Stock market?!?!?! How deep and how wide is the correction?

[twobone]

I sure find it hard to find my bearing these days as an investor.

 

I've had 20 years of experience and have always focused long term. Shocks come and go and the market always rebounds.

 

However, I worry that perhaps we are in a different place. Has the world become so bloated with debt and so over extended without any real productivity improvements that our short to mid term prospects are grim?

[slomove]

Invest in lottery tickets or a trip to Las Vegas. Since the stock market is nowadays churning many times the actual value of traded items I guess it has lost any connection to reality or predictability.

[bsimon]

Grand dad used to tell me:

"When times are tough,always invest in houses and lots...whore houses and lots of whiskey, that is."

[Croc]

You are not the only person struggling with this. I grapple with the issue at work everyday and in my own personal portfolio. Unfortunately what you read in the press is the everyday drama on what is observed. You can see some tactical information out there in places like the WSJ, Barron’s, etc. but nothing much strategic that helps us focus on the end game. The following blue text is part of an email I sent yesterday as part of a work debate on why we are where we are and where do we go for investment strategy and allocation. It was exactly on point to your post.

 

 

Extract: My 100,000 foot outlook that led us to where we are:

- Asian countries, mostly China, artificially pegged their currencies significantly lower than the US dollar, Euro, GBP. As a result their exports boomed (as they were cheap) and their imports stalled (as they were expensive). End result is that there is no growth from domestic market demand - they rely on developed world growth to support their economies.

- The developed economies ran lower interest rates to reduce any further upward pressure on their currencies. Reason for this was to avoid potential recessionary influences. Plenty of domestic demand spending in these economies though.

- Higher relative USD creates purchasing power for consumers who then start to spend on relatively cheaper imports (cheaper than home grown products).

- Lower interest rates drove overleveraging in the US housing market and other sectors (cars, etc).

- The Euro zone complicated things because each country has a separate sovereign government that has separate policy prescriptions so you can get different economic growth results by country. So a two speed economy runs in the Euro zone - healthy and unhealthy. This normally is not a problem for the unhealthy growth countries as a Government can choose to adjust policy settings or let the market find the right setting by lowering the exchange rate to the point where the economy can find its way to be competitive again such that exports are allowed to grow, imports are restricted and the growth level is restored to equilibrium by the market. However, that monetary policy lever is removed in the Euro zone. Now Euro governments have only a fiscal policy available to them (i.e. spend money via a budget deficit and microeconomic reform to incentivize growth). Normally this will not be an issue but Euro governments have tapped out their borrowing capacity hence the crisis with Italy, Spain, et al as their only way out of a debt crisis is to grow and you cannot grow an economy by cutting government spending or leaving the currency high.

 

2008 was a confidence crisis caused by fundamentals getting out of whack with common sense. Confidence was temporarily restored by the policy prescriptions with the aim of engineering a soft landing, however the policy measures did not restore economic fundamentals to an appropriate level. These policy prescriptions ranged from more leverage (Government budget deficits) to money printing (e.g. QE1 and QE2 by the Fed). So we saw a temporary recovery from 2008 because people believed the problem was fixed....but it was not.

 

Our issues today are multiple:

- The developed world is deleveraging. When you deleverage you are effectively saving. If you are saving you are not spending. Not spending means lack of economic growth in the developed world.

- Lack of economic growth in the developed world means less ability (or inability if you are Greece) to pay back your debt.

 

Normal policy cure at this point is to depreciate the currency against its competitors to the level where is restores competition. Refer to J curve discussion at http://en.wikipedia.org/wiki/J_curve for balance of trade and country status explanations.

 

However, the "developing" economies/emerging markets have pegged their currencies too low against the developed world. Or in the case of the Euro, Greece, Spain, Portugal and Ireland have their rate fixed within the Euro zone. Either way, the developed world currencies are too high to be competitive.

 

With the developing world, they are unable to grow without someone in the developed world spending as their economies do not have sufficient domestic market. They will not likely have sufficient domestic spending market until such time as the developing/emerging markets allow their currencies to appreciate relative to the developed world currencies (i.e. empowering their population with relatively more money to spend on imports).

 

Productivity improvements would assist growth but it is an "icing on a cake" solution. You still need the economic imbalances in debt, currencies, and interest rates sorted out as these are the core drivers to our current problems.

 

So assuming politicians are true to form and will delay the pain to preserve their re-election chances then here is my strategic economic projection:

- The USD will continue to progressively decline until a confidence shock causes it to drop like a stone. Figure this will happen in the next 3 years. When it does, figure on US interest rates increasing back to longer term normals.

- With US saving rate now at 5% and deleveraging continuing, then the US economy will bumble along with mediocre growth 1.5% area GDP growth for the next few years. Maybe next year is a recession but it will bounce back to mediocre growth levels fairly quick.

- Asian economies will continue to restrict their currencies with continued rubbish announcements about how bad the developed economies are in managing their economies. Their growth will still be healthy but not the high rates you would normally expect for an emerging market.

- The Euro zone has two choices - closer integration or partial disintegration. Population is not ready for the former so expect the latter. Greece, Portugal, Italy, Spain, etc are all prime candidates to exit the Euro, float a new currency and then devalue it to make their economies more competitive in the absence of other government policies.

