6/20/2013 10:15 PM ET|
Market turmoil hasn't peaked yet
It may be tempting to try to get out front of the rally that would surely come when recent turmoil simmers down. Problem is, trouble is often followed by more trouble.
Do you buy amid the selling or hang on until the worst is over? Let’s look for advice from warriors of the past.
"Buy on the sound of cannons; sell on the sound of trumpets" is attributed to Nathan Rothschild, who, the story goes, made a fortune on early knowledge of the result of the Battle of Waterloo.
Rothschild supposedly bought when everyone in England thought the battle was lost and prices were deeply depressed, and then sold in the euphoria that followed the Duke of Wellington's victory over the armies of the emperor.
Good advice -- even if the quotation and speaker are in historical dispute. (Rothschild is also credited with the advice to "Buy when there's blood in the streets.")
If you can buy at the moment of maximum doubt or turmoil and when prices have been depressed by the certainty of further chaos, and then sell at the moment of maximum joy, when disaster has been averted and all everyone wants to see is victory, then, yes, without a doubt, you can make a lot of money.
The problem is that the sound of cannons can be followed by the sound of even more cannons. And blood in the streets by even more blood in the streets. It's hard to pick the climax of doubt and turmoil.
In the same way, it's hard to pick the moment when the trumpets are to be trusted. Many the flourish has turned out to be maddeningly premature.
I bring this up because I think we're at one of those moments when we can hear the sound of cannons and when blood (and tear gas) is indeed running in the streets, but when it's hard to tell if we've reached the climax of the barrage.
In my opinion, it's still early in the turmoil in global financial markets. The cannons are indeed still increasing their rate of fire.
If your goal is to buy when prices are near their lows because chaos and turmoil have reached a peak, I think it's still early. The trend in many of the world's markets -- yes, probably even in emerging markets, though they have clearly broken downward -- is toward more turmoil.
Let me try to run quickly through the arguments for increasing turmoil in several significant markets. You can decide what the picture is for the global market as a whole.
The United States: I think Ben Bernanke's performance on Wednesday, June 19, has left the markets deeply worried. The Federal Reserve chairman said that the Fed would begin to taper off its $85 billion in monthly purchases of Treasurys and mortgage-backed securities later in 2013. And that it would then gradually reduce its monthly purchases month by month until the Fed ended the buying program completely by mid-2014.
IF, and this is the crucial IF, the strength of the U.S. economy is consistent with projections by the Federal Reserve that put GDP growth at 3% to 3.5% in 2014 and forecast unemployment to drop to as low as 6.5% to 7%.
The market, if I can judge by the selling pressure on June 19 and 20, has taken this as a clear statement that the Fed will begin to taper on that schedule. The problem with that belief -- and with the Fed's policy statement -- is that very few economists working outside the Fed believe in anything like that rate of growth for the economy and jobs in 2014.
The median estimate among economists surveyed by Bloomberg calls for 1.9% growth in 2013 and 2.7% growth in 2014. The U.S. economy hasn't grown by an annual rate above 3% since the four quarters that ended in June 2006. Either the Fed has got this right and just about everyone else has got this wrong, or the Fed is deluded in its optimism.
But anybody who thinks the Fed's June 19 statement puts to rest the debate over when the central bank will taper and by how much is mistaken.
The Fed has left traders and investors in the U.S. wondering whether the Fed's optimistic economic projections are a reflection of the Fed's desire to end quantitative easing as soon as possible or represent an honest appraisal of the U.S. economy.
The Chicago Board of Options Exchange Volatility Index (VIX) has spiked in the last two days, and is now up 53% since May 17. And the market has been set up for further turmoil if economic data in the next quarter or two don't back up the Fed's optimism.
Forecast: More cannon fire likely as the market tries to figure out the data and Fed policy. Hopes that the Fed will be right about growth make U.S. growth stocks a better bet than income stocks and interest-rate-sensitive stocks in the financial and housing sectors.
I'd particularly look for growth stories that aren't dependent on an increase in the rate of growth in the U.S. economy. Companies positioned to benefit from the boom in U.S. energy production come to mind. I'll have some picks on that theme next week in a post on best stocks for the second half.
Taking it to the streets
Brazil: It's tempting to think of the mass protests now rocking Brazil as the sound of cannons -- and therefore a signal to buy -- and the end of the protests as the blare of trumpets -- and a signal to sell.
I think that's a misreading of the extent of troubles in the Brazilian economy. The mass protests in the streets of Brazil's cities were initially touched off by demonstrations against an increase in bus fares in Sao Paulo. But they've now grown into a protest against inflation -- officially 6.5% but far more punishing in crucial categories as food and healthcare -- against bad schools, economic inequality and government corruption.
