Alan Moore Commentary 1-1-2012
Christmas was here last week and it wasn’t any different this time. People spent heavily on bargains trying to manage their credit card deficits, which doesn’t say much for profit margins in the retail sector. Here is one story about that.
A wife shopping at the mall on Christmas Eve suddenly noticed her husband was not around and she became upset because he had the credit card. Agitated, she called him on her cell phone and asked ominously: “where are you?” The husband in a calm voice said, "Honey, remember the jewelry store we went into 5 years ago where you fell in love with that diamond necklace that we could not afford and I told you that I would get it for you one day?" His wife, with tears in her eyes, said, "Yes honey, I remember that jewelry store." He said, "Well, I'm in the bar next to it."
In the Economist magazine on December 3rd was an article called “President Newt”, insinuating that it could happen, given the failure of Obama to turn the economy and deficits around like he promised. Until he got to Iowa, Newt grew in the polls like an E. coli colony on hamburger at room temperature; but in the past, he has always shot-off at the mouth one too many times with a grandiose intellectual idea, like firing all the janitors in the public school system to reduce spending. It will probably happen again, as his PHD gets in the way of his common sense when he gets aroused----he reverts back to his history of temper tantrums and wild accusations. No matter who wins the Republican nomination, Obama will win the debates and the election as long as the economy is still standing at 2%+ growth next November.
Who wins the election really depends on whether we go back into a recession or not and on the unemployment rate: if it is under 8% Obama will win; over 9% and he will lose; in between 8 and 9, it is up for grabs; and the Republicans lost their grip when Obama won the 2-month, payroll-tax-extension bill. Soon, in two months, they will get a chance to get it back, but I wouldn’t count on it. The Republicans are getting played: if they keep approving 2-month extensions, they will appear weak and disorganized going into the election. If they block the payroll tax cut, they will lose the election, because the 160-million, affected voters will not appreciate the tax increase. Obama would love to keep the payroll issue in the headlines every two months going into November, because he is on the winning side of the argument, politically, if not financially. The Republicans have boxed themselves into a no-win situation trying to nix the Democrat’s proposed tax on millionaires to pay for a permanent payroll tax cut. Do you really think the average voter cares about what happens to millionaires?
At the beginning of 2011, the smartest on Wall Street did their forecasts; Goldman Sachs predicted the S&P Index would be 1450 by year end and it will come in around 1250, actually about the same as 12/31/2010. Predictably, no quant really knows much about the future because the models are based on current data melded with historical averages by assumptions, like steady corporate earnings and interest rates. Actual events occurring in the future usually cause the models to miss by a wide margin; albeit, math can only tell us how far the market has strayed from the mean, not what it will do in the future. So having some idea of the market-shaking events that could occur next year is more important than figuring the DOW is at 13 times earnings today and the historical average is 15, then making the call that it will probably rise next year and gravitate to the mean. The flip side of a “probable rise” is the risk that it won’t. Therefore, I will give you my thinking on the negative and positive events that could ruin the Wall Street predictions next year, whatever they may be.
Negatives in order of importance:
1. A banking crisis in Europe created by a Greek default or collapse of the Union.
2. Recessions in Europe and China which cause a recession or slowdown in the US economy
3. Congress continues to fiddle while the deficits burn up our credibility.
4. Military action against Iran which would destabilize the oil market (or Saudi Arabia has trouble).
5. A trade war with China or perhaps North Korea does something stupid.
Positives:
1. Consumers are continuing to spend and support the economy.
2. France and Germany have at least agreed that they cannot afford to have the Euro fail.
3. Employment is improving, although very slowly.
4. The stock market has proven resilient through the deficit crisis in August and the Europe thing.
5. The banks have improved their capital ratios and could withstand a European bank crash; or at least the Fed would come to their rescue with more quantitative easing.
I have listed 5 good things and 5 bad, which is as fair-and-balanced as you are going to get from me. I saw it that way at the beginning of 2011 and stayed out of the market because I can’t afford a “balanced risk”. Due to my risk tolerance, I need to have the odds in my favor to invest, and the only thing going my way is foreclosed real estate; so I’m currently buying residential property in Orlando and renting it out. Therefore, I had no return on my portfolio for 2011 (being in cash), but neither did the S&P Index to speak of------------in lieu of paltry alpha, I am not going to change my investment plans in 2012, unless the list of negatives gets smaller and the positives remain positive. In my limited experience, successful investing is primarily a qualitative decision, not a quantitative one. Hence, the macro-economic climate it the first thing to consider before you even get to figuring out which stocks to buy. Complicating the process is the development of the global economy: not only must you determine the potential GDP growth in the United States, but also in Europe and Asia due to the impact they have on our markets. Stock picking is the easy part because it can be done by the numbers gleaned from financial statements; at least an accounting firm passes on them before they are reported. Government reporting comes out of a black hole and is less reliable; you have to ignore a lot of it and just develop a feel for the economy. I feel like it is not getting better, nor is it getting worse----------- albeit, staying the same is as good as it gets in 2012. The Dow has been in a range of 10,500 to 12,600 for more than a year and I don’t expect that to change: a year-end rally has taken it near the top, but I don’t see a breakout coming any time soon. We were at the top the same time last year and what we got were large swings as Europe waffled, politicians bickered and recession fears waned and waxed. So what’s new now?
For the past four years, the Federal Reserve Bank has distorted the markets using manufactured low-interest rates: therefore, bonds are in a bubble, commodities have been inflated along with stock multiples; all done to save us from more debt liquidation and the resulting bankruptcies. To put that existentially, capitalism without bankruptcy is like religion without hell. You can’t have one without the other.
Successful investing requires the discipline to take only the quality setups and the patience to wait for them. The long-only investor must protect precious capital via a 100% cash position until an obvious opportunity comes along, and there is no specific time period for which the cash position should be held. Cash may be boring and unproductive, but it is safe; and about every ten years an economic storm appears. America had one in 2008 and now there is another brewing in Europe and we are connected by a river of loans, credit default swaps and Fed bailouts. The time to invest is in the eye of the hurricane, because by that time most of the damage has been done---- the eye hasn’t passed over Europe yet, but it will; not to mention what is happening in China, which will take another six months to see eye to eye.
Finally, here is a video I found on Marketwatch that goes for about 10 minutes on retirement and risk taking. It is different from the mainstream advice that a person should invest in stocks for the long-term for retirement. I have always thought that you should invest according to the risk you can afford to take and skip the idea that stocks will make you rich if you hold them over the long term---maybe they will and maybe they won’t----the “maybe” is what risk is. Therefore, I think your portfolio should be looked at as insurance against running out of money to live the rest of your life in relative comfort; only amounts over the necessary amount (the corpus) can safely be used to speculate in the market. A significant portion of the corpus should only be put at risk if the odds are heavily in your favor, like if the DOW fell to 8 to 10 times earnings as it did in 2009.
