The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Good Evening: Without much more to go on than just the afterglow surrounding yesterday’s stock market rally, our capital markets struggled during most of Wednesday’s session. Stocks did manage to hold on to yesterday’s gains, but it seemed as if investors were waiting for more information. Perhaps tomorrow’s economic data (jobless claims and retail sales) will allow them to decide whether or not to further expand their risk appetites, but believe it or not, waiting for more information (a.k.a. patience) is indeed a viable investment strategy these days.

Stock futures were higher this morning in the wake of yesterday’s rally, but there wasn’t much in the way of economic data to digest. Mortgage purchase applications during the latest reporting week were modestly higher in response to lower mortgage rates, and oil inventories rose a bit instead of declining as many had been expecting. The major averages popped by 1.5% or so before the release of the oil numbers nicked the shares of many energy producers. Equities then spent much of the rest of the day grinding back to, and then below, the unchanged mark before a late day rally and drop left the averages mixed. Hopes and fears (such as those chronicled in the pieces you see below) essentially wrestled to a draw.

The Dow Transports led the way with a gain of 2%, while the Russell 2000’s 0.4% drop left it the odd index out. Treasurys were weak in the early going, but a decent 10 year auction sparked a comeback that left yields lower by 2 to 10 bps. The dollar was knocked around for a 1.2% loss, but the greenback’s fall didn’t help commodity prices. Though the precious metals were higher, a 7.4% drop in crude oil was hard for the CRB index to overcome as it fell 2% today.

Yesterday I discussed Jeremy Grantham’s views about investors going catatonic during bear markets. Wondering where the bottom is and staying frozen until one can be identified is NOT an investment strategy. Having a plan and waiting for more information, however, is indeed a legitimate strategy in this turbulent world. Bill Fleckenstein addressed this issue for his readers today in his always-excellent “Daily Rap” (www.fleckensteincapital.com).

Having run a short fund for many years, Bill is commonly portrayed as a bear. Recently, journalists who either can’t read or who can’t find Bill’s phone number to ask him what he really thinks, have decided to call him a bull because he decided late last year to wind down his fund. Fortunately, Bill’s own words settle the matter. He’s agnostic about stocks these days and thinks it’s wise to wait for a few more cards to be played before deciding how to commit his chips. Here is what Bill wrote this afternoon about his what seems to be the most urgent issue of the day — determining whether we’ve seen “the” bottom — as well as his current plan of action:

“I could easily see how this rally could continue and it could turn out to be the bottom (though that isn’t my belief). After all, the financial index has collapsed 85% from the top. There isn’t much more room for a lot of financials to sink. And, not all of them are going to zero. Leaving the market ‘out of it,’ there are plenty of stocks which appear cheap. However, I think the fundamentals are still poor enough generically that I am not willing to look at buying too many stocks just yet. I personally would rather pay up down the road — having a little better understanding of how so many of our problems are going to work themselves out. And, there’s always the possibility that one might not even have to pay up. To sum up, perhaps this will be a decent rally or perhaps the start of something bigger. However, for my money I still don’t like the risk/reward landscape in the aggregate.”

As one of Bill’s constant readers, I was struck by his willingness to be patient, even if it means he misses the ultimate bottom. He wants to wait for the odds of success to become easier to asses, which, unlike doing nothing, IS an investment strategy. Perhaps a Texas Hold ‘Em analogy will better explain Bill’s current approach. Pre-flop, you only know your hand and have little information about where your hand stands relative to those of other players. After the flop, you now know more about the potential for your hand (say one card away from a flush), but you might not stick around if the price of calling someone else’s bet is too high. If everyone checks, however, you get to see a free card or two that will give you a better assessment of your odds of winning the hand.

Waiting for more information allows a patient gambler to better know when to commit his or her chips. Sure you might have to fold the potential winning hand if the price of calling early on is too rich to take a chance on hitting the right card(s), but so what? There’s always another hand to be played. Protests from either the SEC or the Nevada Gaming Commission aside, investing requires a similarly sober approach. The stakes are high and the price of making a mistake is accordingly high in a wild market environment such as the one we are now facing. There’s always another hand to be played, just as there will always be a new set of investment opportunities to consider.

– Jack McHugh

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