
In the mean time I wait, and wait, and wait.
Since 10/3/11, the market has rebounded over 11% on the prospect of a European solution that will both fix the sovereign debt crisis as well as the over-leveraged nature of their banking system. I suspect that this rally is largely a head-fake and my attention is better spent focusing on what companies to buy when the market ultimately reverses.
Despite my efforts to maintain emotional tranquility, this rally irritates me. It irritates me because it wears on my discipline in remaining mostly not invested. It's hard to watch a market rebound 11% and not think, "great I just missed a buying opportunity," or "if this rally keeps going, I'm going to
look like a fool." That's the hard part of investing, the value grind. Maintaining your discipline and sticking to your guns on what prices to pay for different companies is one of the hardest parts of investing (and I would argue, even harder then watching a stock you own drop in value).
This is where the value philosophy is so helpful. Instead of getting annoyed over the markets ability to pump up stocks on speculation of a European panacea, I should just smile and say, Mr. Market is here to serve me. Today he is not offering me anything I want, but maybe tomorrow he will.
In the mean time I wait, and wait, and wait.
Monday, October 3, 2011
The Rest Will Read Like Fiction and Why S&P Can Drop to 550 (or lower)
In an interview today on CNBC, Michael Lewis said two things that were exceptional:
My favorite comment was how we're starting to go through Act II of the 2008 crash and as more investors realize this "the rest will read like fiction."
He also said the following:
“A banking system is an act of faith: it survives only for as long as people believe it will.”
While I'm not happy to be down, I'm actually quite pleased by my return so far this year: -2% vs. -12%+ for the S&P and -22%+ for the Russell 2000. This is how real money is made. Waiting for crashes and buying.
Why S&P Can Drop 50%
I'm out of time for why I think the S&P can drop to 550, so I'll summarize in abbreviated bullet form:
My favorite comment was how we're starting to go through Act II of the 2008 crash and as more investors realize this "the rest will read like fiction."
He also said the following:
“A banking system is an act of faith: it survives only for as long as people believe it will.”
While I'm not happy to be down, I'm actually quite pleased by my return so far this year: -2% vs. -12%+ for the S&P and -22%+ for the Russell 2000. This is how real money is made. Waiting for crashes and buying.
Why S&P Can Drop 50%
I'm out of time for why I think the S&P can drop to 550, so I'll summarize in abbreviated bullet form:
- S&P trades at 1099 right now.
- Analysts estimate that the companies represented will generate 90 in earnings so ~12x earnings.
- Cheap, right? Wrong.
- Profit margins are at or near a record high. One way to show this is how U.S. Corporate Profits (pre-tax) are near a record high relative to Gross National Income (13% vs. average of lets guess 10%). See chart below.
- Based on this if we assume S&P earnings come down 25%, then the S&P will generate ~70 in earnings.
- Historically bear markets have bottomed closer to 7-10x. An 8x multiple would imply 550 on the S&P. Not good.
Sunday, October 2, 2011
Record Low Net Exposure - Preparation for a Crash
My net exposure is currently ~3%, an all-time low. I think the 3 macro conundrums I highlighted a few weeks ago still drive the markets, none of which have given an "all-clear" signal. If anything Europe seems like its running out of options.
I was surprised, however, that the U.S. Congress was able to get their act together and the government did not shutdown for lack of reaching a stop-gap funding measure at the end of September.
Soft-signs that I'm closely watching are Crude and Copper (which are making year-low's as I write) and BNP Paribas (a pulse on Europe's financial system).
All this being said, it makes me uncomfortable to bet against the Oracle who maintains that it's "very, very unlikely" to have a double dip.
Why such a low net exposure?
The price movement of the S&P has been extremely concerning as the bounce on 9/26 and 9/27 failed to recover to the prior highs on 9/16 or even 8/31. This pattern looks like lower highs and lower lows. This occurs until the S&P breaches 1100 where it has received support on 3 separate occasions (8/8, 8/19 and 9/22). I think all the traders out there know that if the S&P cracks 1100, the floor may fall out and the S&P may lose a lot in a short period. This all lines up in October, which is already known as a spooky month for investors (e.g. Black Tuesday which lead the way to the Great Depression, occurred on 10/24/1929, Black Monday where the U.S. index fell 23% in a day on 10/19/1987). I think a stock market crash is a possibility in the coming days and weeks and I'm positioned for it.
I was surprised, however, that the U.S. Congress was able to get their act together and the government did not shutdown for lack of reaching a stop-gap funding measure at the end of September.
Soft-signs that I'm closely watching are Crude and Copper (which are making year-low's as I write) and BNP Paribas (a pulse on Europe's financial system).
All this being said, it makes me uncomfortable to bet against the Oracle who maintains that it's "very, very unlikely" to have a double dip.
Why such a low net exposure?
The price movement of the S&P has been extremely concerning as the bounce on 9/26 and 9/27 failed to recover to the prior highs on 9/16 or even 8/31. This pattern looks like lower highs and lower lows. This occurs until the S&P breaches 1100 where it has received support on 3 separate occasions (8/8, 8/19 and 9/22). I think all the traders out there know that if the S&P cracks 1100, the floor may fall out and the S&P may lose a lot in a short period. This all lines up in October, which is already known as a spooky month for investors (e.g. Black Tuesday which lead the way to the Great Depression, occurred on 10/24/1929, Black Monday where the U.S. index fell 23% in a day on 10/19/1987). I think a stock market crash is a possibility in the coming days and weeks and I'm positioned for it.
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