On December 19th, 2008, Robert Brokam of the Motley Fool, asked John Bogle (born 1929), founder of The Vanguard Group, if we are heading for a depression (Bogle grew up during the Depression).

“Today, we hear a lot of people invoking the possibility of another Depression. So what is your take on today’s crisis? Are we looking at another Depression?”

Bogle answered,

“…This is my tenth bear market, defined as one that goes down at least 20%. And this is in a lot of ways the most difficult one that we have had because the gross excesses — the unacceptable excesses in our financial sector — are carrying over to the economy at large…I think the excesses of Wall Street and Wall Street’s greed have carried over and done substantial harm to Main Street and the people that make America go….”

In the Berkshire Hathaway 2008 Annual Report, Warren Buffet refers to the performance table (see page 4) tracking the 44-year performance of Berkshire’s book value and the S&P 500 index.

“…2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By year-end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.”

There was no place to hide, and asset allocation didn’t matter.

An “Investment News” survey concluded that “70% of 329 advisers said that the economic downturn and its effect on clients have negatively affected their physical and/or emotional health.”

Jed Horowitz, author of the article, writes,

“Mental-health professionals say that stress can trigger depression, which can lead some advisers to feel unjustified guilt over unpredictable client losses.”

“As many as 80 percent of Americans are stressed about their personal finances and the economy, according to the annual survey conducted by the American Psychological Association,”

according to CNNHealth.com.

Dr. Katherine Nordal, the association’s executive director for professional practice said,

“This year…the No. 1 concern is both money and the economy. In my 30 years of experience…this was not the thing that would be high in complaint lists…what we’re seeing today is that the economy and finances are viewed as significantly more stressful, by more than 8 out of 10 Americans”

(7,000 Americans replied to the survey from April to September 2008).

During his March 24th press conference, President Obama reminded Americans that

“We will recover from this recession, but it will take time, it will take patience, and it will take an understanding that when we all work together; when each of us looks beyond our own short-term interests to the wider set of obligations we have to each other — that’s when we succeed.”

.

Recent news suggests, but may not be conclusive, that this recession has found its bottom and finds it attractive.

This cat sleeps.

Dead cat stock market bounces are “A temporary recovery from a prolonged decline or bear market, after which the market continues to fall.” (Investopedia)

If dead cats bounce, the metaphor is useful when predicting stock market trends.

Dead cats bounce along Wall Street after short sellers cover their yet-to-be-owned stock. Their doubt about the market’s continued price-drop prompts them to buy the stock (ie. cover their short position).

Dead cats bounce along Wall Street when investors cover their option positions. Their action may encourage false hopes of a bounce in the markets.

Dead cats bounce along Wall Street when speculating investors throw a dart at Wall Street “blue light specials” (for you KMart shoppers). When checking their purchase in the Sunday papers, they find their shares for sale at a deeper discount.

The dead cat bounce is a silly idiom; no experiment I know of proves a dead cat bounces. No economist or analyst predicts dead cat bounces in the stock market consistently.

“8 Who Saw the Crisis Coming…” (Fortune Magazine, August 2008)
• Sean Egan
• Nouriel Roubini
• Michael Mayo
• Robert Rodriguez
• William Poole
• Richard Baker
• David Einhorn
• Bill Eickman

  “…And 8 Who Didn’t”

• Angelo Mozilo
• Jeff Larson
• Moody’s, Fitch, Standard & Poor’s
• Greenspan, Bernanke, Paulson
• James Cayne
• Chuck Prince, Former Citigroup CEO
• Stan O’Neal, Former CEO, Merrill Lynch
• Zoe Cruz, Former CEO, Morgan Stanley

An ancient test for a prophet requires exact and fulfilled predictions every time, not some of the time.

Stock market moves are not dead or alive, bullish or bearish unless investors make them so. Momentum comes when the greater number of investors take action that opposes other investors. This makes momentum possible.

Most importantly, you don’t know until you presume the cat bounced. Predicting market direction expresses chutzpah blended with keen observations.
You may be right, but the likelihood of accurate and successive predictions confirms the unparalleled dimensions of uncertainty.

