S&P 500 Grand Tetons: Don't Be a Boob - from GTBP.org

I asked our four amateur GTBP.org Equity Traders, some who are up 25% in the last four weeks, for their input on the markets.  You can see their profiles, trades and performance on the GTBP Equity Fund page on http://gtbp.org .  This is what they had to say.

Roger Berkowitz

 

All of the recessions in the past 40 years or so have been driven by the business cycle. They were based in inventory overhangs or inflationary spikes. They required readjustments in the business world, but largely consumers continued to spend. This was good for the economy because consumer spending makes up 70 percent of the economy. After the excesses got worked out, things returned to normal. 

 

Today things are fundamentally different. People keep speaking of this as a crisis born in the housing market. Yes and no. More No. The real danger (and the jury is still out on whether it will come to pass) is one of systematic addiction to debt mixed with a freeze up of the credit markets. We have consumers, corporations, and governments used to living on debt. For 30 plus years we have mostly been living beyond our means. And then in the last 10 years or so a surfeit of financial instruments extended leverage throughout the economy to allow an ever greater disconnect between lifestyle and income. SUV's bought on credit. Houses like ATMs. Derivatives and off-the-books accounting.

 

What the credit crisis means is that all those indebted consumers and businesses and local and federal governments are going to have to tighten their belts. That is the real worry. Forget inflation. We are talking about an increasing likelihood of a long and painful recession. What we now face is not a business cycle recession of the like we are accustomed to. We face a possibility of a massive realignment of lifestyles and expectations that will take years to work itself through the system. If indeed easy credit goes away. If indeed people are forced to pay of their mortgages or lose their houses. If indeed credit cards must be repaid. If indeed municipalities face the need to reduce their debts and liabilities. If all this and more happens, we face an unbelievable and truly horrific retrenchment of the US and the world economies. 

 

One of the trends of the last 20 years is the end of home cooking and the move to eating out. A whole lifestyle has been established on this premise. Will that end? If so, the restaurant industry is set for a massive dislocation. How about retail? What would it mean if consumer spending really decreased for a 2-3 years or more? This is the proverbial shoe that has been threatening to drop for nearly a decade. On the one hand, I know it must drop and that the longer we wait, the harder the drop will be. It will be painful, but we must endure the pain. But on the other hand, such theoretical musings ignore a basic fact. We have no idea what it really means to live through such a massive realignment. If this indeed comes to pass, the economic consequences will be severe. It may be necessary. It may be that in 40 years we and our children muse about how the profligacy of the 20th century brought about a new sense of responsibility and thrift. A nice thought, but tough to go through.

 

I fear the social issues we are arguing over today will be quaint in comparison with what we will come to worry about in 2-3 years. In addition, this economic decline accompanies an incredible loss of power and prestige in foreign affairs, opening the door to dangers there as well. And how will politicians react? Demagoguery and such is also a possibility. I am sure the government will step in and do what it can. What does all this mean? Who knows. The real question is consumer psychology.  We are in unchartered territory. The recesses of the human brain. My instincts are to horde cash. But where to put it. Does anyone else worry that the FDIC has only enough cash to reimburse half of the money in insured accounts? A run shouldn't happen, but fear that it might could be the devil. And the fear is just beginning. 

 

Will there be a buying opportunity when fear takes full hold? I am not even sure of that at this point. More likely we are in for a seesaw for a few years. That doesn't mean there won't be opportunities. There always are. But stock picking will be very difficult. I am going to be very cautious. And at this point cutting losses seems the prudent strategy.

 

The 1000 pound Gorilla in the room is the election. My hope is that the next president will really see that we face a potential catastrophe. If he does, there is a chance here to push through an enormous infrastructure program that modernizes our mass transit and energy infrastructure and also injects an enormous amount of cash into the economy. The other option, less good, is a war.

 

It is a scary time but not a time to panic.

 

Keith Nash

 

Financial Armageddon? Or Not?

 

Anyone paying more than cursory attention to the markets these days can't help but be aware that all is not well. The credit crisis triggered by the subprime mortgage debacle over a year ago continues unabated, despite unprecedented measures taken by The Federal Reserve Bank and the United States Treasury to forestall the banking system from imploding.  Residential Real Estate sales have fallen off a cliff and holders of Alt-A, Option ARM, and even prime mortgages are defaulting at higher-than-anticipated rates. Fannie Mae and Freddie Mac are moribund and Secretary Paulson may be compelled to actually use his Bazooka to save them, with dire consequences for our national debt and the poor, long-suffering taxpayer. Because the financial sector is so important to the economy as a whole, its problems are not confined to its own sphere but instead have acted as a drag on everything.

 

Besides finance, there are other reasons to be gloomy. Our current economic system is based on cheap oil, and at over $100 a barrel, oil is definitely not cheap any more. Sure, it's come down significantly from its all-time high, but that itself is another cause for concern because it implies that the global economy is slowing.

 

So, is this the end? Will our house-of-cards system totter and fall?  Perhaps not. Those of us who lived through the 1970's know very well that things can turn around - eventually. I own a book from that era in which the author seriously recommended burying cash, and gave instructions on how to preserve it from the elements! Hopefully we won't need to take such drastic steps. It's best to keep in mind that much of the advice we read today will seem just as silly thirty years from now. The internet is a great facilitator for the tin-foil hat crowd. That being said, there are some important differences between our situation today and that of the 1970's. Our national and household debt is much larger today. We're bumping up against production limits on oil now, where the shortages then were due entirely to politically-motivated embargos. We import the majority of our oil, while back then we had only recently hit our peak in production and begun to use imports to fill the gap. We had a manufacturing base in those days that we've since shipped overseas. So there is good reason not to expect a replay of events as they transpired in the 1970's.

