Sep 18, 2008: Getting fully invested

  • Intro
  • Extreme reversal
  • Looking ahead
  • The price of learning

  • What happened in the past 2 days comes as close as I've ever seen to a bona-fide long-term bottom. I'm getting fully invested.

    Is this another intermediate-term bottom like the ones we saw and called in Jan, March, and July, or a more longer-term one? Nothing is ever guaranteed, but this bottom sure looks significant.

    As the moose likes to say: This is free advice, it is worth (only) what you make of it.

    Extreme Reversal

    So many are the signs of a very significant bottom here that I can fill many pages with data supporting it. Instead I'll try to be brief, and mention just a few items:

    Looking ahead

    How far and how long will the next up-leg take us. Hard to say for certain, but I think this move should be significant. All the forces seem to point at the same direction: commodities are long-term imploding, inflation is subsiding, the dollar is strengthening, corporate profits in the US at least, are bottoming out (thanks to financials having written-off most of their losses, and to sharply declining fixed costs). The rest of the world, including countries, which not long ago were aggressively tightening rates to fight inflation (see China), are finally getting the reverse message and are beginning to lower rates. Lowered cost-structures, due to declining yields, commodity prices and inflation, are an extremely potent mix boding well for stocks. PEs should be shrinking dramatically soon, which means stock prices will have to follow up.

    Then, there's help from unexpected places. I try to do a lot of legwork trying to find the best data-driven bloggers; those with the good actual records, so you don't have to. I recently discovered an excellent site: Steve LeCompte's CXO Advisory This is a rare treasure combining data-driven analysis, modelling, and great skepticism. Every hypothesis is checked and either verified or refuted statistically. Most importantly, Steve have developed three models predicting the S&500 for a year ahead, based on corporate earnings, inflation, and fixed-income yields. A combo of the 3 models now projects the S&500 to about 1550 by September 2009. (chart below). Given the accuracy of these models in the past, and Steve's excellent other work, I'll be reading Steve LeCompte on a regular basis.

    For more perspective, here is a comparison of past financial crises to the current crisis:

    The price of learning

    At junctions like this, it may be good to look back and try to summarize the good and bad calls I made during this bear market. Even if it may have more time to run.

    I have been both wrong and right during the past 12 months. As my hope has always been to learn and improve over time, I consider all my blunders precious lessons, I literally paid dearly for them, but I believe these errors planted the seeds for a lower error rate in the future:

    Being Right:

    Being Wrong:

    Full Disclosure:
    Getting 100% invested for now. Deploying all cash (and LT treasuries) back into US stocks. Long Dow Transports, US Small Cap Value, Some Biotech and healthcare, and possibly some select, stronger financials. I consider shorts extremely toxic at this time. I've closed my EEV and EFU positions, a bit early since they spiked way too high for my taste, but even so, they helped my portfolio a lot. If I had any shorts left, I would have covered yesterday. Fortunately, I didn't have to. SCC is the only inverse ETF I can think of right now, that still trades reasonably low and may hit some more bottoms on very weak consumer demand (as expected from a prolonged weak economy, high unemployment, bankruptcies, and erosion of real wage growth). But even for SCC, now is not the time. I believe shorts (and put holders) will be squeezed very hard in the coming month.


    The moose will have to switch out of long-term treasuries (TLT) soon. I believe they have peaked yesterday. The problem with following momentum is that one always lags. Whenever events like the past two days occur, major reversals ensue, and delayed trend-following methods lose.

    Sept 21, 2008 update:
    I got an unusual number of email responses to this piece. Almost all advise me to exercise caution. Let me clarify:

    to those who keep emailing me, especially to Moty, Adi, Adrian, Aaron, Lee, Herman, Ilan, Robert, Peter, Anand, Kostas, & Gilbert. Thanks for everything you've taught me, and please keep writing your thougths.

    As always, any feedback is welcome.

    -- ariel