Friday, November 21, 2008

What Now? Is This the Bottom?

Since the Presidential election the stock market has fallen 20% plus, bringing the total carnage to close to 50% domestically (and slightly worse internationally). REIT's are down 60%. As far as I know, this is the first time a stock market has dropped by 50% twice within a seven year period - making it the most difficult time to be a stock investor since the Great Depression. While the economy was not heading off a cliff back in August, the events of September brought everything to a screaching halt.

The failure of Fannie, Freddie, AIG and Lehman (specifically Lehman) was like a freight train running at full speed and suddenly hitting an immovable wall. The train is still there and so is the wall, but there won't be any progress for a long time. Not only does the train (what's left of it) have to be removed from the tracks, but before a new one can be put back on, the tracks have to be repaired, the wall has to be removed and somebody needs to ensure that there aren't any more walls built on a train track.

I believe the problem we are facing is a lack of confidence in any elected leadership. We have nobody who anybody trusts giving us any signs that they have the ability to lead us out of this. My hope is that the President-Elect makes a wise decision with his Treasury Secretary choice - if he does, this will go a long ways toward the process of restoring confidence.

The good news is that oil is down substantially and this will serve as a monstrous stimulus to the American People, their gas prices being cut in half right before the holiday season. The bad news is that we could easily see $4 gas again if we don't address our energy problems.

We have a $10 Trillion deficit and will probably add another $1 Trillion next year. That is small potatoes compared to the $53 Trillion in future deficit we have with Social Security, Medicare and Medicaid.

The problems we face seem insurmountable and for many nations they would be. However, we happen to live in the greatest nation in the history of the world and the people, who have faced much greater adversity and come out stronger will again save this great nation. Our greatness is not derived from our politicians, but from our people.

We are entering a deep recession that may see unemployment rise to 9%, very similar to the 73-74 and 80-81 recessions. Things aren't good, but America has come out of every recession in its history and gone on to become stronger than before. We need to take this opportunity to strengthen our nation fiscally. We need to be careful not to over-regulate and in fact de-regulate some industries. Finally, we need to enact greater regulations on the financial industry that got us into these problems to begin with. Those on Hubris Street (my name for Wall Street) can no longer do whatever they please because they think they are smarter than everyone else in the room, these emperors have certainly been proved to be without clothes.

This all brings us to the question of the day - what now? What do you do with your money that is invested in stocks? Many have started to look at other avenues beside Buy and Hold, they are looking at both Active Management and Market Timers.

I've looked into both and both have failed in their mission at just the moment they were supposed to shine. What follows are how some of the best in the Active Management world have fared:

• Warren Buffett (Berkshire Hathaway): -43%
• Ken Hebner (CMG Focus Fund) -56%
• Harry Lange (Fidelity Magellan): -59%
• Bill Miller (Legg Mason Value Trust) -50%
• Ken Griffin (Citadel): -44%
• Carl Icahn (Icahn Enterprises): -81%
• T. Boone Pickens: Down $2 billion since July
• Kirk Kerkorian: Down $693 million on his Ford shares alone

As for the Market Timers, the number #1 newsletter as ranked by Mark Hulbert for the past ten years is Bob Brinker's and he still had a bullish signal as of November according to a blog that follows Brinker, a quote from that blog as follows:

"Bob Brinker's Marketimer: Bullish. In his most recent issue, which was published in early November, editor Bob Brinker writes: "We continued to believe that there is no risk of a cyclical bear market (a decline of 20% or more as measured by the S&P 500 index (S&P500 chart) in the months ahead ... We expect the stock market to set a series of new record highs into next year." His model portfolios are fully invested.

Mark covers nine of his top market timers and concludes Bob Brinker is not a "lone voice in the wilderness" with his bullishness. "None of these nine top timers is bearish. The average equity allocation among all nine is 83%. This is down only slightly from where this average stood in recent months."
The best news is the worst market timers Mark Hulbert covers are quite bearish with an average recommended equity weighting of only 9%:

This 83% average is good news for the stock market in its own right, of course. But it's particularly bullish relative to the average forecast of the ten stock market timing newsletters with the very worst risk-adjusted performances over the last decade. The average recommended equity exposure among these worst performers right now is just 9%.

In other words, the worst market timers are quite bearish right now, while the best timers are quite bullish. Rarely are we presented with a contrast this stark."

My point - there is no safe harbor from the storm in terms of investing in stocks. They are risky and the only way to capture the total return of them over the long run is to be fully invested in them, not jumping around. Of course, this assumes a diversified portfolio and that you don't have money invested in stocks that you need within ten years.

Bottom line - this is bad, it hurts, its emotional and I have no words that can make you feel any better except that this too shall pass and stocks will rise again, it just might take awhile. Good things come to those who wait and patient, long term investors in stocks have always been rewarded with excess returns.

I'm on a vacation up in Oregon and heading back home this weekend, I'll be available part of Tuesday and all day Wednesday and Friday (no, I won't take calls on Thanksgiving!!!).

If you want to send me an e-mail, I will respond.

Scott Dauenhauer CFP, MSFP, AIF