The Credit Crisis Financial Stocks Short Journal

[Ghost of Cutten]

Quote from Daal:

From Breakfast with Dave:
"CAN WE EXPECT A 30-40% CORRECTION?
There have only been two other times when the stock market ran parabolically up from a low in barely over a year, as was the case this time around (+80% from March 2009 to April 2010): the 112% surge from June 1, 1932 to September 7, 1932; and the 116% runup from March 2, 1933 to July 18, 1933. In the first case, we had a 40% correction and in the second, the correction was 34%. So, we are talking here about the prospect of a pretty hefty reversal in the S&P 500 that could very easily take the index down"

It's not just the huge runup, but also the very high valuations, relative to fundamentals.

At the peak of those 2 rallies stocks were not expensive. At the peak of this rally they were. At the troughs of those 2 declines stocks were dirt cheap. In March 09 they were quite cheap but not comparable to the worst bear market bottoms of the past.

So I think a 20-40% bear market is quite possible. A move back to 850 would be a mere 30% correction from a 80% rally, and would bring stocks back to cheap levels again.

Then again, maybe that is too simple, and stocks just grind around in a nowhere range for the next 6 years, boring everyone to death before finally bottoming out like gold in the late 90s, with no fanfare whatsoever. That would be the path of maximum frustration.

Overall I'd say the best play is forget indexing or guessing where the S&P will go. Relying on market returns in such a confused era seems unwise. I'd rather follow a long/short approach - there are plenty of cheap stocks at the moment, and plenty of great businesses at acceptable valuations, plus there are plenty of appalling businesses and stocks with terrible macro or micro headwinds, so loads of opportunity there. Or just do deep value investing and pick stuff up on the cheap during the periodic selloffs, a la Buffett in the 50s-70s.

 

[Daal]

When drilling comes back it might be significantly more costly
http://www.reuters.com/article/idUSTRE64Q2C020100527

The wild card on the Oil Sands trade is how a housing bubble bust would impact canadian banks. The sands companies tend to rely heavily on borrowed money

 

[Daal]

1.4% Final Sales Q1, looks like Jim Grant has been dead wrong so far in his V shaped recovery hopes

 

[Daal]

Gross expects 4-6% returns from stocks and bond markets over the coming years. That seems consistent with the current valuations of US equities(On a Shiller PE), USTs and corporate bonds

This doesn't mean one can only make that much unless they lever up. The solution of course is to jump into commodities where returns can be potentially be higher, there is the 'roll return' issue for commodities future contracts in backwardation but I plan to do some research on this, I remember that historically there were plenty of commodities in backwardation that generated positive roll returns, all it takes is for the market to be underestimating the bull run, it happened with oil in 2008, the market is not always right

Another solution is emerging markets. I'm sure there are EM that might be in their 80's moment with their expected inflation about to drop materially over many years(as a result interest rates also along with higher stock market valuations)

 

[ralph00]

The recovery may not be gangbusters, but the economy is doing a helluva lot better than most everyone except Grant believed 12-15 months ago when Grant was urging his readers to buy XLF calls (while you were buying XLF puts).

His stock picks have been as good as gold. And that's what ultimately matters. The V-shape stuff gets him interviews on Bloomberg (although I don't recall him ever using that hackneyed CNBC bullshit terminology), stock picks (and pans) that make his readers rich is what makes him a must-read and keeps him in business.

FWIW, in this week's issue, he began his first exploration into the housing mania in Australia.

 

[Daal]

Quote from ralph00:


The V-shape stuff gets him interviews on Bloomberg

Well, then I dont trust him. I dont care about his stock picks, I have no access to them, if he comes out and says the economy will have a V shaped recovery then real final sales barely eek out gains, he was wrong, even if he doubled his networth

He seem to be following a common mistake that people have when they are trading, is that they fool themselves about the 'fundamentals' in order to stay in a momentum trade. They cant get themselves to admit 'I want to stay long because its going up and I believe it will go up more, its some kind of mini-bubble but I dont care', it feels undisciplined, so they lie to themselves about the fundamentals and find a way to believe everything is fine. Now, if they delude themselves in private, I have no problem with it, the problem is when they go out in public with these statements

 

[Daal]

Been re-reading Invisible Hands, its interesting that almost no one in the book mentions a looming EU crisis, shorting the EUR or PIGS debt and thats the biggest story of 2010 so far. The book was written in Dec 2009 and the interviews were probably made some months leading up to Dec. So the top performers in the field did not 'see the crisis coming', I dont believe thats a big deal, its more important to react when they come rather than to be some oracle who see things that take a long-time to play out. I didn't see the EU blowing up this year either, but this fact its interesting nonetheless

 

[Debaser82]

Quote from Daal:

Been re-reading Invisible Hands, its interesting that almost no one in the book mentions a looming EU crisis, shorting the EUR or PIGS debt and thats the biggest story of 2010 so far. The book was written in Dec 2009 and the interviews were probably made some months leading up to Dec. So the top performers in the field did not 'see the crisis coming', I dont believe thats a big deal, its more important to react when they come rather than to be some oracle who see things that take a long-time to play out. I didn't see the EU blowing up this year either, but this fact its interesting nonetheless

In his book Adventure capitalist Rogers talks extensively about how Europe and particulary the PIGS cooked the books to get in.... and how everyone was well aware of it!

You can also watch him and Faber discuss the Euro future here from 2004...

http://www.youtube.com/watch?v=ZzAtL-EBuF4

He probably ranks as your description of being too early though but still listen worthy imo.

 

[Daal]

Quote from Debaser82:

In his book Adventure capitalist Rogers talks extensively about how Europe and particulary the PIGS cooked the books to get in.... and how everyone was well aware of it!

You can also watch him and Faber discuss the Euro future here from 2004...

http://www.youtube.com/watch?v=ZzAtL-EBuF4

He probably ranks as your description of being too early though but still listen worthy imo.

Well, he was expecting a rebound in the EUR and is not selling his €, he told bloomberg some weeks ago. At the very least anyone's exposure should be 0. I'm going to see how high this bounce goes and then consider shorting it

 

[Daal]

One thing to note that the rise in libor is producing opportunities to earn some income in cash that earns 0% on IB. By using IB EFPs, essentially buying a stock and hedging by shorting its single stock future one earns libor while being exposed to almost no credit risk(The US exchanges are too big to fail)