Eight lesson for Perplexed Perma-Bulls

I had a very interesting discussion with a usually bullish (but circumspect) friend who writes me: 

“Man, you bears had an 11% Nasdaq move to the downside that you’d been calling for, yet you have been trying to play the upside most of the way down. You could have shorted it at any time and printed money.”

Unfortunately, it doesn’t work that way. Why not? Because:

1) The initial move down is usually a warning – we don’t just collapse from new highs.

2) There was no indication to GET SHORT NOW — not, at least, in a prudent risk/reward manner. Merely having a 2%, 4% or 6% drop ALONE isn’t enough to make me want to short.

3) You don’t get to top tick the move down, nor cover at the precise bottom.

4) The SPX was down 6% — again, that’s a warning shot across the market’s bow, not the 30% collapse I have been discussing.

5) Playing potential upside by putting on a 1% position on with very tight stops is not a reversal call – it’s merely a probe.

6) Tuesday was the first time I specifically wrote something up and said BUY EM — and that was emailed out to subscribers and the media in real time. Thats a big differnce than simply putting as toe in the water;

7) Unlike #2, there actually were indicators that said GET LONG NOW –

8) Its important to grasp that different long/short entries present very different risk reward ratios – that’s why shorting in the 8th inning of a move down presents a huge difference in how much you risk versus potential rewards than buying what you believe could be a reversal point.

Ultimately, you have to put on trades that fit your parameters and present the best bang for your buck.

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  1. Robert Cote commented on Jun 15

    Does the extreme volitility “blur” the signals? FI, I see homebuilder stocks 5-6% higher than yesterday on no news. That isn’t rational, it’s just noise.

  2. toddZ commented on Jun 15

    The 8th inning reference is ironic in light of the “8th inning end to Fed rate hikes” comment we know so well. Is this the 8th inning or the 2nd? Will there be extra innings?

    I would wait for a base to form before “buying on the dip.” I just got a 10% haircut doing the same thing you’re doing. Not a good feeling…

    Copper has to settle and foreign markets have to settle.

    I’m taking some small short positions today on the theory that this is a small technical short-covering bottom and not the end of the sell-off.

  3. ac commented on Jun 15

    I think the homebuilders thing was a pretty obvious call — if you were able to hold out.

    At least in my delusional world a 20%-30% downswing was “guaranteed” to happen at some point given the dynamics in the industry/economy.

    I still worry about more correction coming in the overall market. I think it’s an issue now of how divorced US business has become from domestic economic concerns. Not enough, I think.

  4. B commented on Jun 15

    The maket definitely caught me off guard by the size of the drop and the swiftness. Not the US so much but the overseas. It’s not every day we see such a move so entering once it has been so swift is very difficult emotionally. One just doesn’t expect a 35% loss in a month. I expected the Naz to drop any moment but it was brutally fast and without mercy.

    I’m almost of the notion that it is time to buy the home builders for a trade. lol. I don’t have a buy signal yet but they have had a capitulative intermediate move. I still think long term they are likely only down about 30% from where they will go from historically similar situations.

    Howsa bout my friends over in China. A Google search on China brought up this Stratfor commentary. It appears it is premium content so I don’t know how long it will be available or why it is but I have alot of respect for Friedman. He’s tied quite tightly but he’s more credible on security issues IMO.

    http://www.stratfor.com/products/premium/read_article.php?id=267648

    Now, they didn’t really go into much detail on they “why” but I saw this coming for a little over a month now. It took me a while to put 2+2 together but I now see alot of synergy with this commodity explosion in 2006. China raised rates a few months ago and Goldman warned it would accelerate growth. Well, now China appears to be in melt mode.

    Here is a quote from Bloomberg a few months ago regarding Goldman’s Hong Kong team’s comments. You still bullish on China’s ability to “beat” the economic cycle?

    +++++++++++++++++++++++++++

    Moments after China’s central bank shocked the world with a rate increase, Goldman Sachs Group Inc. was telling clients that the surprise move may boost the economy, instead of slowing it.

    The central bank’s governor, Zhou Xiaochuan, couldn’t have been happy, yet Goldman economist Hong Liang had a point — one to which markets should be paying more attention.

