I counted more than 10 in just one 5-year stretch in the late s and early s. Bob has been away from Merrill and deliberately out of the limelight for about a decade now. When I caught up with Bob recently, he was rested and relaxed, having just gotten back from a brief jaunt to Nantucket, while my head was spinning, trying to absorb the boom in crude amid the carnage in credit. But just like old times, it all made perfect — albeit distinctly uncomfortable — sense by the time Bob stopped talking.
Listen in. The hardest thing to do is to put it into a long-term context. Meanwhile, the Dow is off As I look at it on a long-term basis, I think we reached a generational peak in the creation and use of credit.
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I was born in , which was at the bottom of the long wave, or in the Depression; so I grew up in a constantly improving economic environment. They worried that the same thing would happen to them as what happened during the Depression. So they all spent only out of what they earned and what they saved. By the end of the century, conversely, we had no one fearing being in debt and debt was not only leverage by individuals but leverage by corporations.
And of course, all of these derivative products were created to leverage more. So no fear of being in debt went along with a period of high expectations — in other words, with a period in which you can be disappointed the most. Somebody once said to me that I underestimated my potential; that I was always too conservative. But this is probably comparable, as far as bubbles are concerned, to the technology bubble or to the bubble in Japan in or to the bubble in housing or to any of the bubbles in the past in which markets went parabolic and those peak values were assumed to be the new reality.
You get breakouts, like in the transports, which made a new all-time high — just before they start down. So we have a market of breakout failures. The peak of the market so far, in terms of breadth, was just about a year ago in July. Not in terms of breadth. Then we started back up again and made the high in early, mid-October, but most stocks did not follow the averages to new highs. Then the market went down into late November, went back up in December that was a shorter move up , and then down into January with a recovery in February.
But then two months later, came the March low.
Thereafter, we had a pretty good rally from the middle of March to the middle of May. In each one of these cycles, strong stocks have tended to go down some, but to come back and make higher highs, while the weak stocks have kept making lower lows after their rallies. The financials are the real question marks and also the consumer discretionary stocks. How much will all this environment affect the consumer with the rising cost of everything?
There are so many pressures. The current position of the market is another leg down in the financials. One way of measuring it is what percentage of the financial stocks are above their day moving averages, and above their day moving averages and above their day moving averages.
This is more anecdotal, not something where I can cite a statistic, but there apparently were a lot of hedge fund withdrawals notified for the end of the second quarter, which I think added pressure to the market near the end of the quarter. And it has continued into early July. We have finally started a correction, in this cycle, in the stronger stocks.
We have been having corrections in steels and rails and some of the other previously strong stocks connected with the materials sector. Now the energy stocks have weakened, as well.
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So it might be that there is still some reaction or capitulation to go here. But the ingredients for an interim low are present. For most stocks, yes. When we had the technology stocks starting down in early , for example, a lot of other things held up until July of Then everything caved, and that was the real ending of that bear sequence. The second, or B wave, is the recovery that comes after that. Then the C wave started.
The C wave is the deceiving one, where it lasts a fair amount of time. It can last several years. When you get to the end of the C wave, things are really undervalued and nobody cares. And I think it could start sometime soon — maybe next week. The converse is also true in a bull market: The energy stocks or the price of crude have been in a bull market; they get overbought and yet they keep going up. It seems to me that if there were a contrary view currently, it would be that the crude oil price is coming down or going to have a correction, just based on what everybody says, including the Arabs and all the people in the business, who are expecting much higher prices.
What you have made money in and are making money in still is all of the stuff connected with the commodity game-and that includes gold. But these areas are extended on the upside at the same time the financials and consumer discretionary stocks are extended on the downside. A correction in the strong sectors could coincide with a relief recovery in the weak areas and confuse investors who have been positioned correctly for the long term. So how long will that last? If we have some kind of a spike up in VIX, then it might last six to eight weeks.
At first, it was Merrill Lynch paying for it; now I pay for it. Right, in the 5 years from , a number of technology stocks made good gains. They went from the depressed levels back up halfway or whatever. It was a good percentage change. Somewhere along the line, that will happen with the financials. The two things you have had to do strategically in this market -? That was the way it looked in May and the way it looked at the beginning of the year. The other strategy, for investors, is to try to identify what the long-term trends are.
The long-term trends do favor the commodities area and energy, still. But the energy stocks, particularly the oil stocks, have been behind the price of crude. When we went through the last big bear market, you could see that it was a process. You had a certain part of the market — the value stocks — hold up almost the whole time.
Those leadership stocks did suffer a crack right at the end, but then they bounced right back. What we do know from experience is that once a sector bubble bursts and equity valuations start to implode, there is a long and substantial contraction. The credit bubble and financial institution excesses are generational in scope and unlikely to undergo a short-lived or smaller-than-normal contraction.
There are always opportunities. What is noteworthy in that regard is that as a high sector weighting contracts something else takes its place. Energy replaced the Nifty Fifty consumer growth stocks in the s. Technology eventually replaced energy in the s and s. Japan mainly was replaced by the equity boom in the U.
It would appear that neither sector has reached an excessive weighting yet and are likely to cross, with energy well above financials before the sector shifts are complete. And then comes the C wave. The C wave, as I mentioned, is the deceiving one. It can last several years and when you get to the end of the C wave, nobody cares. Of course, now there may be some technology stocks that work — and that may be what the best way of handling this market is: Even in the worst bear market, there are some things that do well.
But the thing is to pay attention to stock picking and to having some hedge against the longs with some shorts.
But the old techs face a rough road. Markets tend to return to the mean over time When stocks go too far in one direction, they come back. Excesses in one direction will lead to an opposite excess in the other direction Think of the market baseline as attached to a rubber string. There are no new eras — excesses are never permanent Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots.
Fear and greed are stronger than long-term resolve Investors can be their own worst enemy, particularly when emotions take hold.
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Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names Hence, why breadth and volume are so important. Bull markets are more fun than bear markets Especially if you are long only or mandated to be full invested. Spread the wealth. What's been said: Discussions found on the web:. Rich, IMO the credit crisis makes it different this time…longer, deeper, slower to recover… For what it is worth. Objectivity is always prudent; Emotion based decisions lead to losses. Re: 3, you have to be a bit careful in your wording. Frank: I think we already saw one try at alternative investments in the commodities bubble.
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