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thoughts on the market with the correction at nearly 10%: still largely sitting it out

Recs

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May 19, 2010 – Comments (14)

Well when I first posted that I wasn't buying much of anything into this correction yet because fear hadn't gotten really extreme a week or 2 ago...  that was true.

Fear has gotten extreme now, sort of.  As recently as yesterday folks at Real Money Silver, which I read every day, were ready to buy the dip and play the bounce-back.  Then the market rolled over bigtime yesterday and everybody gave up.  

Today there is all but no optimism over at RMS.  A CNBC poll had 37% of respondents predicting DOW 5000 or lower by years end.  One guy said we wouldn't even recognize america by years end.  The death of the Euro is almost universally accepted as a given.  

The bears aren't predicting a correction, they are predicting an outright crash.  Just today a few of the bearish leaners over at RMS said "a correction is beginning" or something along those lines.

So fear is rampant now.  But ...  I still think its fairly new.  And, as Doug Kass likes to say, the crowd usually outsmarts the remnants, at least for a while.  

My list of indicators that we are at the right time to buy isn't full yet.  These are:

-Kass turns bullish and starts posting optimistic scenarios (partly, but not to his usual extent).  The guy has had a great track record on the dips since I started reading him 15 months ago.

-Checklist gets scared and panics, later fear gives way to excitement over cheap buys.  Maybe this indicator will get weaker over time with experience, but I'm still not as scared as I was in July...  But then I guess I wasn't in February either. I did get excited in February over some cheap buys like MCGC at 4.20 and all. 

-Tech Ticker brings out the psycho-hyper-bears.  They have begun doing so...  

-my former business partner calls to talk about his dividend income stream and adds it up and repeats to himself that its more than adequate so he doesn't have to worry.  check

-bears get cocky and loud, not really a check here yet.  

-the fly, from ibankcoin, moderates his bearish view (never used this one before, so its an experimental indicator, but he seems quite bright).  

I think we retest the flash crash lows.  Dow 10k or 10kish, s&p under 1100.  

 

The overall scenario looks about like this:  earnings estimates, per S&P, for the forward 12 months are rising still after a good earnings season and stand at 85.  2011 estimates stand at 95, lowered slightly over the Eurozone crisis.  Now, that would imply that the market has considerable upside between now and then if indeed estimates stabilize or continue to trend upward.  However, of course, estimates always peak about when the market is peaking...  Early 2008 saw very high estimates only to have the bottom fall out of everything.  

Oil and other commodities have been beaten up so badly in all of this that alot of the speculative-premium has been drawn out.  a $20 drop in oil probably gets it within 10-15 bucks of actual supply/demand prices.  Dropping oil prices are, overall, GOOD for the economy.  

The risk of a significant worldwide economic crisis, take 2, would be about this:  Greece defaults, causing a banking crisis in Europe, causing a contagion, causing more sovereign defaults, causing armageddon, causing a new mega-crash.  A second deflationary spike in 2 years.  

The optimistic side of the economy is that earnings are good, economic readings have been good, companies remain super-lean, inventory rebuilding still hasn't happened (tremendous power in that, in my estimation, due to the current over-lean condition.  There are few cars on lots, a large number of supplier to former businesses of mine are on allocation withmany products due to sudden rush in demand.  They had shut off some supply, many factories and plants I am familiar with are on mandatory overtime...  little hiring yet, but it has to come eventually unless we crash anew economically.  and the ECRI says there isn't even a hint of a double dip recession visible in their work, they have a good track record.  

So there we are.  Its a more uncertain crash, and not yet as cheap, as the other corrections. But the fear, predictions, and uncertainty surrounding it may be near record levels for the past 12 months...  

My game plan is to slowly buy when things hit my pre-determined targets.  I bought some TCK deep in the money long dated calls today.  

I am still eyeing GS and GOOG, but have acted very very little on them.  I am considering adding to CNO and...

I have a big list of shares to dump that have held up during the correction, and I will be shifting into "best bets" from my boring shares of mo, t, vz, and all of those the lower we go.  Casino's have also held up well and I'll be liquidating those shares (and covering the hedges I have one them) as we drift lower.

Or, as it is, tank mindlessly lower day after day...

Always remember, folks, that its corrections like these that really provide us with the chance to make money.  However annoying or painful or horrible they are to watch, it is these dumps that allow big profits, in the end.  The bigger the dump, the bigger the potential.  

I don't think this correction is over yet, but...  it will end one day.  And higher than dow 5000.  :)

14 Comments – Post Your Own

#1) On May 19, 2010 at 12:11 PM, biotechmgr (34.33) wrote:

I'll agree on one thing, the current decline will end one day, perhaps around Dow 8500. Then a rally but below highs, and down past 5000. World debt will unravel the whole thing.