    The People’s Bank of China last week raised its one-year lending rate to 5.85 percent from 5.58 percent, while holding the deposit rate at 2.25 percent. Liang warned that only adjusting the former increases banks’ lending margins and may boost credit creation, the opposite of what Zhou wanted.

    Why? Chinese lenders derive more than 90 percent of revenue from the difference between the two rates. “It enhances banks’ incentives to lend,” said Liang, head of China economic research at Goldman Sachs in Hong Kong.

    ++++++++++++++++++++++++++++++++++++++

  5. rf commented on Jun 15

    any word on Hedgie losses last month ?

  6. vgf commented on Jun 15

    The Barclay Group — more than 70% of hedge funds suffered losses in May, with an average decline of 3.09%. The Fairfield, Iowa-based firm reports that 11 of its 18 hedge fund indices lost value, with its Emerging Markets Index hit hardest (down 4.73%), followed by its Technology Index (down 3.44%), European Equities Index (down 3.37%) and Pacific Rim Index (down 3.24%).
    Directional equity strategies took the brunt of the losses, reflecting price declines in the stock markets of industrialized and emerging economies,” said Barclay President and founder Sol Waksman. The overall Barclay Hedge Fund Index dropped 1.78% in May, with the average gainer climbing 1.41%. Barclay found that hedge funds employing short strategies performed best, up 4.97% for the month.

  7. C commented on Jun 15

    From the Stratfor article referenced above:

    “The solution of Chinese companies is to sell more products to generate cash to pay off the loans. It is difficult to sell into the Chinese economy because of high savings rates, driven by government policies and economic insecurity.”

    Seems like they could change those policies pretty quickly.

    ” The Chinese government needs a high savings rate to help stabilize the banks; dramatically increasing domestic consumption would undermine the savings rate, threatening the banking system just as surely as defaulting loans would. ”

    Why “dramatically”? Seems like even a moderate change would have an impact.

    “The solution for these companies, therefore, is to increase exports.”

    They make it sound like the only solution.

    I found the analysis too simplistic. I believe the Chinese economy can be managed. Their leaders are not stupid or bought off to the degree our own current administration seems to be, blissfully depleting the national treasury like drunken sailors.

    My impression is that the Chinese people are accustomed to following a party line in the interest of the “greater good,” and I’m willing to bet there’s a lot of pent-up demand for STUFF over there, especially among their younger generation. Given the incentives and the wherewithal, they will spend. Moderation is the key, and with such a huge population, even moderate spending will have a big effect.

    Also, unlike Japan, they have vast natural resources to fall back on. I think the general outlook is positive.

    Not an economist, though, so what do I know?

  8. C commented on Jun 15

    Sorry…lured off topic by the provocative B!

  9. joe commented on Jun 15

    With all due respect C, you don’t seem to know much about the Chinese situation. I fully agree with B on this one, China is screwed. Consumption as a % of GDP is about half of what it is in the US, meaning their economy is supported entirely by Foreign Direct Investment and Exports. As the US economy moves into recession and consumption drops (currently running over 70% of GDP vs historical average of mid 60’s), deman for Chinese exports will drop. Coincident with that will be the falling dollar and rising Yuan, which will put further downward pressure on Chinese exports. Want to know why the Chinese have resisted calls to appreciate the Yuan? check out the chart from Japan post the Plaza Accords… Domestically, China’s money supply is exploding. Credit creation is off the charts, and many of the loans are non-performing. It’s estimated that over 900B of bad loans sits on Chinese banks balance sheets. This is about equal to the “massive” foreign currency reserves that China has built up, and obviously with good reason. In today’s WSJ, there’s an article about the off-balance sheet liabilities of many of the municipalities in China, which they have wracked up building roads and infrastructure galore because there is no muni bond market. So b/w the local governments and the banks, the entire stash of currency reserves already has a claim against it. Now, why are those 900B in loans non-performing? because the government has used the banks as a means of funding works projects to employ hundreds of millions of Chinese. Take steel factories for instance. B has commented repeatedly on the crazy number of steel factories in China and the incredible output capacity that they have built up. All these factories have been funded by the banks, and almost all of these factories are not economically viable. Thus the problem with “centrally managed” economies. This gets to the crux of why you are mistaken.