Market optimism or pessimism occurs when a mass of people make the result theoretically probable. The determination or prediction of probable outcome never eliminates uncertainty unless there are glaring market anomalies (**see Robert Schiller).

Italian economist Vilfredo Pareto’s principle asserts that 80% of value comes from 20% of those who have the potential to create value. The calculations do not support the 80/20 rule every time, but at minimum the concept retains its assertion.

Therefore, 80% of market analysts are right 20% of the time or 80% of stock market predictions are right 20% of the time. As with all predictions, there’s no certainty of which prediction is right.

For me, further proof that asset allocation, with static weighting and dynamic investment methods works when market anomalies lack affect.

When Vilfredo’s cat died, he did not drop her stiff body out of his bedroom window to see if she’d bounce.

“It is a maxim of empirical economics that if you torture the data sufficiently, they will confess.”
(Stephen A. Marglin, The Dismal Science “How Thinking Like An Economist Undermines Community” (Cambridge: Harvard University Press, 2008) 122.

Empirical economics is distinct from theoretical economic theory or the fundamental distinction between deductive and inductive economic ideas.

We’ll all know in six months.

“If you want to have a better performance than the crowd, you must do things differently from the crowd.” – John Templeton

Templeton is right, but most of us act according to John Emerson’s views posted on Scienceblogs.com.

Economists have always had trouble with bubbles, like the one we just experience (sic), and this is partly because not only are people not totally rational and not only do they not have perfect knowledge, but besides that, they communicate with one another, so the irrationality is not randomly distributed so that the irrational individuals are weeded out, but can pervade a whole population.

What will the maddening crowds do? Uncertainty prevails for the moment. We may presume, I think, that Americans possess an unwavering commitment toward work and prosperity, and these ethics should become evident in the value of stocks.

Getting The Facts

“Just the facts, ma’am”

Sergeant Joe Friday never said, “Just the facts, ma’am.”

He said, “All we want are the facts, ma’am…All we know are the facts.”

“The story you are about to hear is true; only the names have been changed to protect the innocent.”

The narrator introduced the story.

On April 26, 1951, on a black and white Zenith television, viewers heard, “You’re Detective Sergeant, you’re assigned to auto theft detail. A well organized ring of car thieves begins operations in your city. It’s one of the most puzzling cases you’ve ever encountered. Your job: break it.”

The past two years of stockmarket activity is “the most puzzling” I’ve “ever encountered.” My job is to explain it with just the facts.

Finding facts stripped of emotion and sales pitch takes some searching.

Finding reliable sources for facts takes some investigation.

The facts you are about to read are accurate, to the best of my knowledge; the names have not been changed, and there’s plenty of guilt for everyone.

My best resource:

Asset Allocation: Balancing Financial Risk by Roger Gibson

So, what am I learning now from Mr. Gibson.

David Drucker, an independent registered investment advisor, interviewed Mr. Gibson on March 26, 2009. “Roger Gibson on the Market Crash” is available on Morningstar Advisor (a service provided by Morningstar).

“All we want are the facts…All we know are the facts.”

Drucker’s first question, “Do we need to somehow recognize and incorporate a new level of volatility in the asset classes we use?”

Gibson’s answer, “It depends on whether we’re looking at short- or long-term volatility. Certainly 2008 was without much precedent in terms of how big the losses were and how far they stretched across all asset classes….”

Facts:
• All of Morningstar tracks 3,734 funds invested primarily in U.S. stocks lost money
• All of the 978 non-USA funds lost money.
• All of the 144 U.S. and non-U.S. realestate funds lost money.
• All of the 128 natural resource funds lost money.
• More than 4,000 funds tracked by Morningstar lost value.

Before going back to Drucker’s interview, an overview of corporate earnings might add prespective to mutual fund returns.

Mutual funds gain or lose value because of corporate earnings. If corporations do well, thier stocks perform well (not always, but usually).

