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Just Repair, Not Replacement

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Back on Friday, March 6, with the Dow closing at the subterranean 6,626.94, I struggled over the temptation to move some funds over to equities. But by Saturday morning had decided against it, solely to keep the discipline of maintaining at least a 6-month investment horizon. I verbally warned against feeling like we might have missed a great opportunity since although I pointed to 7500-8000 as my expectation for near-term direction to the Dow, I gave it at most 3 weeks of steam. And although that measure of gain would be nice to have for a 3-week investment, I didn’t care to indulge in the sleepless nights that would come from edging toward being a day trader.

As the market bubbled up through March, I reiterated my belief that we were only seeing a temporary bounce, sharpening my feelings that we might be in for a bloody spring as we wade into the thick of the first quarter’s earning reports. And held onto my belief of 8000 as the current ceiling for the Dow.

And then held to that belief of an 8000 ceiling even as we punched a few holes through it, very similar to the brief taps made in the 13000 ceiling I set last year this time. Just a few small holes in the ceiling, that’s all: repair only, not replacement with any higher ceiling. We’re still not scraping together enough sustained buying power (read: pensions and other long-term institutional investors) to hold and extend it further upward. From here, up remains a hard fight, while down will increasingly look too easy.

I do like some of the longer term signs I’ve been seeing, though. So take it back on down to the basement, and – as noted in my previous post in this category – I might be interested in re-entry into equities as early as Memorial Day. But will be quite content to remain on the sidelines through then.

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Written by macheide

20 April 2009 at 3:27 pm

Posted in calls & puts

Bloody Spring

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I know I’m a bit of a crank to leverage pension policies so heavily into my own personal investment outlook and strategy. Even so, that’s never failed me, not once. I pulled out of the market completely just before Black Monday 1987 and stood back that very morning laughing about what was about to happen, simply because I didn’t want to be buying across the aisle from what then was one of the largest pension fund sales in history. And the few individual stock purchases I’ve made during my life all made very heavy earnings from short-term knowledge of the pension plans of the companies (none of them clients, of course – I do steer very clear of using any insider information for my personal investing). I can’t even begin to count all the times I’ve watched new cash head to the market from pension plans anxious about accounting rules, riding the buying up in my own 401(k) equity investments. Then this past year, I had no interest in being among those having to balance out all the selling that pension investment reallocation strategies had been necessitating, so I’ve been happy to have not lost a dime in the market during its recent meltdown.

So let’s point out yet another potential pension influence: those 2009 pension cost figures about to be revealed in the first quarter financial statements about to be issued by companies with calendar fiscal years. One speculation pegs the increased pension cost at a level that would pretty much wipe out 2009 earnings for pension sponsors (those that don’t sponsor pensions being untouched by the higher pension costs, of course, so only suffering earnings erosion from the general economic malaise). My own personal estimate looks for a pension cost increase of only half that speculation, but even that more favorable expectation would hit corporate earnings like a sucker punch . . . . delivered by a wrecking ball!!

And much the same way as earnings estimates in early 2007 and early 2008 failed to anticipate pension cost decreases those two years, so too even the most dire earnings estimates making the rounds on the street these days have not yet taken those significantly higher pension costs into account.

Aside from several obscure pension forecasters whose word has not yet been recognized, so far the only indication of this wrecking ball has come in the form of some early warnings from du Pont and one or two other companies, but with none of those early warnings having yet put the dent that will have to be made in earnings projections. By the end of April, the naked truth will be hitting hard. And I believe we’ll see blood flowing through the ditches. And be hitting that basement floor like we were thrown down at it.

But even if many of the pension plans that have survived this ugly decade close their doors or freeze their benefits, the market meltdown of the past two quarters has hit an important wall: either more pension funds follow the lead of GM and others into permanent reallocation; or else pension plans take a temporary reprieve from their investment policies (not unlike how the stock markets have granted grace periods on otherwise applicable delisting requirements) . . . or we’re about to see an acceleration of the leveling out and turnaround in pension fund equity investment that I had originally anticipated coming in the final quarter of 2009 or early 2010.

