Time to choose between greed and gravity
I have the best job in the world; there is no doubt about it. I get paid to manage other people’s money. It is stressful and humbling. It can also be energizing, as there is no better feeling than being thanked by someone who we helped build a better future for.
I have the best job in the world, however since March, I don’t sleep much at night. I lay in bed, thinking about the future direction of the markets. There is no worst feeling for me than losing my client’s money. The crash of 2008/09 was a difficult time, and the fear of another forces me to use prudence, sometimes against my client’s will. I know I am not alone, a recent article published in marketwatch.com, stated: “after 2008, some 93% of financial advisers wrestled with post-traumatic stress disorder.”
In March, I came to the conclusion that the recent returns we enjoyed in the US were soon coming to an end. The time had come to raise cash and for our more aggressive investors, start shorting the S&P 500 and the European markets. Obviously, sitting at my desk today on May 13, I was either wrong or too early.
The second thing I hate the most is being too early for a long enough time period that my clients start demanding better return. Nobody tells you you’re doing a fine job when you’re up 8% and the market is up 15%. How can I explain to them that this is much more than a numbers game and that sometimes we are better to make less and be patient than to aggressively go for the homerun? Better be wrong and safe than sorry. Over the long term, avoiding important lost of capital is much more important then beating an old bull market.
Despite the pressure from some of our clients, we haven’t changed the strategy. There is nothing worst than going against your fundamental views and your instinct to please your clients. It will always come back to bite you. Patience is a virtue and we intend to be virtuous.
Why I am bearish.
There are some positive signs out there. Weekly unemployment numbers are getting better and it seems that the real estate bottom has been hit and we are rebounding rapidly. However, pretty much anything else is showing us a picture of worst things to come:
PMI – Purchasing Managers Index
Bond Price Action
The dollar continues to get stronger; this will hurt earnings going forward. How is it that the depreciation of the dollar from 2009 to 2011 was excellent for the stock market but its appreciation doesn’t matter? The situation in Europe is getting worst and we can expect a weaker Euro going forward. Therefore, the USD will continue to appreciate. Fig: 4
We keep hearing that the economy is getting better everywhere, however, the consumer disposable income is not. This is a strange phenomenon to say the least. Without the consumer, there is no real sustainable pick-up in the economy.
The last five graphs illustrates why investors should be cautious at the present time. There are probably ten other graphs that can be presented depicting a clear slow down of the global economy. However, the stock market continues to hit new highs. Why is this?
The quantitative easing carried by the Federal Reserve is the core reason for the bull market since 2009; what will happen when the punch bowl is removed? The much anticipated article by Jon Hilsenrath published last Friday on the subject was enough to inject some fear in the market during the week end. What will it be like when Dr. Bernanke starts discussing the exit strategy?
How to profit from here:
If like us you believe that a correction is inevitable, here is how you can profit:
– Reduce your exposure to equity or move your stop lost higher
– Favor securities in the USA as the dollar will continue to strengthen.
– Look at stocks presenting a low correlation with the market. Some Biotech stocks as an example have almost no correlation to the S&P500.
– Move out of emerging market and commodities
– Short the Euro and avoid European stocks. We are getting really close to the next crises.
– Avoid Financials Stocks
– Go long treasuries as rate will fall when the market correct. This trade will be supported by the flow of Japanese funds finding refuse against the depreciation of the yen and the fall of the Japanese Bonds. Note that this is a short term trade, not a long term investment.
– When the panic start to set, short European stocks.
– Build your cash reserve, be patient and wait for the moment to reenter.
At this junction, the choices are clear, either you believe that the Federal Reserve is Almighty and therefore you remain long equities, or you believe that the force of gravity can’t be defied forever. Time to choose between gravity or greed.