 

What course of action should one take, in light of the facts? Prudence suggests getting out of debt, out of the stock market, and into cash.  Make sure you don't exceed the FDIC insurance limits on your bank accounts. Keep some cash around the house. If your appetite for risk is robust there are an array of investment techniques for profiting from a downturn: shorting, buying PUT options, buying the various 'short' ETFs, etc..

 

I've found a website (see link below) by Dr. Chris Martenson with a good video tutorial about the basic problems. It's called the 'Crash Course'. All I ask of you is to view these videos and give the matters some serious thought. The link is:

 

http://www.chrismartenson.com/crashcourse

 

Your own best course of action depends on your particular circumstances. I highly recommend getting out of debt and moving any stock market investments you have into cash or (perhaps) U S Treasury Bonds. Caveat: I'm not a registered investment advisor, and this is not to be construed as investment advice. Let there be no suing of Keith!

 

I sincerely hope that I'm utterly wrong about this and that some day you all can rib me about it, and believe me, I'll be the first to laugh at myself. But if I'm right, as I think I am, then if only one of you takes notice and pursues appropriate action, I feel I'll have done some good in the world.

 

Jon Nordhem

 

I pretty much agree with his assessment of the credit mess. The Fed will probably make one more rate cut witch is a last gasp effort to move the economy forward. I think they should save it, it won't do any good. This market has a way to fall before we get capitulation. There are just too many pessimistic investors out there. We just saw a 300 point jump in the Dow after the Fed decided to bail out Freddie and Fannie. That held for one day only to be answered by a 300 point drop. The support level on the S&P was in the 1210 area and that was tested and broken this week.

 

Need I say that I'm short and will stay that way until I see a change in the market direction.

 

Alicia Pereira

 

The Dow will bounce off 10K and at that point I am looking for good companies that have gotten dragged down to invest in long.  At that point I am bullish because I am a longer term investor.  Every time there is a recession the fear mongers come out and the same topics come up, energy, population.  But to me the market situations always seem to work out.  I see the 10K as a floor and it will bounce back.  The companies that I am interested in at that point will be recessionary proof consumer staples, like P&G, McDonalds, Johnson & Johnson, and King Pharmaceutical.   I would go heavy into good dividend paying stocks, like PGH and FRO.  One last thing, the election is a big question.  Who gets elected will have a big impact on the market but from perception more so than fiscal policy.   But I am struggling with the understanding of which candidate will do better for the economy.  Wall Street typically likes Republicans but World Leaders want a change and are comfortable with Obama.  So Obama might bring in needed international investment.  But the bottom line, this is an opportunity.   

 

I have a 30 year time horizon and personally I am looking at real estate seriously now.  With all these foreclosures, these folks need to live somewhere.  Buy the house and rent it back to them.  I am seeing an increase demand for my apartment buildings which is allowing me to increase my revenue per unit.  I like buying distressed properties.  Today, many investment companies don’t tell you that you can buy real estate with your 401K.

 

Conclusion

 

How do you digest this information?  How do you position yourself to preserve assets, lifestyle and profit by identifying trends?  The reader will have to draw the conclusions here themselves.  Please add your comments, ideas and concerns below.  That is the great part of the Internet; the ability for interactive conversation in media.  Back on July 29th, I wrote a stream of consciousness piece a month ago called ‘Trends Evident’ here for the GTBP.org which goes along with this article as well.  It was my thoughts after spending several hours scanning news articles. 

 

What do you do now?  What if you already rode the market down in your 401K some 20-35%?  How much further down do we have?  You know the moment you move it all over to cash the market is going to rebound.  That’s just how it works for the average joe.   If you invested in 2000, it took 7 years to get back to that level and now you would be down again.  IF you have a financial advisor that had your portfolio 100% long equities and bonds over the last 12 months, I would look for a new advisor.  My personal liquid accounts look like this for the past 18 months, 90% cash, 5% long specific stock picks, 5% ultra-short ETFs.  This was not necessarily the right thing.  I could have gotten a nice 15% dividend off some energy stocks like PGH.  But I was intra-day-trading for income to take advantage of certain technical trends.  Overall, I am only up slightly, which means that I have lost money since I am digging into my capital to live.  So, for me I have to get a job to preserve my capital and standard of living.  You know anyone hiring?

 

For this fall and winter I see the market heading south till the major capitulation followed by a bear market rally which will bring the S&P back up to 1200.  The leading indicators here are consumer spending, lending and retail sales.  Retail sales are terrible; food service sector has recently taken a turn for the worse.  Jobs and corporate earnings are lagging indicators but confirm the downward trend.   You have corporate earning coming up next which are not going to be good.  That is then followed by the missing consumer for the holidays which will further exacerbate the market.  No home ATM equity, no credit, the job market will get worse.  In my opinion, and this entire article is an opinion piece, the market will take several years to recover to the July 2007 highs.

 

We can’t tell you what to do here. Each individual has to be taken into the equation to figure the best route for them.   Investing is a balance of fear and greed and it is of utmost importance that you can sleep at night.   I would be happy to recommend an advisor if anyone is interested.

 

After reading this article, “How to avoid a heat attack by drinking and smoking” is a must read.

 

Comments welcomed!