Monday Mop-Up

That was not good!

We lost our "Must Hold" on the S&P (1,470) and the NYSE fell further out of range along with the Russell.  The SOX fell out of our comfort zone while the Dow (22 pts) and the Nasdaq (11 pts) are holding on by a thread.

According to Briefing.com: "Stocks closed lower across the board Monday as uncertainty surrounding $400 bln in pending buyout deals and weak housing data gave investors an excuse to lock in some of last week's sizable gains."  Gee, sounds like they read my morning post!  It's great to have an 8-hour lead on the market movements and you know my mid-term outlook is downright gloomy so I have to wonder if I am perhaps too positive about the short and long runs?

I'm going to repeat a disclosure I made to my members when we first went private back in December:

• I hate to be a naysayer on the markets and one reason is it hurts readership.  That’s right, I’m going to let you into a dirty little financial writing secret and tell you that readership goes down if I take off my cheerleading dress.
  • This is the main reason I don’t do a lot of advertising on the site…  As much as I like to think I am above that stuff, when I used to depend mainly on Google ads I would get bothered by any drop in the daily take (kind of like a Nielson rating). 
• Nobody wants to hear the economy is about to collapse or the market is going to tank so it is human nature for readers to want to spend their valuable time reading things that make them feel good, rather than worried.
• I can say this now (as my membership has a waiting list!) and I feel the need to keep myself honest in what I consider a very tricky spot for the market and also to make all you nice people aware of this major industry dynamic to help put what you read at other sites into context.
• Telling you bad news costs money!  If I had an editor and shareholders to answer to it is unlikely we would even be having this discussion, so imagine the pressure that most publications are under to keep you coming back.  Always remember that the press is a business and their mission is to keep you reading – sadly that is more important than giving you the truth!

So I'm going to tell you what I think, regardless of the "ratings" but I am no less susceptible than you (well, maybe a little less because I'm such a cynic!) to the constant onslaught of market cheerleading that the mainstream media throws at us. 

Another factor in people's irrationally positive attitudes about the markets is that most people are not option players.  Most people are not short sellers.  Most people (about $51Tn worth globally) have all their money tied up in positive market bets and it simply isn't palatable for them to contemplate a 20% decline in the markets.  Logically, since the market is up close to 100% since '03, a 20% drop should not seem so out of the question – yet how many people really plan for it?

Market watch pointed to factors that could lead to as much as a 40% decline in the S&P over the next 2 years and I almost fell off my chair yesterday when a money manager was explaining to the CNBC host that, by taking diversified "defensive" positions, you could "limit" your losses to 15-20% in a 40% decline which, he said (and I kid you not): "would put you ahead of the markets."

That is NOT a valid investment strategy!  An investment is: "The purchase of a financial product or other item of value with an expectation of favorable future returns."  This fund manager's advice is kind of like your football coach saying "Let's get out there and lose by less than 20!" – Not very inspiring…  This is your money!  It took your whole life to earn it (this is why they call it your LIFE savings), if your financial planner or fund manager or whoever tells you to "gut it out" and "hope to hold on" – FIRE HIM! 

There are ways to make money in good and bad markets and, when there isn't, there is cash.  No broker is ever going to tell you not to play and no hedge fund manager is going to send out a letter that says: "My forecast for the next 3 months it to stick to cash but I'll still charge you a 2% management fee for keeping it in my bank rather than yours (plus 20% of the interest)."  (I can say this now because my fund isn't up and running yet but I promise to try not to be such a tool when it is)

We've been sticking to cash and are still mainly in cash and I have a lot of restless members but, as I pointed out in last week's post on hedge funds, some of the top fund managers in the country lost significant portions of their virtual portfolios in the past couple of months.  While my ego is very healthy, it is certainly not so big that I plan on outperforming Barclays, Fidelity or Sowood but, unlike the guy who says "let's try to lose less than them" I'd rather not play a losing game or, even better,  wait for an opening and find a way for us to win on the downside!

Oil hit $72 and treasury rates fell and the dollar rose (pushing gold down) as investors flew back to the very dubious "quality" of the US dollar.  None of this inspires a lot of confidence but we still need to watch and wait as the Fed could certainly decide to use another round to fire up the markets but I question their supply of ammo.  This is why things are so tricky now, the Fed CAN give us a short-term boost whenever they want but, if that isn't enough, what next?