Is the Bull Dead? What Mothers Says

[tabs]

I had a converstaion with Mother down in Tucson about the Stock Market and the $. She said something interesting. That on heavy down days the only buyers of stocks are the companies themselves. Companies are buying back their own shares. Companies don't buy back their own shares unless they consider them to be at a bargain price. She feels that the coming year will be more of the same volatility due to it being an election year, however this is all prelude to a Big Bull Run in 09.

Mother is also a believer in Business cycles and the comment of another stock analyst come to mind when describing Stock Market conditions. " We all know what RE is doing and Bonds at a 4% yield, so what other alternative is there to the stock market?"

With regards to the $$, it seems like the US is in a race to see which currency will be cheaper the Yuan or the $$$. The $$ decline is a reaction to the Chinese reluctance to fairly value their currency and/or let it float on the world market like every other currency. Once the Chinese have their Olympics and get the prestige they feel they so reichly deserve things will move along and the $ will regain some of its strength.

[motion]

Originally Posted by tabs

reichly deserve

LOL

[Porsche-O-Phile]

Yea, I caught that too. I figured it was an intentional play on words. It does kind of seem to have a very fitting sort of double-meaning. Very aprospro.

[MRM]

Mother makes some astute points, as usual, but she ignores the fact that companies are as often wrong about their own share price and make as bad of decisions as any arm chair investor. Companies buying back their own stocks might mean nothing more than they have spare cash (most do because they've been downsizing costs and not expanding for years) and don't know what else to do with their cash so it's easy to put it back in their own company. Company buy backs are an important factor to consider, but not the only factor on which to bet the farm.

My sense is that the market ha probably swung a little lower than it should, but that it has farther to go. Sub prime will probably get worse before it gets better, but it will go from bad to better than expected fasted than anyone but an insider can guess. So rather than trying to time the upswing, it's probably a good idea to buy cautiously into downturns and look for selling opportunities on days when the market is way up.

Another thought to consider, financial stocks have been battered. Some because of subprime, some because of guilt by association. But many are paying high dividends. I think it's time to start looking at battered financials, buy ones that look particularly out of favor and have high dividends.

Most investors buy the hot stock, which, by definition, means it has recently gone up. Then they sell as soon as it starts losing value. Which stocks that have had a runup inevitably do. This means most investors buy high and sell low. Buy respected stocks in out of favor sectors when they look so bad that they can't get worse and sell when they are so hot that they make the cover of Money magazine.

For that reason I sold my mutual fund in August and bought a lake cabin. The cabin had an assessed value of close to $500,000. We got it furnished (and very well furnished) for $340,000. 90 minutes from the Twin Cities on a 1200 acre lake that is 150 feet deep and has 16 feet underwater visibility. That's quite a bit less than the sellet paid for it two or three years ago. People think I'm crazy to invest in real estate with the market in the tank. I tell them that's exactly the point. Why would you buy when the market is hot? You buy when the market is in the tank and sell when it's hot.

[Porsche-O-Phile]

Very true, but the data I keep coming across all seem to indicate that we're a LONG way from the bottom.

"Alt-A exposure" is going to be the buzz-phrase of 2008 the same way "subprime exposure" is for 2007. Mark my words. This is going to get much worse before it gets better. I liken the extent of the RE bubble to unearthing a recently discovered mass-grave. You know it's going to be bad and the more digging that's done, the more horrors you discover and the bigger the tragedy is.

[tabs]

MRM you mean like buying MOT at $16.00 a share.

[jyl]

My rule of thumb is that the market bottoms about six months to a year before the economy bottoms. Investors are anticipatory, and when they see the upturn coming, they want to buy ahead of the upturn.

Suppose the US will enter a recession in early 2008, which is what I believe.

Conventionally, recessions don't last that long - 2 to 4 quarters. In that case, the US economy might bottom sometime in 2H08, and the market might bottom in 1H08.

Plus, stocks are reasonably cheap, 2008 is an election year, the Fed is actively easing, a $100BN/yr war will end in 2009, and good growth in the rest of the world is helping exports. So, under a conventional scenario, the market should be set up for a recovery in 2H08 and into 2009.