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#2) On May 19, 2010 at 12:13 PM, JakilaTheHun (99.93) wrote:

Always enjoy reading your thoughts, checklist. 

I admit that I have rather mixed feelings on the market right now.  The Eurozone is a mess and it looks like a contraction might finally be taking place in China; but it would seem that the US is in good shape comparatively speaking. 

China's tough, because there's so much fraud there --- I'm sure those who can read through the B.S. and find the true gems will be rewarded very handsomely, but I find that difficult to do with China. 

I was never as fearful as everyone else during the '08 downturn.  And as time went on (and prices got cheaper), I became more bold in my buys. 

I can't say the same thing about Europe right now. The situation there is so terribly complicated that I find it difficult to predict how valuations would hold up under certain scenarios:

What if the Eurozone breaks up?  

What if Greece defaults?

What if Germany forms a Baltic block and ditches the Euro?

How are non-Eurozone countries in Europe (e.g. the UK) affected by all of this?

 

The biggest enemy of investors in uncertainty and I'd say things are very uncertain in Europe right now. If things get cheap enough, I'll probably start buying a lot of European stocks anyway, but for now, I've really only dipped my toes in a slight bit. 

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#3) On May 19, 2010 at 12:43 PM, Option1307 (30.13) wrote:

Good thoughts, thanks for sharing!

I can't say I have a good handle on the market right now as I could see it going either way. Fortunately I'm not too stressed as I cashed out many of my longs from early 2009 a few months back and have been sitting with lots of high yielding stocks and cash. As you said, if things get a bit cheaper, I'll likely load up the hspooing car, but for nowI'm just being patient. Really the only trades/buys I've been making recently are long USD and shorts EUR, woo!

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#4) On May 19, 2010 at 12:48 PM, DarkToast (38.91) wrote:

Nice post. +1

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#5) On May 19, 2010 at 2:39 PM, ocsurf (< 20) wrote:

Nice read Checklist...+1

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#6) On May 19, 2010 at 3:57 PM, EnigmaDude (86.57) wrote:

Good to know what you are thinking.  I have added a few shares here and there, mostly oil related stocks.  Seems like many of them are getting hammered as a result of the combination of market volatility and the gulf oil spill and whatever else is driving down the price of oil these days.

Also watching my IMAX stock continue its climb, soon to take the lead in chimpcontest!  We shall see...

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#7) On May 19, 2010 at 9:11 PM, DarkReaper (< 20) wrote:

Thanks for the insight +1

 

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#8) On May 19, 2010 at 11:19 PM, dragonLZ (99.37) wrote:

The optimistic side of the economy is that earnings are good, economic readings have been good, companies remain super-lean, inventory rebuilding still hasn't happened (tremendous power in that, in my estimation, due to the current over-lean condition.  There are few cars on lots, a large number of supplier to former businesses of mine are on allocation withmany products due to sudden rush in demand.  They had shut off some supply, many factories and plants I am familiar with are on mandatory overtime...  little hiring yet, but it has to come eventually unless we crash anew economically.

checklist, as you always add value when you comment on my blog, I hope you won't mind if I share here the letter I received (with the 12%-of-the-annual-salary bonus check) from my employer at the beginning of March:

 

Dear _____,

Today's paycheck marks the final payroll for your company's fiscal year. And, what a year it has been.

After losing half of our sales volume and making so many painful cuts to keep our business afloat, we now find ourselves in the midst of a dynamic turnaround...

- We are now tooling up for $____ in new annual sales

- We are improving our quality (February's scrap rate was just ___%

- We are improving our productivity through automation and inovation

- We are improving our environmental stewardship with significant reductions in water and energy use

_______, your hard work and dedication has made all of this possible. We extend our sincere thanks and congratulations to you for all you have achieved this year. Enclosed is a bonus for you. The bonus is a token of our appreciation for your service to our company. It is also way to celebrate our return to prosperity in 2010 after an extremely difficult 2009.

Sincerely,

__________________________

End of letter 

p.s.

Yes, there are less people working. In 2008 we had 30% more people than we have today. 50% less than we had in 2000. But,...

We made a huge investment in new technology in 2008 (how's that for having ball$), which is paying off huge already. 

Last year we lost money almost every month, this year we made money almost every month.

A few big programs we got awarded are just starting: Mainly GM work, Ford too. 3 new programs (not so big) for Chrysler are in the proto-type stage. Hardware industry picking up too. Our customers (Tier 1's and 2's) are getting busier every day. Some are on mandatory 6-day-weeks...

