Juggling Dynamite

It is anyone's guess where we go from here, and there are plenty of guessers hard at it. The majority of guesses I see lately are increasingly pessimistic. And that may be right. I asked an audience at a conference Sunday for a show of hands as to who felt optimistic about the stock market over the next 12 months. 5 out of about 300 raised their hands. Two years ago, this question saw most in the audience with their hands up. In the past I have found that this question tends to be a good contrarion indicator at turning points.
Logic breaks down for me when commentators start pointing to the stock market declines in the past 6 weeks as a good predictor of what the future holds. The thing is 18 months ago markets were at all time highs around the world. Was that the market's best prediction of present times? Then that argument falls flat. Markets did a horrible job of seeing the present mess coming. The fact I have known for many years is that markets aren't omniscient or rational; they represent herd think and a collective vote born of human behaviour and emotional reasoning. The behavioral science concept of the ‘recency effect’ states that humans most typically see the same ahead as what we have seen in our recent past. So in a bull market, we see more bull, in a bear market we see more of the bear. This is the human nature that we have to fight in order to keep thinking and measuring…
Today Obama made an awkward attempt at being bullish. This was no doubt in response to recent criticism that he is not caring enough or talking enough to the stock market. Tonight on Fast Money Oppenheimer Technical Analyst Carter Worth showed show positive trends in some of the charts on Copper, Oil, and potentially the stock market. We have noted these exact trends and potential support in our technical work at my firm recently. Will these trends hold? No way to tell. But they may. These less dire interviews are in short supply right now so it is worth a watch, especially for those feeling completely dark.

Good article this morning on the Big Picture about conflicts of interest in the money business. This is why people of moral fibre generally can't stay working at the broker/dealers/mut fund sellers of the world. Products sales are the ugly elephant in the room. They try to cover it up with smooth words, feel-good pictures and fancy charts, but the foundation is a fraud. It’s all about growing firm revenue. Nothing really to do with best interests of customers, or valuable risk management. I worked on the sell side for six years; I know its smell well.
As for the customers who take their advice from the drug pushers and the “advisors” who sell themselves to the machine, as my Irish father would say, “You choose to lie with dogs you get fleas.” Once we learn that lesson though we can make wiser choices. It takes more thought, work, and personal responsibility, but it is incredibly liberating to break free of the mythology. See Big Firm Conflict of Interest and the comments that follow it.

Yesterday the S&P 500 closed February at 735 marginally below its previous cycle low of 741. Not good. The next few days will tell the tale of whether this is a momentary blip that will now trigger a wave of long awaited buying pressure or the beginning of a fresh leg down for the S&P. Emotional responses and opinions here are useless, the price action will speak for itself. Meanwhile the Canadian market (TSX) finished at 8123 so far holding a few hundred points above its prior lows. If we could see the future we would know the date that this market crisis finally ends. It will end one of these days. Markets will eventually go back to gradually climbing a wall of worry. The art of surviving these times is to mentally prepare for various outcomes and be flexible. Lots of cash is key. Without liquidity and cash there can be no ability to capitalize opportunities when they present. And there are lots of opportunities in the offing.
In 2008 Warren Buffett's company posted its largest book value loss ever in its 44-year history at -9.6%. But even more relevant to his shareholders is that the market value of their shares fell 50% over the past year. I included the following chart to 2006 in my book in 2007; here is the updated history from Berkshire Hathaway's 2009 financial summary.
berkshireletter 2009

Buffett does not know when this market crisis will end either, but he has billions in cash and he has been buying equities over the past year.
The following chart from www.financialgraphart.com offers some big picture perspective on the bear of 2007-2009 relative to all the other bear markets since 1929. See How Far Have We Fallen? The depth of this market decline is already second only to the Great Crash of '29, but time wise we see that it has so far lasted less than the average. None of this tells us how much longer or deeper this bear go. But is still a useful perspective to see our experience in its historical context. We are living through a bad bear, but nothing about it is “unprecedented” or unpredictable. We very much look forward to the recovery.