TSIF (99.96)

Self Fulfilling Prophecies and Riding out the Storm

August 27, 2011 – Comments (10)

  I sit here after putting away the outside remnants of summer living in the Northeast.  I was a little slow putting the heavier items away and got drenched.  I could have waited, but one never knows when the intermittent down pours will pause and gather strength. What’s the harm of a summer time shower as you wander about your yard? I’ve also learned that if I wait for a pause, it’s Mother Nature playing tricks to get me committed. The down pour will come anyway. 

I reflect now on the past few weeks of volatility in the market and some thoughts I’ve had the past few weeks.  I really don’t put much stock in why the market moves when it does. It could be the lowering of GDP projects, credit down ratings, the fear of default in Europe, the question of cuts in our federal spending.  The pundits who get paid to report will attribute the erratic market to the “flavor of the day”.   

The real reason the market reacts in fits and jerks and oscillations that rival past history is clearly sentiment/fear.  The markets of late are weak/late at valuing anything. With the exception of some bell weather dividend payers with large institutional followings, I don’t think most care about valuation, certainly not one to two quarters ahead when the future is so murky.   You toss in computer trading and you attenuate the effects.  Alstry is correct that computers are faster than we are and will drive the markets to an overshoot/undershoot condition.  However, it is man who wrote the computer programs and we know there are weaknesses there that can be used.

Tomorrow, if the weather doesn’t shut down my power for two long, I’ll pen a blog on 4 ways that I’m going to play the markets during the volatility spikes.  I don’t know if there will be anything useful to anyone else, but I’ll clear my notes and maybe I’ll get some Foolish input on which/why any of my four ideas are flawed or riskier than I think. 

Fear/Uncertainty will continue in the market as long as: 

1.  Unemployment remains high.

2.  Consumer confidence remains low.

3.  Housing remains depressed. I know a few pundits who are hopeful in this area, but the banks have a huge pent up inventory due to court rulings and process time.  A few people like the variety/control/location of building new, but these are minimal.  Housing sells/builds stimulate the economy and lower interest rates might help, but overall, I don’t see this helping in the next 6-12 months. 

Uncertainty is amplified because we’re still recovering from the last recession.  People were already fearful about maintaining their limited resources and they’ve “aged” a few more years since then, making retirement even more of an issue for many. 

Finally, the self fulfilling prophecy.  

1.   The Federal Government will cut spending. Whatever areas they cut, medical, military, program supports, etc, will all have ripple effects in the economy.  The uncertainty of what is bad enough, but Federal spending cuts will cut jobs and lower confidence.  Many companies are guiding downward in earnings because of the certainty that cuts will occur and the uncertainty of where.  Technology, Health Care, and Military providers are especially vulnerable to both uncertainties.  

2. This is a global world we live in.  Europe, Asia, and Emerging Markets will all have ripple effects of their own as they work through their own issues. 

3. Analysts are estimating a 1 in 3,  to now a 2 in 3, chance of a double dip recession. This breeds uncertainty and the markets will sell, buy bonds, buy precious metals, and will hesitate buying equities. 

We've set the path for continued volitility and our speculating on a double dip contributes to the chances we might have one as we destabilize our confidence and prepare for the worse.

I think there is still opportunity for long term buy/hold if the investor has a long term outlook, patience, selective buying, and an ability to “tune out” some of the noise. For those looking to ride through the uncertainty and the storm there might be other tools rather than cash on the sidelines. 

It's been proven that sitting on the sidelines, even for a short period during a recovery can cause you to miss out on the largest market increases and chance to build your retirment funds. Getting in too early, however, if the market is in freefall is also hard to live through at times. 

TSIF;  Hmmm as expected it just stopped raining for now...but I feel better knowing I'm now prepared for the heavier parts of the storm. 

The Sky isn't Falling Today, but if you're in the Middle of Hurricane Irene it might feel like it is.  Hold on, stay strong, we don't know what tomorrow will bring, but calmer waters are ahead and replacing our material possessions is not only viable, it will be great for the economy!!!

Disclaimer, if I knew anything, would I be posting here?  ;)