So, the Dow reached 10,000...again. Interestingly, I heard a CNBC commentator say, "now that everyone is focusing on Dow 10,000..." News flash--not everyone is focusing on it. In fact, many of us probably don't care. Round numbers are psychologically important in the moment, but that's all they are. However, pundits seem to use this as rationale for some new Camelot-type era in the stock market and, if you can believe it, in the U.S. economy. At the same time, stories abound of people who decided not to pay their mortgage payments, yet are able to stay in their homes for months until the mortgage company even notices! This reminds me of the hot phrase before the consumer credit bubble burst: "moral hazard," the fear that if people were allowed to let their debt woes from excessive spending be forgiven, it would encourage them to keep on doing it. This will only make the problem worse for both our generation and those that succeed us. I have not heard the phrase much lately, and that in itself is a reason to be concerned.
I could not help but think back to 1999, when massive amounts of money were spent by governments and businesses around the world to reduce damage to our infrastructure and technology from the feared "Y2K" problem. Y2K-related spending effectively resulted in an economic stimulus (i.e., kick in the pants to get it going at a stronger rate), as money that would not have been spent for years under normal conditions was doled out in heavy doses over a relatively short period of time. It seems more apparent by the day that this is what is happening again, though for completely different reasons.
It's not Y2K damage we are trying to stave off, it's a deeper recession. Or, if you believe the commentators and Wall Street seers that think the recession already ended, the stimulus is aimed at avoiding the dreaded "double-dip." Yet when you look at Technology mutual funds up 54% year-to-date through October 14 (well ahead of the broad stock market), financial media giddiness, and sentiment indicators showing a return of greed in place of fear by investors (which didn't take long!), we believe you will arrive at precisely where we are on the Emerald team: this is starting to smell a bit like that 1999-2000 period. No, it's not the tech bubble, with Y2K fears lopped on top of it. Rather, we think it's the aftermath of the consumer bubble, and the euphoric feeling of relief by investors that it stopped getting worse. While that feeling could last even into early 2010, we are concerned that we have moved from overvalued to overreaction in terms of stock price movement. We'll attempt to coin a new term for this: Y2.01K, which is next year (2010) in expressed in thousands. We think it's more important to keep your eye on Y2.01K than Dow 10K.
We also find it interesting (perhaps annoying) that the media seems to pump up the Dow index at moments like this, even though it is a flawed index. The Dow has an odd, antiquated, price-based weighting system, which is why professional investors tend to favor other indexes like the S&P 500 when referring to "the market." However, many portfolio managers are happy to answer the question from clients "how are you doing against the Dow this year?" That's because at the market close on the day the Dow hit 10,000 (10/14/09), the S&P 500 was up 23.3% for 2009 to date, while the Dow was up a more pedestrian 17.1% (source: www.wsj.com). Thus, any manager who is matching the S&P for the year looks like a star against the Dow.
As long as I am moaning about an investment world that has again run amok, here are two more bits of evidence that something is just not right.
1. Here's a headline from Thursday: "It's Time to Decide: Are You In or Out of the ETF Rally?" If you are a regular reader of GreenThought$, you already know what I'm going to say, but here it goes - investing is not a black-or-white process. I believe you are better off being "in" all the time, but using asset allocation techniques that incorporate hedging and tactical management at times of high market risk. A flexible risk-reward balancing act beats a constant guessing game any time, in my opinion.
2. It was reported recently that in the first eight months of this year, approximately 90% of the money that went into mutual funds went into bond funds. The remainder went to equity funds, but even that small segment went to the more conservative types of stock funds. From what we read, even bond managers are perplexed by this. It also hints at the retail investor being dramatically underinvested during the historically-strong stock market run since March. That would not be a problem, except that historically, that's exactly the cycle that leads to a renewed round of trouble for the markets. The "little guy" gets in late, enjoys the party for a while, thinks he has figured it out this time...and then the cops come and break up the party.
So, you might ask at this point, are we bearish? A better question is "what do we do now?" Our answer is to continue to ride the coattails of this 1999/2000-style momentum, but do so with a balance that weights toward risk-management over return-maximization.
(c) Emerald Asset Advisors
www.emerald-eas.com |
Most Popular Articles