- Commodity inflation will continue given the demand from the developing world. Low growth should restrain other forms of inflation. However, US health care inflation will continue to run at its normal 9%pa rate.

[Croc]

Continued:

So knowing this where do you go as an investor?

- US Bonds - No go. Yields are at record lows and there is only one way to go. Yields up, fair value goes down, investor losses unless held to maturity.

- US Stocks – Not appealing. Figure on sub-par growth then prices decline to keep the P/E ratio in balance with normal rates.

- Avoid anything in the Euro zone unless you are targeting on a value play where you can cherry pick the best pieces.

- Emerging markets stocks/bonds - best growth opportunity plus you have the added benefit that the currency is likely to rise against the USD. Expect a long term holding time and it will be very volatile.

- Gold - Will still go up as a play against uncertainty but most of the ramp up in price has already occurred. Not sure how quick it will unwind. Little too volatile lately. Too hard to judge prospects.

- Cash - you preserve the capital but lose money this way as the inflation continues to erode purchasing power and the fees eat up return.

- Real estate (direct) - value play if leveraged to give decent returns. Very market specific.

- REITS - Probably the best bond surrogate/cash surrogate as returns are decent and risk of capital losses less. If carefully picked (i.e. no warehouse REITS) then you can insulate recession impact from the property base. Still some potential for declines but you should be able to yield 4% if picked right.

- Hedge funds – average returns are no better than a emerging market bond fund without any of the currency upside and for good measure you get killed on fees. Tax treatment can be iffy too for some.

[twobone]

Thanks Croc

 

Canada hopefully is in a better position. Although a falling USD makes our exports more expensive. At least we have a strong resource rich and diversified economy.

 

I guess I'll just hold on, keep investing with current cash flow into dividend paying stocks and repurchasing more stocks with those dividends and with any luck we will be out of this valley.

 

 

In future I need to pay more attention and build more of a cash holding to enable diversification and buying when others are selling

[Kitcat]

Croc:

 

You took the words right out of my mouth:). As I read you, we all need to invest our spare change in solid, inflation proof items. I am thinking a nice, perfectly restored Porsche 356, to supplement my already sizable investment in my se7en(s).

[slngsht]

Grand dad used to tell me:

"When times are tough,always invest in houses and lots...whore houses and lots of whiskey, that is."

truer words have never been spoken.

[BusaNostra]

Croc knows his stuff.

 

My weakness is financial. All I know, I live one day at the time, 1 per 1 ratio dude.

I don't believe in investing to a business however I believe in investing my time and money to my family...now! I used my money all the time & when needed to make my family happy.The rest of my money goes to educating and helping my grands.

The best investment of all times.

Inherit your money by your family or goes to probate court when you are dead is selfish....that's my definition.

[HOTTTCAR]

BUY farm land that can b double cropped. zone 5-6 and hire the best farmer in the area to farm it. 5-10% + value inflation/anum. Do the work to find it. Keep a few thousand in Gold and get out of crap game.

 

.............Well it works for me.. :-)

[twobone]

I'm now investing in companies that pay fair dividends and have massive capitalizations. Canadian banks (TD has a AAA rating....higher than US treasuries now!), transcanada pipeline and Exxon Mobile. Hopefully this plays out well in the long run.

[twobone]

trying not to panic......

[Ruadhd2]

Getting scary.What about income producing real estate?

[WestTexasS2K]

Deep and wide as the GRAND CANYON! Today really hurt.

[MHKflyer52]

trying not to panic......

 

Deep and wide as the GRAND CANYON! Today really hurt.

 

Now NO JUMPING OUT OF WINDOWS IN TALL BUILDINGS or off ROOF TOPS it will pass or at least that is what I keep telling myself....as I check my retirement plan getting longer and longer and less and less.

[Croc]

Can I recommend that you do not panic and start doing stupid things. Selling now just crystalizes the losses and then you are out of the market when the inevitable bounce occurs in the next day or two.

 

If you struggle with the pressure of the stock market on a negative day like today then maybe you should not be invested in stocks as your risk tolerance is too low compared to what the stock market actually is like.

 

This is when you do the opposite of the lemmings in the market :willy_nilly: and start selectively buying quality stocks at 10-20% discounts to the fair value based on the financial statements. :cooldude: As yourself what Warren Buffett was doing today....

 

Now if you were invested in bonds then you had a very very good day and you may want to harvest some gains there. REITS looked to have a good day as well.

[twobone]

I'm 100% long on stocks in the search for returns. Anytime I have diversified into anything else I end up selling to buy stocks on a dip.

 

I need to start to learn to sell a bit on a bounce to have cash to buy back in on a dip.

 

I can stomach dips. Its just this structural crisis stuff that makes me double guess my strategies. CDN bank stocks have generally faired very well.

[scannon]

This little clip seems appropriate at this time:

 

‪‪E-Trade Baby Loses Everything‬‏ - YouTube

[WestTexasS2K]

Were loooooong term. DB Pension plan.

[scannon]

On the advice of a good friend, I pulled almost all of my money out of my IRA mutual funds and put it into an IRA cash account about 10 days ago. I'm really happy to be standing on the sidelines for a change.

 

Now I just have to figure out when to jump back in. Any suggestions? I have to keep it invested through the IRA to prevent paying taxes on it until I need to withdraw it.