    “I believe the Chinese economy can be managed. Their leaders are not stupid or bought off to the degree our own current administration seems to be, blissfully depleting the national treasury like drunken sailors.”

    That’s a joke I hope. No economy can be “managed”, least of all one run by a bunch of authoritarian communists. Man is fallible, power is corrupting, and those two traits lead to sub-optimal decisions by men in power, thus the reason that markets are always more efficient at allocating capital than “leaders” are.

    China is facing deflation the likes of which Japan never knew. Prices fell in Japan 1-3% a year. I think China is in for a much ruder awakening than that.

  10. C commented on Jun 15

    That’s why I read this board. I’m trying to learn and absorb different points of view to refine my intuitive thinking. Thanks for the ideas and insights, all.

  11. jac commented on Jun 15

    “” I believe the Chinese economy can be managed. Their leaders are not stupid or bought off to the degree our own current administration seems to be, blissfully depleting the national treasury like drunken sailors. “”” …….. are you nuts ??????.. half of the companies there are run by the sons of Aparatchiks or Army Generals ….. … they make the Russians look like saints

  12. GRL commented on Jun 15

    To add my two cents, it is worth noting that Stratfor has been negative on China for many years, long before the MSM ever got wind of any problems.

    The bottom line is that China is a Japan 1990’s scenario waiting to happen, with much greater implications for markets and economies world wide. (Except for a massive export of savings, Japan’s economy was relatively isolated.)

    Stratfor just recently noted all of the various accounting firms that have been putting out negative reports on the Chinese banks (this, just after the recent massive bank IPO in Hong Kong that investors were so eager to gobble up), and has suggested that the rose-colored glasses through which the MSM views China are starting to crack. Eventually, the cracks will cause the rose-colored glasses to fall off completely, and the Western rush to invest in China will end (if it hasn’t already), cutting off at least that source of life support for the system.

    Thanks to Stratfor, I have managed to steer clear of all Chinese stocks, funds, and ETFs, and have no regrets. Stratfor may be wrong, but it sure doesn’t look that way so far, and I for one would not bet against them.

    You might also want to check out what they say about Russia.

  13. C commented on Jun 15

    Like I said, what do I know?

  14. GRL commented on Jun 15

    And to add another two cents — viewed in this light, the recent efforts by Chinese companies to invest in oil companies and the like overseas should be viewed as a sign of weakness, not strength, i.e., capital flight.

  15. Cherry commented on Jun 15

    Communists? Oh, please, please move on from that label. They are far from, especially when materialist greed is consuming these Chinease “communists” over their poor brothers(and has for some time).

    Considering in China’s history, they have always been despotic in nature, this is simple a natural progression of its history after Emperor Mao’s high profile run as Emp.

    They taint a Market economy, nor will they be. They taint a egalitarian nation either, nor will they be. Something we will have to learn to deal with.

  16. trader75 commented on Jun 15

    Anyone who uses the phrase “you could have printed money” doesn’t have a grasp on the dynamics of trading in my opinion.

    There are countless ways one could “print money” with the help of a rewind machine or an accurate crystal ball. Since neither of those exist, the only way to take advantage of a surprisingly large move is to position for it before the fact–which requires balls, foresight and risk control.

    A lot of folks don’t grasp the pari-mutuel nature of the market. The greater the probability of an event, the more the ability to profit from that event is diminished, just like at the track. The folks who caught a nice chunk of this downmove (including yours truly, hehe) were already running against the crowd before it happened. The big wins typically come out of left field–uncertain situations have a far greater reward / risk proposition than certain ones. (Deep value investors know this too–recent case in point, chicken stocks.) This means that creativity and risk control are far more important attributes than trying to be right all the time, which is a self-defeating exercise. The professional trader wins by understanding the odds and consistently getting the best of it–which means being wrong in small size on a regular basis. The “printing money” episodes are simply the most visible outliers of a consistent and well-defined process.

  17. B commented on Jun 15

    They are communists. You can call them whatever you want but that doesn’t change the label. They control free speach, they have had thousands of incidents of brutal state-driven crackdowns each year on those who try to practice free speech. And those people disappear. They are run by the centrally planned communist politboro.