I think it's cooking time...

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#9) On May 20, 2010 at 1:20 AM, checklist34 (99.73) wrote:

Thanks all for the comments and feedback. 

Along the lines of what Dragon posted in reply to my thread, I would observe these, all are true and from my own life:

-business at my old business's is the best it has ever been, despite severe contraction in the industry it serves.  Business nearly stopped in the fall of 2008 and is now many times higher than 1.5 years ago.

-several suppliers for my old biz's have products on allocation.  In each case its because they curtailed capacity during the crisis.  This would be a prelude to inflationary price raises IF there wasn't so much extra capacity just sitting around doing nothing.  It seems probable that the forces of competition will cause capacity to be un-idled before major price increases stick in the market place for too long.

-my former business partner tried to buy a new suburban and found none in stock in the nearest 3 dealerships.  now, folks, if chevy's are in over-stock, something has fundamentallyh changed in the universe

-literally all of the plants in a multi-billion dollar unit of a business that many people I konw well work for are on compulsory overtime.  very little to no hirings have occured.

-my old businesses, in the plants, are running at 50-55 hour work weeks.  no hirings have occured.  as with directly above, hiring has to occur at osme point.

-local furniture stores and other office stores are on monster backorder waiting times, up from PLEASE GOD PLEASE, JESUS AND MARY, PLEASE OH DEAR LORD PLEASE BUY SOMETHING, YES WE HAVE IT, RIGHT HERE IN STOCK, 18 months ago.  

-Inventory rebuilding hasn't even begun.  Inventory de-stocking was a huge part of the recession and rebuilding to even quasi-normal, but still lean, levels will represent a significant boost to the economy

-I see now, so clearly, why employment is a lagging indicator.  businesses are scared by the recession and lay off many, they remain scared for a long time and only after a while of feeling not scared do they dare hire again.  

-etc.

-I got drunk at a friends birthday party this last weekend and made out with ihs secretary.  I know what  you are thinking.  You are thinking that I did exactly the right thing, because she is hot as can be.  However, I have been wondering if instead I should have simply gotten drunk and started a bar fight to avoid future weirdness when I go over there to borrow the fax machine.  I know what you are thinking now...  ferpetessake, Checklist, you are old enough to not have weirdness over that.  But I will, its just the way it is.  

Now, that noted, it has been a long-time dream of mine to make out with a secretary, and since thats basically illegal now if its your own secretary, this is as close as I'll ever get.  So, yes, I am pleased.

The spring is coiled for a decent economic rebound, folks.  Hopefully nothing disastrous happens to prevent it...

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#10) On May 20, 2010 at 5:56 AM, fireman9119cac (24.42) wrote:

Checklist...I think.life is about life experiences...when you are a fat old guy sipping beer chatting with you other old fat friends you will be talking about life expiences not the dividends you received back in 05...

That was a diller

Kudos to the smooch session with Jennifer Marlow.

JM = secretary from WKRP...only famous one I know

FM

 

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#11) On May 20, 2010 at 11:29 AM, russiangambit (29.41) wrote:

> The overall scenario looks about like this:  earnings estimates, per S&P, for the forward 12 months are rising still after a good earnings season and stand at 85. 

Isn't it the case thought that prior to the slow down earning estimates are good, and then bum - the wheels come off and the earnings start freefalling and the estimates have to be thrown away?  Are you saying that you can't see a scenario where that would happen? 

 

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#12) On May 20, 2010 at 1:26 PM, EnigmaDude (86.57) wrote:

Dang - I knew I should have kept my mouth shut about IMAX!  Oh well - added to my position today.

So you made out with the secretary, eh? My fantasy is to have a hot nurse looking after me while I recover from my knee surgery next week.  It's good to have dreams, even if it does piss off your friends!  (He'll get over it if he's a real friend).

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#13) On May 20, 2010 at 2:40 PM, checklist34 (99.73) wrote:

yeah, old jennifer marlow was totally worth it...  !  I do need to borrow that fax machine, though, maybe i'll hit kinkos

Gambit, yes, as I mentioned in my opening post...  earnings estimates would always peak with or slightly behind the market, and so YES they are a fallible measure for investment decisions for sure.  

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#14) On May 29, 2010 at 8:33 AM, fireman9119ca (67.17) wrote:

Checklist

Anything striking you fancy?  Have you pulled the trigger on anything?

 Thoughts on OTE ?  Should I double down?

Is the divdend safe?  Does the de listing bother you?

 thanks in advance

 FM

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