One uncertainty is, how deep will the recession be? In other words, how far down should stocks go, before they bottom? It depends on whether the coming recession is only in the US, or if it pulls in Western Europe, or pulls in Asia and emerging countries too.

I think the market has mostly discounted a US-only recession. Can't be precise, just my feeling based on how much certain sectors have declined - look at consumer stocks and financial stocks. The market is starting to discount at least a slowdown in the rest of the world, but has much further to go down if we get a full global recession.

Another uncertainty is, how long will the recession last? The US housing bust will drag on at least through 2009 and likely 2010, I expect. It will be a multi-year process for US consumers to repair their balance sheets.

But the economy can grow, and the market can rise, while housing is still completing its bust - see the early 1990s. All those housing related jobs will be lost in the first years of the bust, after that it isn't an incremental negative.

So my working assumption is the market bottoms in 1H08 under an optimistic scenario (recession is US-only), or goes down a good deal more and bottoms in 2009 under a reasonably pessimistic scenario (recession spreads globally). I'd watch the economic news from Europe, Japan, and China as the best clue for which it will be.

[tabs]

Mother doesn't know if the US will go into Recession. She thinks it maybe a close run thing. At the moment she thinks this is the "most difficult market since 1989-1990." The credit debacle and election year all add up to more unpredictable volatility. She thinks the housing bottom is close, I think she is being overly optimistic on that front.

Mother told me an apocalyptic story about her former manager. He came into her office and told her that if she "only" sold a few annuities she would get an award as a leading producer. She told him that all of her clients who could benefit from an annuity already had them. She soon left that firm as she was recruited out by the manager of another firm who manages that firms offices in 4 western states. They wanted her so much that they opened a branch office in her home. She has a rough commute from bedroom to office via a detour by the kitchen coffee pot.

The firm she was formerly with is in deep deep sub prime trouble and might have to spin off the brokerage biz. To help stay afloat they recently had to get a loan from a ME loan shark at 11%.

Another potential victim of the sub prime is the big WAMU...it too might be merged into another entity.

That is what is eventually going to solve the sub prime..the in trouble players will be merged into healthy players.

[Porsche-O-Phile]

Although WAMU shares are cheap right now (relatively), I have a real problem with them. I think a long position on WAMU would be a very amateurish/naive play, and the guys over at Motley Fool tend to agree with that logic.

Conventionally, anytime a company is slated to get bought out, a long position is generally a good thing as the buyee's stock jumps up and a short position on the buyer is generally a good thing as the buyer's stock jumps down. Not always, but usually.

WAMU seems like the Countrywide of the banking world. They not only drank the housing bubble kool-aid, they chugged it. And actually went to the kitchen to brew up some more and chugged that too. I suspect they are in very serious trouble - more than they're letting on right now. I honestly wouldn't be surprised to see them go under in 2009 or 2010, if they last that long.

I don't honestly know who would want to buy Washington Mutual. Citi? B of A? All the big players have their own housing bubble toxicity problems and are trying to distance themselves from subprime and MBSes and SIVs. I don't know if they'd be thrilled to swallow a very-poisoned Washington Mutual. . . Heck, nobody has even made a play for E*Trade yet, and they're DIRT cheap at the moment. Same reason I suspect. And I also think THEY are in real trouble and wouldn't be surprised to see them go "poof" before 2010 also.

This housing bubble thing has been very, very bad. I hate to be all "doom and gloom", but this rabbit hole goes very deep and I think we're only just scratching the surface insofar as seeing as just how bad it really is and how much damage all this stupidity has done to various sectors of the economy.

[tabs]

Mr Robert Ruben ex Clinton Admin sec of the Treasury.... just had to borrow 7B at 11% from a ME loan shark, so I don't think they are in any position to be buying anything.

I think that the mergers will include big write downs of the bad loans. So that the shareholders of the introuble companies will be taking a big stick up the a$$.

[turbo6bar]

I admit I was a bit wrong regarding the housing bubble. There wasn't a housing bubble. It was a credit bubble. I do not believe equity markets can make meaningful moves until credit woes are fully disclosed. Big heads state the climate hasn't been this bad in decades. It's worrisome considering the worst may still lie ahead.