In English? Like I predicted verbally three weeks ago and reiterated in writing earlier this week, I see the current “rally” as only a temporary bounce. So then when I refer to blood in the ditches and being thrown at the basement floor, I believe we still have a real chance of seeing the Dow cross below 6k before Memorial Day. But whereas earlier this year I anticipated steering clear of equity investment until late 2009, if not until 2010, I might now be making my turn as early as Memorial Day. Especially if the bottom has dropped out between now and then. And although I do look beyond pension policy – to the global economy and to technical factors and to a host of other influences – like so many times before, pensions will play a major role in my decision if I do move then: the worst of the info on pension cost increases will have been fully factored in by then; but we might then be seeing some serious money come to the demand side of the markets in the form of pension investment rebalancing back up to some higher equity mix. Meaning we might then see the market leap off a bloody spring and head straight up.

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Written by macheide

25 March 2009 at 3:15 pm

Posted in calls & puts

Just a Bounce

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That dead cat’s even jumped a little, yes. But without much more than hedge fund money buying into it, it’s still nothing more than a bounce.

Yes, I came very very close to sending 10% across to equities two weeks ago. But I’m not into making 3-week moves. And another week is all I give this, even with today’s latest edition of rules from Treasury.

Today’s 497-point hop in the Dow wins Kelly a steak dinner, but I don’t expect Nat will have to wait more than another two weeks to pick up her Olive Garden outing from a comparable drop. Burn out the little bit of outside money that might be foolish enough to venture back in, and we’ll be back to the basement.

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Written by macheide

23 March 2009 at 6:09 pm

Posted in calls & puts

Basement Door

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We’re finally standing at the basement door.

Throughout our giddy ride down an elevator in near freefall, I’ve frequently looked out the window, not yet seeing the street through the fog, at best only speculating how far down I thought the ground floor might be. But yesterday’s thud sounds, looks and feels a lot like the hard concrete of street level.

I do still believe we’ll be giving the basement a lengthy visit, perhaps even take a mattress down there for want of a better place to sleep off our drunk.

And once we get down there and poke around a bit, it wouldn’t surprise me all that much if we were to find it to be like a building with a basement parking garage . . . that goes down into basement level two . . . and basement level three . . . and maybe even a dungeon below. Except if we spend too much time below the basement we can see from here, we’re going to come out of it looking like strange deep-sea creatures.

Meanwhile, I’m still hanging on tight to my wallet and my belt. Any bounce we imagine any time this spring still doesn’t have enough momentum to levitate, the elevator cable’s still snapped, and our legs are too damn tired to climb any stairs.

Yeah, at this level, we could easily have a short-term visit back up to the second or third floor, like what we saw last December, and that could so easily turn a month’s return of 15% or more given how far down we are. But I’m not into one-month horizons; and within the next three months, we’ll be well down the basement stairs. Yes, I believe we can see the floor of basement level one from here; but I don’t think we’ll be seeing the ceiling of the fourth floor or higher anytime before Labor Day; and I’m still of the opinion that I could sit tight the rest of 2009 without regret.

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Written by macheide

3 March 2009 at 7:42 am

Posted in calls & puts

Still No Consistent Buying

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Yesterday afternoon, Bloomberg radio spoke with an analyst who was shrugging off the day’s 200+ Dow gain as little more than temporary short covering. None of it “new money,” he claimed. What’s needed for a real turnaround, he observed, was significant new money, day after day after day, through good news and bad.

That’s the first time in the past year that I’ve come across anyone else pointing to the absence of persistent buying in the equity markets. There being no end to the commentators Bloomberg usually parades around chirping about how underpriced and “oversold” the market supposedly is.

No matter how beautiful the women are, they won’t find suitors if all the men have been killed at war.

I know, the market is not entirely about the massive permanent outflow of pension money. But with that huge shift so drastically tilting the plane the past two years (only partially counter-balanced in 2007 by Chinese money), the weaknesses created by the credit crisis could do nothing but drag the market to historic lows.

Nine months ago, with the Dow in the high 12s, I marked 13k as the ceiling for the remainder of 2008. Then consistently throughout the months since, I have never yet seen a floor (although last September, with the Dow then still over 10k, I did point down to the 5s), but have only seen the ceilings drop again and again and again.

For now, I’ll stick with this loner Bloomberg managed to dig up, against all the unsubstantiated wishful thinking for a rally. As low as stock prices might look on an unthinking chart, the price doesn’t matter when the market has no buyer who is there day in and day out. So yes, I’m still looking for us to visit the 6s and even the 5s before we’re finished with this meltdown.