    They simply have given their people and international observers the illusion they are changing with just enough day to day freedom as long as you bow to Mao. That, coupled with an export driven economy, allows them to keep the social disturbances to a minimum while they maintain control. Now, they may have a long term plan to work the leaders out of a job by creating a true democracy but then we really don’t know for certain. Do we? And historically, how many commies give up control for the good of the many when they are lining their pockets with bribes and corruption?

  18. me2200 commented on Jun 15

    Great discussion on China, guys. How do we trade it ?

    Thanks.

  19. GRL commented on Jun 15

    The fundamental point is that China has a statist (communist and imperial) legacy which prevents it, like Japan, from allowing private enterprise to allocate capital unfettered by government control.

    As in Japan, the misallocation of resources, specifically capital in the form of bank loans, has led to a deep, structural, systemic crisis, which the Chinese, like the Japanese before them, are trying to export their way out of.

    All of these government-directed economic systems appear from the outside to be strong but are, in reality, inherently weak due to their refusal to allow private actors to use the price mechanism to allocate resources efficiently. The outward appearance of strength allowed the West to miss the coming collapse of communism in Russia and Eastern Europe in the ’80’s, the collapse of the Japanese economy in the ’90’s, and now the collapse of the “Chinese miracle” in the 2000’s.

  20. rob commented on Jun 15

    me2200,

    i suggest waiting for an extraordinary event, like pandemic bird flu or insolvency of china construction bank, and shorting the hell out of FXI.

  21. Gabe commented on Jun 15

    Where’s the volume? This looks to me like the mother of all short sqeezes.Any comments Barry?

  22. D. commented on Jun 15

    I don’t know what kind of returns you posters get but I find many of you are just trying to be cute.

    I sold my XIUs in December made good returns, now I’m all in cash. When the techs crashed, I was also in cash so I outperfomed big time.

    When I left for maternity leave in 99 for 6 months, I told my boss to overweight oils… Huge returns, little work!

    I’m just waiting for the markets to correct properly. Being in cash permits me to do some fundamental research, build my model portfolio without having to look at the tickers every two seconds. In my experience, I find that managing this way guarantees that I’ll never get influenced by the herd.

    I found that by trying to be cute, too much precious time was wasted for an incremental basis point.

  23. wcw commented on Jun 15

    GRL, I expect you finally sold out of your long-Somalia positions when they chased the warlords out recently and returned its economy to the fetters of government control. To be serious: central authority is not the enemy of profits, competition is. If you really want to print money, get a government-sanctioned monopoly.

    In re: homebuilders, I can’t see being out of my short entirely. The news flow is going to skew negative for the foreseeable future, while the only positive is the reasonable price multiple. I am looking for a higher reentry point, though. One of my usual targets isn’t borrowable today at my el-cheapo broker, which to me sounds like squeezes may be on the way.

  24. me2200 commented on Jun 15

    I’m 100% cash too.

    D: good advice. I’d love to hear some of your ideas. What is the next thing after oil ?

  25. whipsaw commented on Jun 15

    lol, dow closed up nearly 200 points. The bulls are coming back to their watering hole. Once they’ve had time to lose their fear and bloat up some, it’ll be time to scatter them again. This is like watching the movie after you’ve already read the book.

  26. jkw commented on Jun 15

    Cherry,

    You must have just read Marx and ignored the redefinition of the word communist over the past century. The system Marx described is unworkable. The Soviet Union and China have determined what communism now means: a totalitarian state that controls everything it can. It doesn’t matter that this has nothing to do with the economic system that Marx described in The Communist Manifesto. It is the modern definition of communism and has been for at least 50 years.

    Marxist communism was tried for a year or two after the October Revolution. It doesn’t work and never will. The closest you can get is market socialism, which is basically what the Scandinavian countries are doing (moderately high taxes with good unemployment and health insurance in a mostly free-market economy). It will be interesting to see if it works as well as it is supposed to in the coming global downturn. If they get through with little trouble, market socialism will spread rapidly. If their deficits become unmanageable, it will die (at least for a while).

