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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?  ;) 

10 Comments – Post Your Own

#1) On August 27, 2011 at 7:05 PM, portefeuille (98.82) wrote:

double dip recession

For Germany it would be just the next recession. GDP, company revenue, earnings, ... have long past their 2008 highs. And unemployment is "seasonally adjusted" as low as it has ever been since reunification in 1990 ...


left scale legend: "business expectations for the next 6 months"

Ifo Business Climate Index Falls Considerably (pdf)


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#2) On August 27, 2011 at 7:10 PM, portefeuille (98.82) wrote:

#1 And house prices (inflation adjusted, i.e. real) in Germany are more or less constant for the past 2 decades or so ...

The "German character" parts of this article are mostly nonsense, but the "financial crisis in Germany facts" should be okay.

It’s the Economy, Dummkopf!

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#3) On August 27, 2011 at 7:20 PM, portefeuille (98.82) wrote:

#2 And Düsseldorf does feature quite a bit more than stupid bankers.

50% of Vodafone came from Düsseldorf for example, hehe ...


Mannesmann AG was a German corporation with headquarters in Düsseldorf. The company was founded in 1890 originally to produce seamless steel tubes. It was traded on the Frankfurt Stock Exchange. (Ticker symbol is MMN.) The company had approximatively 31,000 employees and revenues (1999) of 23.27 billion Euros.
Over time, Mannesmann purchased a lot of companies to become a diversified conglomerate. Amongst its subsidiaries was Hartmann und Braun, which has since been sold off to Elsag-Bailey which was subsequently purchased by ABB
Mannesmann was acquired by Vodafone Group Plc. in 2000. This was a controversial takeover as never before in Germany had a large company been acquired by a foreign owner. This was a hostile takeover but the merger was backed in a private deal between Mannesmann management and Vodafone.
Under the terms of the deal Mannesmann sought assurances from Vodafone that the Mannesmann brand and name would be kept under the new owners. This was agreed and the deal was announced. However not long after this, Vodafone went back on the deal and rebranded.



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#4) On August 27, 2011 at 7:21 PM, portefeuille (98.82) wrote:



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#5) On August 27, 2011 at 7:31 PM, portefeuille (98.82) wrote:


the unemployment rate

unemployment is "seasonally adjusted" as low as it has ever been since reunification in 1990

I think ...




For the June survey the "current situation index" was highest since the surveys started. I don't think the German manufacturing industry is done with the "boom" yet. It could easily re-enter that sector with the next survey result.

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#6) On August 27, 2011 at 7:52 PM, portefeuille (98.82) wrote:

For those dividend fanatics. The 2012 dividend yield (consensus estimates) for some DAX companies.

RWE - 9.19%, E.ON - 8%, Deutsche Telekom - 7.4%, Deutsche Lufthansa - 7.29%, Deutsche Post - 7.16%, 
Daimler - 6.56%, 
BASF - 5.32%, 

yield of German government bonds (10y).


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#7) On August 27, 2011 at 8:05 PM, portefeuille (98.82) wrote:

RWE - 9.19%, E.ON - 8%

the data might be a little aged. The current consensus should be slightly lower (Atomausstieg, ...).

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#8) On August 27, 2011 at 9:18 PM, leohaas (29.98) wrote:

"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."

This cannot be true! If Government spending did not have a positive effect on the economy, then cutting Government spending cannot have a negative effect on the economy!

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#9) On August 27, 2011 at 9:58 PM, Frankydontfailme (29.29) wrote:


Government spending usually has a short term benefit to the economy. Removing the spending gets rid of the short term benefit. In the long term, this short term stimulus is much more damaging than beneficial.

I say usually because it is conceivable (although in practice rare) that government spending could actually benefit the economy in the long term. Infrastructure projects come to mind.

I get that you were being snarky, but I thought it had to be addressed anyways. 

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#10) On August 28, 2011 at 10:36 AM, TSIF (99.97) wrote:

Portefeuille, no dipping downward at all in Germany!   I'm going to hold you to the "boom cycle" don't go discouraging me further!  I am really counting on Germany to prop up all of Europe if not the US and other countries as well. Keep things moving upward over there...don't wimp out on me......  ;)

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