Stocks go up or down, most times, because corporate earnings go up or down. Standard and Poors reports that corporate earnings for the past 20 months decreased more than 90%. Corporate earnings have been recorded since 1936. Current corporate earnings, or lack of earnings, are the worst on record.

“In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.” (Chart of the Day)

Drucker proceeded to ask about bond/fixed income funds since asset allocation models include both. Gibson’s firms studied bond fund performance too.

Facts:
• The Morningstar database tracks 1,730 bond funds (taxable and municipal)
• 1176 (68%) fixed income funds lost money.

“In 2008, panic fed on itself. I had more than a couple of sleepless nights in the last quarter as foreign markets were in a freefall because the U.S. markets were in a freefall, and the next morning U.S. markets were again in a freefall because foreign markets were in a freefall, and so on.”

Roger Gibson, David J. Drucker interview, March 26, 2009

Risk premium may inprove in future years.

Risk premium is the difference between the return received for a risk-free investment and the return on a risk-investment (stocks, commodities, etc.)

For example:

If stocks returns are 9%

and if Treasury returns are 4%

The risk-premuim is 5%

“During times of excessive optimism, people overshoot markets on the high side, and during times of extreme fear and panic, markets overshoot on the downside. In 2008, people panicked and dumped securities, which sets the stage for higher-than-normal rewards for people holding on.”

Roger Gibson, David J. Drucker interview, March 26, 2009

Drucker: So there will just be some years–like 2008–where asset allocation, with all its benefits, won’t keep us safe.

Gibson: Let me answer that with my favorite quote, by Paul Volcker, who, 15-20 years ago, was at CFA conference and said, “You cannot hedge the world.” I love that quote, if you’re living on this planet, you can manage risk, but you can’t eliminate it. We got that lesson in 2008.”

“All we want are the facts…All we know are the facts.”

My Grandmother (“Nannie”) would say, “Raymond, pick up your feet.” At the table, she would remind me to “sit up straight,” and when eating she’d say, “chew your food quietly”. She expressed herself lovingly because the way I behave matters. Probably sounds quaint but I must say, she cared.

Folks working the Wall Street trading floors care too. They’re not different. Even their motivation equates with most investors. They seek profits and wealth. They abhor losses. Their proclivity for gain makes them “push their luck”. No different from any 401(k), pension plan, mutual fund, or individual stock investor.

Excessive desire for gain blows bubbles into markets because no one wants to miss the game. Everyone wants ” in”. If you’re not in the game, you’re not a player, and you’ll feel ashamed. Nobody wants to “fold”. Investing differs from poker, but the methods and outcomes seem dissimilar as the “pot” grows because avarice instigates excessive risk-taking.

At a point of time, unknown to most players, realism cascades into the game. Emotional and economic tremors awaken “the players”  and the game ends. Players drag themselves (or get dragged) away from the table, or languish waiting for the next game to start, and the evolution toward the next game begins on the heals of the one just ended. 

What keeps this paradigm running? Human nature does. Many investors claim an understanding of risk-taking, but most want only consistent gains. These players come to the table late and leave too late.  

Investing is not a game, yet has specific rules. Maybe investors should follow the rules while adhering to ethics and managing emotion. Investing is about modernizing, making life better, healing, serving, and improving the world.

Investment dollars empower entrepreneurs and corporations to test and implement proven theories and methods to achieve a common good. With keen wit and a sharpened ethical edge, investors,  entrepreneurs, technology innovators, and business managers could apply new energy to their work and profit incentive.

Respecting resources, people, and the earth may validate adherence to wisdom and purpose when investing. Many corporations and investors have abandoned legitimate purposes and intentions for their product and service by losing a grip on the what is “good and right”.

Noah Robinson writes, ” We live in a world that’s resource-constrained but ingenuity-rich.” Taking care of the earth, the world around us, having fun, and sleeping well does not contradict the power of new ideas and the ethic that governs those concepts.

Noah Robinson elaborates in his article, “What is Ethonomics?”

My Grandmother knew this in her quiet, reserved, and short-of-stature demeanor. She collected her dividends, invested in quality companies, and held her stocks for the long-term. She saved. She was an investor.