  27. tjofpa commented on Jun 15

    Part short squeeze; part save the pro Put sellers rally maybe. Bet we faltline tomorrow after initial pop. Just give me a few more pennies on XOM, DD, and NVDA and I’ll be out.
    Can’t believe I didn’t buy those MER 65’s yesterday after making some dough on the 70’s last week. When the tape is this volatile the returns aren’t bad at all.

  28. B commented on Jun 15

    This was a 95% up volume day. Whew! That has to be a record this cycle. I think all of those people who were going to get screwed if options expired a few points south of here mounted a mighty rally.

    So, joe, do you take the same medication I do? From your post it appears so. lol.

    GRL, you bring up alot of good points about behavioral dynamics of Japan and China. I’ve argued for ages that we need not worry about China overtaking the US because the cultural norms stymie innovation. That said, Japan has taken alot of medicine and they are at least twenty years ahead of China and likely alot more than that as it pertains to sustainability and structural reforms. China is absolutely no threat to Japan for quite some time IMO. And we saw what kind of threat Japan was to the US. None. People add up all of those bodies in Asia and the fear of God goes through them. Well, all of those people have been there for two hundred years and America has been a comparative blip. The future is the innovation society and that is where America excels. And it just so happens many of those in Asia who are free thinkers want to move here so we get alot of their best talent as well. Now, I want everyone globally to have a better life but I just don’t think anyone is going to unseat the US.

    So, me2200, I’d say there are two plays on this. One is short industrial commodities or their stocks. They are still at 100 year high levels and they are likely going back up for a while so you’ll get a safer entry. Shorting Phelps Dodge gave you a cool 30% return this month. My three favorite commodity shorts are TIE, BOOM and PD but surely not right now. But, they showed their hand this decline. The leaders up are usually the leaders down. I don’t care what anyone says, this is an industrial commodity bubble if history is to be repeated. And, I could argue economic reasons why there is no way that history cannot repeat itself. So, thinking bubbles, think of who the best shorts were in the 2000 decline. The leaders up. This was their goldilocks and it doesn’t get any better than right here.

    I would also say longer term a “long” play is Goldman Sachs, HSBC, Citi and BAC. If China craters and the financial system with it and China continues down the path towards WTO promises, these companies are uniquely posititioned to cherry pick distressed assets at bargain basement prices. Today then aren’t allowed to do that. Tomorrow………they are supposed to be able to buy Chinese assets outright. Goldman and others made a killing in Japan. That said, I woudln’t touch them now until I see how this real estate thing is going to turn out. And, Goldman is artificially inflated to extreme valuations because the this cycle where M&A was intense and their trading desk printed money.

  29. me2200 commented on Jun 15

    B: thanks for taking the time to write that. I learn a lot from what I read here.

    “I don’t care what anyone says, this is an industrial commodity bubble if history is to be repeated.”

    Hallelujah brother ! We is singing from the same songbook.

    Question: you recommend shorting commodities. Is oil in that list ? Does anyone foresee that oil would fall (we have more than enough of it) but gasoline would hold or increase as we have a refinery shortage ? Because I do feel we have a refinery issue building up.

    Is anyone forecasting a decrease in gasoline consumption if we go into recession ? Or will it flatline ? BTW: for those not familiar, refiners had some amazing crack spreads this spring.

    Thanks again.

  30. ~ Nona commented on Jun 15

    D, thank you for your comments.

    I’m about 70% in cash; I’m going to let trailing stops get me out of more positions. I was 100% out of tech almost a year before the tech wreck. It might have been nice if I had stayed at the party a little longer, but at least I missed the grand finale.

    Like me2200, I’d love to know your thoughts about TNBT (The Next Big Thing). Don’t be shy.

  31. jkw commented on Jun 15

    I can see oil falling. Inventories keep coming in at record levels. The high prices are reducing consumption. There have been lots of stories about SUV sales declining.

    In a recession, energy usage will drop. People are already cutting back on travel and employment isn’t even down yet. People without jobs aren’t likely to drive any more than they have to until gas is cheap again.