There would be less anger to fuel these protests if Brazil's economy were growing at the 7.5% rate of 2010, but growth fell to 2.7% in 2011 and then to 0.7% in 2012. The forecast for 2013 has been falling this year and is now down to 2.77% among private economists -- and no one believes the Banco Central do Brasil's official forecast of 3.1% growth.
At the same time as growth has lagged, inflation has kicked up to an annual rate of 6.5% in May. That's at the top of the central bank's inflation range of 4.5% plus or minus two percentage points. Raising interest rates to fight inflation would reduce economic growth, but the central bank doesn't seem to have a choice.
Forecast: The cannon fire gets louder as we move deeper into 2013 and I don't anticipate a drop in volume until we've seen a couple of further interest rate increase from the central bank. I'd look to Brazil's domestic consumer sector after those rate cuts. As tempting as the price of shares of Brazil's banks and exporters are at current levels, I'd still look for further drops in those sectors.
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Money Managers can't get paid if folks are pulling out all their money so their number one job is to say anything and everything to get folks to invest. Regardless of the actual state of the economy or the Stock Markets. The Market turmoil has NOT peaked simply because all the factors which are affecting the Markets and will affect the Markets haven't been taken into account. Things such as the Big Banks massive Derivatives liabilities and the issue of not enough folks making a living wage. Up until this week, the markets have basically ignore those issues. Fact is, even the issues have issues, and that's a major problem.
Watch it, Watch it!!!!!! Big Black Friday losses coming today. This is going to look really ugly to the naked eye today. But, don't worry our non corrupt government will boost it, prop it, and leverage the country into more inflation. Get used to Beanies and Weenies!!!!!!!!!!!!!!!!
I was right the last time and made 80% return getting back in at the bottom. There are alot of factors here.
1. inflation-that money has got to go somewhere and when it does you will pay more. This is awful because in 1980 the min wage was 3.75. Today that would be 16.50. Who is going to buy the stuff in which to repair/sustain the economy, now throw in the inevitable inflatation, no inflation? well, we can fix it with higher interest rates, right? Either way you have diminished buying power for half of Americans. You know the ones who shop at Walmart. The ones who shop at Target won't buy because of the higher interst rate on their card.
2. China-look it up.
3. Europe - read the papers
4. You - you're not special and neither am I. You will not escape this correction, 200x value give me a break!!!!!!!!!!
Is this another article about Asia?
I feel we should all stand behind our investment in Paula Deen even though she doesn't like those n_gg_ers.
I applaud Jubak for including Rothschild's wonderful quote once again: "Buy when there's blood in the streets."
Yes, Bernanke should go back to buying 85 billion dollars a month of collateralizied debt obligations. With our money.
Can you say Master Limited Partnership?
A rough day yesterday. Even with well placed shorts, including gold to glean some profits, the later half of the trading day hit everyone. There were no safe havens, everyone was 'running for the exits'. So those of you spouting about buying opportunities, if you HAD cash, you missed the last 4-5 months of market highs to glean those profits in the first place. What some are saying around here doesn't really add up.
Today, you have a buying opportunity to scoop up bargains. I'd look at entertainment industries such as Disney ( they were one of the big losers yesterday) as their stock price should be rebounding. Why ? #1: They raised their prices to $95 per person, #2: summer time attendance numbers always increase.
But don't be running around like a bunch of 'chicken little's' ! It's just the beginning of the end for QE - we need to have equities stand on their own, a strong dollar, and continue to pay down your debt- the day's of cheep money are over.
There is only one reason for the degree of run up in the markets over the last 4 years. Only one, and that reason is the Fed throwing money at the markets in various forms of QE over that time period. I know some can't believe that, and I know some will say that the laws of supply and demand somehow don't apply to the markets, but when you have a central bank just printing money out of thin air (money we will all have to pay back) and putting it into the markets, it creates demand that would otherwise not be there, and thus market prices rise in response to the false demand created.
Get the Fed out of the markets and you'll see where the markets should really be. Better yet, get rid of the Fed altogether. If we continue on this path, there will come a day when the Fed can print as much money as they want, and it will have a one word definition: Worthless.
The turmoil has not peaked yet, it would be great if we could say the anyalist "have" peaked!!!
Corporate profits are at record HIGHS but Dodd/Frank destroyed the Economy. The S&P 500 companies have over a TRILLION in CASH, yet another Record all time high. But according to some, Dodd/Frank destroyed the economy. What destroys a economy over time is when Corporations sit on record Profits and Cash on Hand but refuse to pay a living WAGE.
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