   

Whole Earth from Space

 

Good news always encourages. When reading any news about the stock market, we read circumspectively. Caution, discipline, and purpose should drive investment decisions. Asset allocation works when applied with patience and consistent commitment.

Here is a positive Bloomberg.com stock market comment after four days of positive numbers and during the G-20 Meeting.

Global Stocks Rally on Improving Economic, Banking Outlook

 

A few streets in Boston have cobblestone or brick pavement. Treking along these walkways involves paying attention to your feet. You also have to stay alert to your destination.

The stock and bond markets are similar. Every now and then you can trip, but if you keep your eyes on the destination, you’ll get there most of the time.

Remember the TV ad, “I’ve fallen and I can’t get up”? Stock and bond investing is not like this. You may fall (your portfolio value), but you will get back up. The only way you might not get up is if the walkway turns to rubble. That predicament does not seem likely.

Hyperlinks on this website are provided as a convenience and we disclaim any responsibility for information, services or products found on websites linked hereto. 

NOTE: This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. For more information, including a prospectus with charges and expenses, call the number of any brokerage firm, mutual fund company, investment advisor, or insurance company.. Please read the prospectus carefully before investing. . Mutual fund investing involves risk, including the possible loss of principal. In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments typically exhibit higher volatility. Products of companies in which technology funds invest may be subject to severe competition and rapid obsolescence. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Past performance does not guarantee future results. Ethos provides this news page for information purposes only and it should not be construed as legal, accounting, tax, or professional advice. Ethos Advisory Services disclaims any loss or liability which is incurred as a consequence, directly or indirectly, of the use or application of this news page or any page on ethosadvisory.com or echievements.com.

October 29th, 2008

Nothing about the stock market is too predictable…what you expect usually does not happen.

Some will disagree. For them, the direction of the market is clear. At least clear when claiming prescience. They’ll never admit when wrong; they will boldy exclaim and humiliate when right.

Stock trading intra-day has relevance, but what seems to matter most is what the market indexes say at 4PM (or after the final trades settle around 4:10 or later).

Here are three observations:
• Volatility prevails
• The better hedge funds seem to be standing on the sideline
• Nobody is really certain about what happens next; Those who are certain see “gloom and doom”
• Many wait for the next economic “shoe-to-drop”

Finally, whatever happened to dollar-cost-averaging?

You’ve heard or read the story about Chicken Little (I have five of them roosting outside my office window; in moments of distraction, I watch them eat while my dog snores on the office couch.)

Anyway, Chicken Little hunts and pecks for morsels, gets whacked by a flying acorn, and thinks (chickens don’t, but you get the point) the sky is falling. Off she runs to Federal Reserve Chairman of the Kingdom. News gets out, and the eggs start falling off the wall, the sky starts cracking, and everyone runs for cover with egg-on-the-face.

Every story has a moral. Chicken Little teaches us to have courage, fortitude, and conviction. One version tells us that everyone runs for cover because the sky is falling. That story line tells us not to follow the herd or in this case, the flock.

How come we feel so much worse when markets decline, crash, collapse, or crumple? What makes us so vulnerable when thinking events have turned against us? Behavioral science gives us an answer.

Investors feel worse over a loss than they feel good over a gain. Feeling loss of any type reminds us of death, deprivation, disappointment, and depletion. Loss reminds us of mortality. You may find this a thougtless-stretch; I find it a thoughtful-truth. Fear shouts louder than confidence because facts lack relevance when facing danger.

No matter how many facts line up to reassure us, most of us just can’t be convinced. That ugly feeling in our gut will not go away. The facts matter (as time may confirm), but sometimes feelings overwhelm and many investors become Chicken Little. However our confidence, resilience, determination, and commitment toward work and innovation may just prevent the sky from falling.

“If you can keep your wits about you while all others are losing theirs, and blaming you. . . . The world will be yours and everything in it, what’s more, you’ll be a man, my son.” – Rudyard Kipling, English short-story writer, poet, and novelist. Nobel Prize(1907), 1865-1936