    There is a significant war premium in oil right now. If Iran announced tomorrow that they were going to give up on refining uranium, oil would probably be below $60 within a week. Iran won’t do that, but it is an important factor to keep in mind. I don’t see the war premium going much higher unless Iran shuts down mid-east oil shipments (which they recently threatened to do). That could possibly spike oil over $100.

    The upside risk right now is mostly hurricanes. Nobody knows what they will do this summer/fall. The gulf isn’t as hot as it was at this time last year, so there probably won’t be as many bad storms. But weather is hard to predict more than a few days in advance.

    I should mention that I don’t trade commodities at all, because I feel that I don’t understand the markets or the risks involved. But I think what I’ve mentioned is true and should affect oil prices in some way. Things worth researching further at the very least.

  32. RW commented on Jun 15

    Might be worthwhile shorting some industrial commodity stocks but stronger companies with proven reserves in politically stable regions are excellent value plays longer term; low relative and absolute PE’s w/ most profitable at a quarter to a third of current spot price WRT their underlying commodities.

    As to communism, E. O. Wilson said it best: “Why did communism fail? Good ideology, wrong species.” As a myrmecologist and originator of sociobiology, Wilson should know.

  33. me2200 commented on Jun 15

    I need a good forecast on what the price of oil and gasoline is going to do. It is for a business investment decision.

    Some people are saying the price will hold through a downturn because demand is so high and supplies are so tight. Others say it is going to fall off dramatically, like to $30.

    What are the chances of oil falling back to $30. If you look at the futures market, just about zero.

    Anyone have any other input into this sort of forecast ?

  34. trader75 commented on Jun 15

    Oil not falling in recent days is kind of like the dog that didn’t bark in my opinion.

    A lot of guys were beating the drum for oil’s “speculative component” last year, laying the blame at the feet of go-go hedge funds; I think Andy Xie of Morgan Stanley must have called for a speculative crude oil collapse at least three or four times.

    Now we’ve seen the real effects of speculative withdrawal as emerging markets and highflying commodity stocks get slaughtered, yet oil is still hanging out at $70. Not 100% sure what it means but it definitely says something interesting.

  35. me2200 commented on Jun 15

    “Not 100% sure what it means but it definitely says something interesting.”

    I thought the same thing. If crude oil could be stable when everything else fell, there must be some fundamentals behind it. Or it is the last bastation of the hedge funds !

  36. whipsaw commented on Jun 15

    My “good forecast” regarding oil is $100/bbl by December. I think that you guys get so wrapped up in fundamental/technicals/economic metrics that you forget about the geo-political gorilla. It doesn’t really matter what makes sense from a capitalist perspective even if you could figure that out as long as the Chinese are swinging a big bat and the Middle Eastern countries have a bone to pick.

    What you Cold Warriors Heros have forgotten when you rant about “communists” is that even if China is in dire straits (which is probably true), it isn’t going to collapse amid a shower of capitalist roses, it is going to war in the classical fashion of a regime that needs something else for the people to get behind (i.e., Argentina/Falklands). If it comes to that, then I would definitely short WalMart and Home Depot among many others. And I would not want to be in Taipei.

    Toss in the probability that any problems that we have with China will coincide with problems in most of Latin America and Castro will wind up laughing himself to death. As far as the ME goes, I think that you can pretty much count on a major event happening in Dubai- it is screaming “Attack Me OBL!” and that will be worth $20/bbl in itself.

    Hell of a world we live now- I only had to grow up in the middle of a useless war in Asia that was gutting the Republic as fast as it bankrupted it, so you kids have it…. hmm well maybe not?

  37. M.Z. Forrest commented on Jun 15

    Short term you could see oil get down to maybe $50/bbl. Long term I don’t see that being sustained. Venezuela and now Saudi Arabia have stated they want the price to be either $60 or $70/bbl. Add into the equation that capital expenditures are drying up due to changes in tax policies in South America, and I think you see a real floor forming. Long term you will see this in medals as well as South American countries further implement confiscatory tax policies to retain a greater portion of their mineral wealth. If I remember correctly a large metals company in Brazil tanked pretty hard because of foreign flight out.

  38. D. commented on Jun 15

    The next big thing (lol)… If I only knew myself! I’ve been kicking a lot of tires but there is so much money out there, that everybody is doing the same thing.

