The market was up 4% today.
Below is a link to an article explaining why (China lower rates, coordination with multiple central banks lowering the rate on funds that are borrowed during emergencies).
Forbes Article
I thought about covering my 13% S&P short at the open, but decided to hold on for a few reasons: 1.) this seems like an act of desperation (they're lowering the emergency overnight rate, because they don't have any other policy options left) and 2.) the structural problems in Europe are unaddressed.
My friend Steve described it as laying foam on the run-way ahead of a plane crash. I like the analogy.
In the mean time, I'm trying to live the value life style: Look at stocks that I think have deeply compelling business models that will prosper for the next 20-30 years and make a list waiting for them to come down to attractive prices.
There's a reason that so many value investors live and work to past their 70's. It's because the lifestyle is much easier. It's not as stressful. You sit on your ass and enjoy the day reading about great businesses. All the while you wait for good opportunities. If there's no good opportunities today, go home earlier and read about something fun. At most, maybe you get a couple of opportunities a year.
What a great model.
Wednesday, November 30, 2011
Sunday, November 27, 2011
Thanksgiving 2011
Bloomberg had an article on how the S&P had its worst Thanksgiving week since 1932, the Depression.
S&P Worst Week Since '32
Before going into my strategy for the rest of this year, I need to acknowledge that my call for a market crash in October was dramatically wrong and reflects my inability to call the market. Instead the market sharply rallied and my hedges cost me a lot of money. For a brief period my performance looked particularly lackluster as the broad indices were positive for the year, while I was still down ~1-2%. Since the October rally, I exchanged my stock specific hedges for an S&P short that I don't have to roll-over each month and pay the option premiums.
While my views of the market are below, my strategy remains largely the same: sit on cash until you find great businesses at good prices. There are a few that I've come across over the past few weeks, but nothing that I've bought in size as I'm still waiting for a broad market capitulation in the coming months or years.
I'm planning on two separate outcomes for the remaining of the year:
1.) Usually this time of year there is a Christmas / Santa Rally. It's bonus season and it helps put Mr. Market in the mood for the season's cheer. That said, with the S&P down ~8% YTD and layoffs announced in the thousands it's hard to see a strong rally. Perhaps it could come from a delusional life-line that the ECB will save Europe. It wouldn't be the first time the market went up on a hope and a prayer, just look at October this year.
This view is already partially confirmed as I look at my Bloomberg -- U.S. futures indicate a strong market opening on Monday morning "amid speculation the International Monetary Fund will help Italy after the nation's borrowing costs surged." Its funny how the short-term "fixes" that neglect the structural problems can still get the market's animal spirits going. It was only a few weeks ago in October that the market was surging on France's "ultimate solution" and only a few months ago where many said "there's no such thing as a new normal."
If we do get a broad market rally I will likely take it as an opportunity to unload some of my less favored positions like TSRA, SWY, and the remainder of my Japanese basket. The goal would be to free up some cash for better opportunities in the future. Maybe I'll even consider adding to my S&P short. I currently have ~20% gross long exposure, ~7% net.
2.) If the market continues to sell-off I'll probably just sit tight. Human nature being what it is (you can debate on whether its optimistic or predictably stupid), I view this scenario as less likely. Given my low net exposure, I'm happy sitting tight. Maybe I'll even consider some small purchases or locking in some profits on my S&P short depending on how far the market drops. I expect the market will ultimately breach its September / October lows, but we may have to wait until 2012-2013.
Overall I still view the economic landscape as a mine field where any day in the future you can wake up to discover the market is down 5%+ on a major "surprise" headline: "Greece Defaults", "Italian Debt at 10%", "Israel Strikes Iran Nuclear Facilities - Oil Price Shock", "Japanese / French / U.S. Debt Downgraded","Major European Bank Run", etc.
These are perilous times and I think the right play is from the story of "Farmer Womack." Sitting on mostly cash and waiting for the moment when everyone else is depressed and has little hope of the future. Then you buy.
S&P Worst Week Since '32
Before going into my strategy for the rest of this year, I need to acknowledge that my call for a market crash in October was dramatically wrong and reflects my inability to call the market. Instead the market sharply rallied and my hedges cost me a lot of money. For a brief period my performance looked particularly lackluster as the broad indices were positive for the year, while I was still down ~1-2%. Since the October rally, I exchanged my stock specific hedges for an S&P short that I don't have to roll-over each month and pay the option premiums.
While my views of the market are below, my strategy remains largely the same: sit on cash until you find great businesses at good prices. There are a few that I've come across over the past few weeks, but nothing that I've bought in size as I'm still waiting for a broad market capitulation in the coming months or years.
I'm planning on two separate outcomes for the remaining of the year:
1.) Usually this time of year there is a Christmas / Santa Rally. It's bonus season and it helps put Mr. Market in the mood for the season's cheer. That said, with the S&P down ~8% YTD and layoffs announced in the thousands it's hard to see a strong rally. Perhaps it could come from a delusional life-line that the ECB will save Europe. It wouldn't be the first time the market went up on a hope and a prayer, just look at October this year.
This view is already partially confirmed as I look at my Bloomberg -- U.S. futures indicate a strong market opening on Monday morning "amid speculation the International Monetary Fund will help Italy after the nation's borrowing costs surged." Its funny how the short-term "fixes" that neglect the structural problems can still get the market's animal spirits going. It was only a few weeks ago in October that the market was surging on France's "ultimate solution" and only a few months ago where many said "there's no such thing as a new normal."
If we do get a broad market rally I will likely take it as an opportunity to unload some of my less favored positions like TSRA, SWY, and the remainder of my Japanese basket. The goal would be to free up some cash for better opportunities in the future. Maybe I'll even consider adding to my S&P short. I currently have ~20% gross long exposure, ~7% net.
2.) If the market continues to sell-off I'll probably just sit tight. Human nature being what it is (you can debate on whether its optimistic or predictably stupid), I view this scenario as less likely. Given my low net exposure, I'm happy sitting tight. Maybe I'll even consider some small purchases or locking in some profits on my S&P short depending on how far the market drops. I expect the market will ultimately breach its September / October lows, but we may have to wait until 2012-2013.
Overall I still view the economic landscape as a mine field where any day in the future you can wake up to discover the market is down 5%+ on a major "surprise" headline: "Greece Defaults", "Italian Debt at 10%", "Israel Strikes Iran Nuclear Facilities - Oil Price Shock", "Japanese / French / U.S. Debt Downgraded","Major European Bank Run", etc.
These are perilous times and I think the right play is from the story of "Farmer Womack." Sitting on mostly cash and waiting for the moment when everyone else is depressed and has little hope of the future. Then you buy.
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