I am a financial professional who is actively interested in the integration of financial markets, the economy, geopolitics and history. My only "public" record is on the Miller Industries (MLR) Yahoo! message board, where I have chronicled my investment in the company since February 2003.

Monday, July 17, 2006

This is a Kodiak - not a Teddy

Bear markets are miserable time periods for most investors. There is an old saying that even bears lose money in bear markets, as they are shaken out of their shorts by all of teh volatility. We have already witnessed one explosive short covering rally that bounced the S&P 500 off of 1220 and back up to 1280. It is a chemical reality that most people who short do not have the mental ability to watch positions move against them for long until they capitulate and cover their short. This lays the foundation for the next vacuum in the market as prices cascade lower while the short base is re-built...only to be sacrificed in the next short covering rally! What a vicious cycle indeed. My work suggests that the current decline should take the S&P 500 at least to 1220 but more likely to 1185 (give or take a few points). That market action would likely set the stage for another vicious short covering rally in August back to the 1255 area....and usher in the next phase of the bear. That stage will likely take the S&P down to the 1040 area. Small caps, international stocks and emerging markets are likely to continue to be the most volatile market segments. This is true for both the cascading sell offs as well as the short covering rallies. Brief Jim Cramer Update - his public portfolio is now down about 7% for the year and just 11% since it started in January 2002.

Wednesday, June 28, 2006

Non-Linearity and Mean Reversion

These are two fundamental concepts that the vast majority of market participants are either ignorant of or in denial. Most investment dogma is based on such nonsense as "efficient" markets and optimization - pure rubish. Only professors could conjure up such garbage, as any real examination of history empirically shows that markets are not efficient and rather than being linear actually organize themselves like other complex systems in exhistance. Many investment "experts" rely on "long term" data to provide horrible financial advice. For example, the average financial advisor will suggest that stocks are the best performing asset class over the long term and that taking more risk (as defined by volatility) is directly related to higher returns. Just because stocks have been up more than cash or bonds since 1926 we should all have 75% of our retirement dreams in that asset class! This mind set ignores two critical concepts - valuation and mean reversion. If one buys stocks when they are expensive, the future returns are greatly diminished. Stocks have ALWAYS traded like a valuation pendulum around the mean - going from dirt cheap to insanely expensive and back again over very long term cycles. Those investors who purchase/own stocks when valuations are high and at the end of such a cycle have "enjoyed" returns below that of inflation, cash and bonds for periods exceeding 15 years! The last cycle ended in the 1998-2000 period and the S&P 500 has underperformed lowly T-Bills since that time frame - a period of 6-8 years. This is the beginning stages of the stock market reverting to the long term mean and then likely moving towards dirt cheap once again as it did in 1982, 1946 and 1920. Anytime investors purchased stocks valued as they are now, they have made ZERO money after inflation going forward and still endured the volatility that always accompanies stock investing. The recent transition back to a cyclical bear market is part a parcel for how the long term pendulum swings back and forth. The 3+ year cyclical bull from Oct 2002 until May 2006 was just enough to suck enough people in so that the bear can do real damage. Where did most of the money flow? Emering and international markets. What is getting hit the hardest now that the bear market has begun? Emering and international markets! All of this is the kind of noise that occurs while the market gradually reverts to the mean over the long term. There will be another major cyclical bull market that will emerge but not until we are much lower and great pain is felt by most investors.

Monday, June 12, 2006

Bear Market in Full Force

The secular bear market that began in 2000 (actually 1998 for many stocks) is restablishing its credentials after a 3.5 year hiatus. Many are still in denial as to what recent market action means, however, investors would do well to not be complacent. The internal health of the market has been deteriorating consistently since January of 2004 - yes...2004. The S&P 100, the largest 100 stocks in the S&P 500, peaked then and is essentially flat since. These are the most widely held stocks, so by definition most investors have not done nearly as well as some market segments. The most risky market segments have done incredibly well over that time - small caps, mid caps, international, emering markets, etc., are all up huge. However, it now appears that market leadership is transitioning out of those risky areas back to the blue chips. This is very normal historically - market leadership changes during BEAR markets not bull markets. The risky segments have exploded to the downside since the peak in mid May and I expect them to lead to the downside throughout the bear market. Even though we are in a bear market cycle, there will likely be explosive countertrend rallies along the way. The former leaders will likely spike the most during those rallies and tease investors into believing that they have finally bottomed...just in time to knee cap them once again. This is the vicious nature of bear markets - just enough hope to keep investors committed long enough to do real damage. At this point, I would guess that there is 2-5% downside in the S&P 500 before we get the first explosive rally.