    Last month I went to lunch with one of my old colleagues. He’s got a million in personal money to invest and he’s been looking at retirement residences. He said that there is so much money out there, that nothing under 2 million will make a decent return. Competing bids are incredibly aggressive… less than 2% vacancy rate assumption.

    I work top down and bottom up. It freaks out my stock picker colleagues because they prefer not to look at the macro stuff. I don’t understand how they can plug numbers into their spreadsheets if they have no clue what’s going on. I guess that’s why bank analysts typically put 5% revenue growth no matter what!

    For example, from 2001 to 2005, I managed a financial companies mutual fund. Real estate was taking off and the only loans growing on bank books were consumer loans. The first thing I did was go into StatsCan and the US census bureau to look at the population pyramid and household fundamentals to get a feeling for what we would be going through for the next 10 years. When people talk about boomers buying more houses or immigrants saving the day, they’re dreaming!

    Next, for each sector select top notch names and create a model where I calculate my own normalized earnings and target price fro each co. Then I wait for the stock price to hit my buy price.

    I usually have 2-3 no brainer table pounders. Currently I have none.

    I’ve started to look at agricultural commodities. I think food is too cheap. I think inflation will pick up so I’m looking at cos. that have no debt, have fixed their debt or can easily pass on price increases.

    In the 50s and 60s, Canada’ stock market did better than the US because of its exposure to commodities. I get the feeling, the commodity cycle might correct short term with America slowing but will soon pick up steam with a growing developing world consumer. The capitalist Western world lives for growth and with the Western world consumer tapped out, growth can only come from the developing world!

    Currently, I’m not looking for the next bubble because I’m betting that the excess liquidity gets wiped out once and for all. I might just be able to pick up current bubble stocks for cheap!

    I’m pretty sure boomers will be taking hits on two fronts: real estate and the market. I’m afraid that when this happens, they’ll throw in the towel and just buy CDs. This is not 1987 and 2000 anymore, most are not 35-40 anymore, there is a huge group that can’t afford to lose any money.

  39. whipsaw commented on Jun 15

    per “D” (or B or C if my guess is correct):

    “usually have 2-3 no brainer table pounders. Currently I have none.”

    If so that is because you have limited your choices. I am long in an XAU/USD trade at the moment and laughing my ass off as it goes up during the Tokyo session. It will pull back tomorrow of course, but I will be long gone by then.

    I am out of the US equities market for a while now. Already took plenty of scalps over the past month and am resting up for another slaughter session in July, but am going to probe the gold thing in the interim.

  40. Brian commented on Jun 16

    Agriculture is interesting. Jim Rogers says agriculture is the next commodity to take off (after oil and metals). Not a lot of great stocks in that field: MON, maybe SYT. ADM is more a subsidy cow than a real business. I’m not getting into wheat futures. Maybe there will be agriculture ETFs like there are energy and metal ETFs. (Probably after the big move is made).

    It was something to watch oil hang in there at $70 while everything was cratering.

  41. me2200 commented on Jun 16

    “I’ve started to look at agricultural commodities. I think food is too cheap. I think inflation will pick up so I’m looking at cos. that have no debt, have fixed their debt or can easily pass on price increases.”

    Don’t bother looking at the commodities themselves unless the 3rd world countries decide to clean up their act or producing countries remove their tarriffs. The world is swimming in wheat and gains. The technology to produce gain inexpensively is incredible. Better varieties, better technology, better equipment, etc.

    A lot of people are worried that ethanol is going to steal a lot of acres that go for food. But what they don’t realize is that the brewing grains are resold as cattle feed, so really not much is lost. Unless people stop growing grains entirely and just grow corn. But I don’t see that happening.

    Anyone have an outlook on ethanol ?

    “In the 50s and 60s, Canada’ stock market did better than the US because of its exposure to commodities. I get the feeling, the commodity cycle might correct short term with America slowing but will soon pick up steam with a growing developing world consumer.”

    I just don’t see that happening. As far as I can tell, the US consumer is going to go into hibernation for the next few years. And I think the Chinese consumer will go for a nap too. I think the commodity boom is done.

