19 October 2008

Back from Ireland and Full of Bull

The Brother Kite, who happen to be playing the Lit Lounge on Second Avenue this Thursday.

I fled the market carnage for a week, driving around Ireland, from Dublin to Cork, and around the Southeast. There, the news dominating the headlines there is how the Taoiseach and his governing party are screwing health care access for the over-70s. The Irish government found a very effective way to push the financial crisis below-the-fold. Well done.

Apparently, I missed out on the Phils quickly dispatching the Dodgers (that's what the Trolley Dodgers get for vacating Brooklyn), and I was blissfully unaware of the new volatility records made while I adapted to the local culture and drove upwards of 100kph on narrow country lanes that would justify 25mph limits in the States. The only lament I have is that we were stuck with a behemoth Nissan-badged Renault sedan. The Nissan Primera was an absolutely crap car--French interior ergonomics and Japanese blandness conspired to make me wish I were driving either a nimble, full-blooded French Peugeot 206 or a Honda Jazz.

As I look at the markets this week, I see that Warren Buffett and Barry Ritholtz are snorting like bulls.

First off, Buffett shares with Times readers some learning from history:

Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.

Buffett then dethrones the "cash is king" argument:

Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: "I skate to where the puck is going to be, not to where it has been."

Ritholtz gives three factors that have made him go bullish, against the deep negative sentiment in the market. His second factor is the most compelling:

The October University of Michigan Confidence number is just shy of the lowest level since 1980. University of Michigan Consumer Confidence level is at levels not seen since the end of the 1970's bear market. (Hence, my "Blue" double entendre). The telephone survey is compiled last week and as late as yesterday. It certainly reflects much of the market action over the past 2 weeks.

That's right, we are as negative as anytime we have been over the entire course of the 1982-2000 Bull, or the start of the 2000-03 bear. Worse than the 1990 recesson, worse than LTCM or the Thai Baht crisis, worse than the tech and dot com crash, worse than 9/11.

That is some seriously bearish sentiment

Fear and negativity are still rampant in the market, according to some of my favorite indicators, the VIX:

and the trio of S&P 500, NASDAQ 100, and Dow components trading above their 50-day moving averages:

I hope Buffett and Ritholtz are right in the short-term--I am looking to book some losses this week and get back into trading this volatile market, with a view that the bear market is a bit overdone.

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