Appendum – And just now I heard a numbskull on Bloomberg blame today’s retrenchment (Dow currently losing over half the ground it gained yesterday) on “profit-taking.” Profit-taking??? OK, I know that’s the standard way of saying, “We don’t really know why it’s going down today.” But in this instance, it’s just plain idiotic. The only people in this market with any so-called profits to take are either day traders who bought in just yesterday morning and are already cashing in, or long-term investors who bought over a decade ago and are finally giving up. And if that’s the alleged “profit-taking” that is moving this market today, then we’re in even worse shape than everyone already fears. Seriously, where does Bloomberg manage to find these jokers?
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Written by macheide

25 February 2009 at 10:10 am

Posted in calls & puts

Still Not Yet Turning Up

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For several months now, business media has been flooded with prognosticators whose main argument for calling a market bottom and advising equity purchase amounts to little beyond the simplistic observation that a bull market has generally preceded emergence of the economy from a recession. Blindly, “If you wait until the recession is over, it’s too late to buy stocks at their cheapest, so buy now.”

Without showing the slightest inclination to understand why a bull market precedes emergence from a recession. That whereas the economy is like watching the bow of a huge vessel, the market watches the props and tiller, which set the direction long before the boat actually reflects a change.

So yes, the market quite likely will behave as it usually has, and move up before we’re out of this mess. But don’t expect it to do so when we’re still laying off over 25k more employees day after day after day, when we’re still cutting back on new equipment expenditures, when we’re closing down businesses left and right. Level out, and maybe the market won’t even wait for reversal of those trends before it moves back up. But as long as those indicators continue to plummet, don’t look for the market to find any steam to lift it out of the valley.

Besides, I still don’t see any major buying power standing ready to do anything more than a day or two of ass-covering. Until pension plans and other major institutions return to regular buying day after day after day regardless of market direction, there is nothing out there to support a bull market. They still don’t get it: much of that supposed “cash on the sidelines” is money that has left the market permanently, no looking back, no return.

So yes, we’re still 0% invested in equities, and still looking for lower markets as we move through the winter. I have distant hopes of maybe edging a toe back into stocks perhaps as early as the last month or two of this year, but I don’t think I’d be missing much of any bull market if we just hold our powder until 2010.

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Written by macheide

4 February 2009 at 5:59 pm

Posted in calls & puts

No BS

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No, as memorable as 2008 was, don’t remember it as a so-called “BS event.” Unless you recognize the only smidgen of validity in BS thinking to be in the admission of ignorance, and count yourself among the fools.

And 2009? We still haven’t touched the bottom yet. We’ve been bouncing around in this current range only because we got here too fast, so are waiting for gravity to catch up with where we dug ourselves down to, then will sink further. Yes, we’ve now discounted that Bush recession into the market, perhaps even as deep and as long as the top edges of what we have yet to see. So yes, stock prices are cheap, even taking into account all the companies that won’t survive 2009. But as Borders is finding out, it doesn’t matter how far down you discount your product if you don’t have customers walking through the door.

And pension plans still won’t be lining up to buy stocks, even at these cheap prices. I know, demand for equities also comes from 401(k) plans and mutual funds and hedge funds and all; in fact, the market’s dysfunctional tantrum this past autumn can largely be blamed on those other potential buyers finally getting with the program. But with the collapse of what had been a decades-long reliable source of buying in the form of defined benefit pension plan cash, the market will continue to bump around in the dark lost, with no major buyer stepping up to lead us out of the dark.

So we won’t break out back to a five-digit Dow anytime soon. Rather, before spring break, we’ll be making stocks even cheaper by testing those November 2008 lows, and still no major buyer will come forward, not just yet. By Labor Day perhaps, the largest wave of pension fund selling will have subsided (although smaller pension funds will still be catching up with delayed me-too sales); and even without a reversal that would switch over to major pension fund buying programs, the mere decrease in selling pressure should whiplash through the markets enough to stir others back over to the buying side. Depending on how bad things have been through the first half of this year.

So we ourselves might return to the market by mid- to late summer. But not yet: we’re not yet in “Buy Soon” mode. For now, it doesn’t matter how cheap the market has priced itself when there aren’t yet any major buyers willing to commit.

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Written by macheide

7 January 2009 at 5:17 pm

Posted in calls & puts