Feb 18, 2008: Cues & Clues (for confusing times)

Highlights:
  • Market updates
  • Pundit survey & the AUM clue
  • More cues & clues
  • A big clue-stick

    • Market Updates

    After an impressive rebound from the Jan 22-23 lows, the markets took a not very surprising breather, falling pretty sharply in the first week of February. The general advice: if you're bullish, wait for pullbacks for buys, and if you're bearish, wait for overbought conditions for sells, should always be kept in mind.

    In the past week, markets have stabilized again and a new higher-low since the 22-23 of January bottom seems to have been established. The news overall has been mixed and utterly confusing. The markets seem to be so confusing to many observers, that one pundit seems to be saying the exact opposite of another, thus the title of this article: Cues & Clues. How can one remain "unconfused" in the midst of such mixed-signals and polarity.

    First, let's try to go over the most important good and the bad news (for investors) of the past few weeks:

    Good News

    If you think something under good news is actually bad as an investor, think contrarian indicator.

    Bad News

    And with all this, it is no wonder that even those with excellent long-term records, don't agree, to use a bit of an understatement.

    Pundit Survey & the AUM clue

    At uncertain times like these, the biggest insight I get is from tuning out the perma-bulls and the perma-bears. There's no signal in reading them. That leaves those who are the most realistic and least emotional. Naturally, this also means, those with the best long-term records. So let's look at a small, and by no means representative, yet instructive, sample of those:

    Of all the above, I like Andy Mayo the best. Why?

    I like him because he is not managing billions and he has nothing but the truth, and his own insights to promote. He sounds the most ego-less and admits the situation is confusing, and his truth seeking leads him to follow the charts. He's thorough and is looking at many indicators. Note to self: add to bookmarks, and keep revisiting.

    Here's perhaps the most significant thought: Big guys who manage billions can not turn on a dime. They must voice strong opinions to try and support their positions. But there's a huge difference between 4 billion and a 150 billion "under-management". The latter, more than the former, should be assumed to be already committed and already "priced in" the markets. This is true especially when that humongous position is in agreement with ECRI, the financial rags gloomy covers, and the prevailing investor sentiment. In other words, the biggest (note, I didn't say just 'big', but 'biggest') Assets Under Management (AUM) positions should be used by perceptive investors (big or small), as the the most contrarian.

    These huge positions are yesterday's market.

    This leads me to bet on Grantham as the least reliable indicator of all the above. In all humility, this is a true eureka moment for me. For many years I have been "programmed" to listed to the big players (if they're big, they must know something I don't), and treat the small ones as contrarians, I now find that, paradoxically, the biggest whales in the ocean, should be treated as contrarian, just like the smallest "odd lots" are treated! Pay attention to that AUM number.

    But this doesn't mean that the 4 billion AUM are golden either. The bullish pundits are far from perfect. Independent data-driven views are IMHO the most precious. Fisher was hit hard by the recent correction, same for Miller, both have lost some of their "magic touch". While the defensive, sitting in cash, precious metals, and commodities were making a killing. So if both defensive and bullish may be wrong, who is right?

    I tend to be a big believer in reversions to the mean and this gives some advantage to the bulls. I notice that Gold is up over 10% in the past 3 months, and down 2% in the past 5 days.

    Since Fisher and Miller have great long term records and pretty dismal recent records, maybe that means that their better days are coming back. When the Granthams start moving into stocks, Fisher's and Miller's best bull days predictions become reality.

    Cues & Clues

    Let's assume for a moment that Fisher and Miller are right and we are in the last up-leg of a secular bull. Even if the outlook is less bright and we're just in an intermediate leg up from a big drop, there seems to be a value opportunity here.

    But what about that bullish mega cap recommendation above? It was based on the fact that during those times where credit is scarce, small caps tend to under-perform. Also: it sounds like a classical anchoring-effect. Since Fisher thinks it is 1998 redux, and since mega cap outperformed then, they must outperform now. He may be right, but this seems (to me) a bit premature given that:




    Based on this chart, large caps have been underperforming, mega-caps have been even worse, and mid-caps have been the best place to be. We'll keep watching this chart in the coming months. If Fisher turn out to be right, there will be plenty of time to switch to mega caps.

    In the mid-caps group, value and growth are neck to neck with value slightly under performing.




    In the small-caps group, value seems to be gaining ground over growth.

    A big clue stick

    A reader (you know who you are) has sent a wonderful link to a humorous video clip where British satirist John Fortune is interviewed as "George Parr the Investment Banker" by fellow satirist John Bird. In the clip the two are explaining the subprime crisis. This is British humour at its best. Now that it's official that the British tax payer will be bailing out Northern Rock (see the Daily Mirror link above), this seems to be timely again. It also means that governments will do whatever it takes to avert a 1930's style collapse. Enjoy.

    As always, every investor should make up their own decisions. The above is an approximate description of my thinking and my own actions, and is not a solicitation to buy or sell anything. Any feedback, question, request, criticism, or "still confused" note, is very welcome.

    -- ariel