Jim Cramer - soon to be a Pariah

I have followed Jim Cramer's public career since 1998 and have read virtually every word he has authored on TheStreet.com since that time. I also read his first book, Confessions of a Street Addict. I genuinely believe that Jim wants to help people understand how the market really works and has the best intentions. However, I am confident that I have a pretty good understanding of who Jim is, how he made his money, and how that is a combustible combination for is public career and those who listen to his "guidance". In his first book, it becomes quite clear that Jim's hedge fund fortunes had very little to do with being a fundamental investor. Jim is a trader/mercenary and his ability to pick stocks based on fundamental reasons is average at best - in my opinion. He relied on his wife, Todd Harrison of Minyanville.com (former president of his hedge fund) and other traders to coin consistent profits. That action created MASSIVE commission dollars that were used as leverage with the firms they directed it to, to gain access to research analysts. Jim's fund would accumulate a stock that had a good "story" that they could pitch the analysts on and convince them to upgrade the stock. Once the stock was upgraded his fund would blow out the stock into the price spike from the upgrade. Good work if you can get it! That was legal at the time, so there is nothing "wrong" with what they did. However, it is hardly the kind of track record that warrants someone listening to his daily stock advice. His public portfolio has done very little since he created it in 2002. He built his reputation on being in cash for the 1987 crash - he admits in his book that was due to luck. His major buying opportunity in 1991 was because of his wife - left to his management his fund would have done very poorly. When the only other major market disruption of the 1990's occurred in 1998, his fund almost collapsed and was bailed out when his wife returned, borrowed more money than was legally allowed, and was bailed out when the Fed cut rates in October 1998...none of which were due to Cramer's abilities - he was suicidal at the time. So in summary, I have learned a tremendous amount from Jim and appreciate his willingness to share the inner guts of how Wall Street really works. However, part of that education also allows me to state with supreme confidence that Jim Cramer will be a pariah after the current bear market plays out. His viewers/readers/listeners do not have the same make up as a trader/mercenary. They don't have the stomach to trade actively. They buy what is hot and what Jim talks about on his show, but then will not have the stomach to sell. Many of his viewers are already barried in "BRIC" stocks that are probably down 20%+ in the last month. Jim will blame the Fed and say that he has been bullish on them from 40% lower. Unfortunately for him, he is unrealistic as to how the average investor "works". They will end up panicking and will sell at the wrong time and Jim will be blamed and lashed out at. The irony is that that is precisely how he has behaved towards others in the past - karma anyone?

Thursday, June 01, 2006

Juco Arrives!

I've been an active reader of blogs for about 3 years and thought that the present was the "right" time to begin my own. I am a financial professional in an industry that I believe is leading most of its clients down a path that will likely lead to widespread problems when the Baby Boomers approach retirement age. The US stock market is in a long term bear market which likely began in 2000. Its duration is likely to last at least another 10 years plus, and it is crucial for people in the US to realize the monumental challenges we face as citizens and investors over the next decade plus. My goal on this blog is to communicate what I see as the problems we face as well as what the average person can do to attack these problems head on. My first piece of advice is to ignore 99% of the popular media - especially the financial media. Finally, the reason I believe now is the right time to start this blog is that I believe that there is a high probability that the US stock market, as well as most global stock markets, are in the beginning stages of a cyclical (usually 6-24 months in duration) bear market that may produce broad stock market declines of 20%+. I hope to lay out the rational in future post.