    “The capitalist Western world lives for growth and with the Western world consumer tapped out, growth can only come from the developing world!”

    Agreed, but I think it will take a while.

    “Currently, I’m not looking for the next bubble because I’m betting that the excess liquidity gets wiped out once and for all.”

    Boy do I hope you are right.

    “I’m pretty sure boomers will be taking hits on two fronts: real estate and the market. I’m afraid that when this happens, they’ll throw in the towel and just buy CDs. This is not 1987 and 2000 anymore, most are not 35-40 anymore, there is a huge group that can’t afford to lose any money.”

    I agree on all points here.

    Good discussion people. Thanks.

  42. D. commented on Jun 16

    whipsaw: I’m a stock picker so when I said no table pounders, I was talking about stocks. I agree that I’ve limited my choices but I believe in focus. I really prefer to stand back once and a while and make sense of what’s going on. I feel I lose sight of the forest when I don’t do this. I don’t care about leaving money on the table.

    me2200: I’m looking at companies. Looking at commodities are part of my top down approach. I think cheap oil and low rates have really positively impacted the agricultural complex in the last decade. Both permitted the acquisition and usage of machinery, increasing productivity and competition. This is coming to an end plus droughts are in the horizon.

    For example, development in dry regions with no consideration for environmental impacts (i.e Las Vegas) can only deplete aquifers making it tougher for future agriculture.

    I’m also looking into anything that revolves around water management.

    Ethanol… everything points to the fact that production is more energy intensive than the energy it gives us for combustion. If governments are crazy enough to subsidize this we’ll see. They’ve done more stupid things so it’s not beyond them.

    As for the Chinses consumer, I think short term there will be a correction and materials will get hurt but over the next few years Chinese internal demand will pick up. Let’s do some math… If Western world goes into recession and unmeployment goes from 5 to 8%, that means 20 million people lose their jobs. Over next 5 to 10 years it is estimated that the Chinese middle class will go from 30M to 100M households. That’s just China.

  43. D. commented on Jun 16

    Brian:

    “Agriculture is interesting. Jim Rogers says agriculture is the next commodity to take off (after oil and metals). Not a lot of great stocks in that field: MON, maybe SYT. ADM is more a subsidy cow than a real business. I’m not getting into wheat futures. Maybe there will be agriculture ETFs like there are energy and metal ETFs. (Probably after the big move is made).”

    I went looking for an ETF also. Came back empty handed. Same conclusion… ETF creation after big move has occured? BTW, I think there is one in the pipeline.

  44. B commented on Jun 16

    D, if you don’t mind, might I make a recommendation for you to dig into. Quantitative analysis. I never understood the top down approach. It’s like throwing darts IMO. It’s sort of like relying on an economist to predict the direction of the stock market. The fundamentals look great but I can’t explain why the stock market is down 80%. That was the general view of economists when we had a teeny weeny recession in 2001. Investing has little to do with fundamentals IMO. Whether than is a stock or an economy. In the middle of the Great Depression we had a rally of 500% in the S&P. What fundamentals drove that? Fundamentally nothing.

    I can tell you in ten minutes which sectors are outperforming, which sectors are going to lead the next bull market once we hit a full scale decline, etc. And, I only use mathematical algorithms and statistics. Math never lies. People do. It picked Apple, Google, Valero, Express Scripts, Goldman Sachs, Genentech, CSX, etc this cycle. And, I could do it in five minutes with quantitative models.

    EPS? New Products? Revenue growth? Huh? Who cares! The key is to use statistics and mathematics to determine where the fast money is flowing. That way, you are seldom wrong. It’s all about following the money. Now, I’m not saying it is magic but it sort of is for people who are used to digging through reams of data and making field trips to companies to talk to the marketing director about a new widget. It’s fast, it’s scientific and it’s beautiful. And, it will tell you whether grains/food are the next big thing rather than trying to formulate whether food is cheap. Because it really isn’t about food being cheap. It’s about following the fast money. If they decide food is cheap, then it will be cheap. If they don’t, it isn’t cheap. Btw, I suspect Rogers is a quant without reading his work.

    Vive la science!

  45. D. commented on Jun 17

    B.

    Whatever.

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