I do not have coins enough to play in the credit markets. Some good deals may actually be present. I'll pass on equities, for now. I want to see capitulation there first.

[jyl]

Some rambling.

My quant friends tell me that consumer, financials, and tech stocks screen most attractive right now.

I have not been buying financial stocks because I don't know enough about their business models, and am not able to distinguish between the models that are broken and those that are merely dented. Too many negative surprises keep emerging from credit and derivative markets, instruments I've never heard of and that are suddenly called toxic after being rated AAA just moments before, so it is not a place for me.

However, I have started buying some consumer and tech names. Mostly smaller-cap companies who have stumbled so the stock prices are down -50% or close, with foward PEs under 10X, where I think the business model is not broken and earnings will still grow in 2008. I've only bought a little, hoping I'll get a chance to fill up at lower prices.

Larger-cap stocks in the consumer and tech sectors have for the most part held up, so I am not too interested in buying. I've also sold most of my NDX long.

The last couple months have been pretty awful for small and mid-cap stocks. Traditional (long-only) investors are on the sidelines, not willing to buy and risk losing money just in time for fiscal year-end, if anything they have been selling for tax loss and window dressing. Hedge funds have dominated the trading and they have been playing for the very short-term, 'till year-end. Value investors are not stepping in, they are patient and generally pessimistic, so they're waiting for even lower prices. Investors generally have been favoring large-cap stocks, for more international exposure and stronger business models, plus they are harder for hedge funds to move around. So a quarterly miss and trimmed guidance sends a small stock down 20% overnight and it doesn't find a bottom, just keeps going down relentlessly.

I think - hope, speculate, whatever - that this market is making some names way too cheap, IF we do not have the global recession scenario.

When I can buy a solid company that will grow earnings >10% even in a weak 2008, at <10X PE and in some cases near 10% FCF yield, where the stock has already been nearly cut in half, seems like the odds are good enough to make at least a small bet.

Originally Posted by turbo6bar

I admit I was a bit wrong regarding the housing bubble. There wasn't a housing bubble. It was a credit bubble. I do not believe equity markets can make meaningful moves until credit woes are fully disclosed. Big heads state the climate hasn't been this bad in decades. It's worrisome considering the worst may still lie ahead.

I do not have coins enough to play in the credit markets. Some good deals may actually be present. I'll pass on equities, for now. I want to see capitulation there first.

[jyl]

Well, I just had a depressing call w/ a friend who argues persuasively for the global recession, or at least global slowdown, scenario. He works for a largish company, and part of his job is to monitor the outlook for the banking industry. He expects financial industry writedowns to exceed 10X current levels (appx $50BN to date); that would put many banks below regulatory minimum capital levels, which will have serious implications. This is partly due to mortgage delinquencies, but also rising delinquency rates in all types of consumer lending, including credit cards and auto loans. He pointed out that in 2008 consumers are likely to lose nearly $2 trillion in wealth (8% decline on $22 trillion residential RE value), while consumer debt/income levels are already at historical peak levels. And so on. None of this hasn't been mentioned here on PPOT, but it's depressing to hear it all together.

I also had a depressing talk last night with another friend. He is the CEO of a company that makes a particular type of sporting product that is fairly ubiquitous. His market grows mid-single-digits on average, so high-single-digit in good times and low-single-digits or slightly negative in bad times. He is planning for a zero-growth 2008.

Sigh. I am going to have a glass of cheap wine. Can't afford to open the good stuff.

[jyl]

Various economists and investment banks have "probability of recession" models. Most of these are saying 10% to 20% chance of a recession, a few are saying >50% chance.

The thing is, if you look at a chart of the "recession probability" from these models, superimposed on actual recessions, you see that when the models give a recession probability over a certain, seemingly low, level - like 10-20% - then 8 times out of 10, there is in fact a recession in the following year.

In other words, when the model says recession probability is near-zero, the real odds of an imminent recession really are near-zero, but then it turns non-linear - once the models say 10% or 20%, the real odds are more like 80%.

Originally Posted by tabs

Mother doesn't know if the US will go into Recession. She thinks it maybe a close run thing.