ITS ALL ABOUT THE U
(SHAPED RECOVERY)
Here are a few more guidance points during these very confusing times for investors:
· Many here in South Florida have had an affiliation with the University of Miami. Emerald Partner Allan Budelman, for instance, earned his MBA there. Fans of the school's sports teams have a rallying cry, "its all about the U!" We think that same idea can be applied to the eventual recovery in both the economy and global stock markets. Many will assume that stocks transition from bear markets to bull markets, rising as fast as they fell. On a very short-term basis, this can and does happen. However, like a sprinter trying to run a marathon, it runs out of gas fairly quickly. Market strategists distinguish between "V-shaped" recoveries (in which plummeting prices are followed by rapid rises, so that a shape of a letter V is formed) and U-shaped recoveries, in which prices rattle around near the bottom (or perhaps within 20-30% of the bottom) for a while before gradually, and in give-and-take fashion, a new bull market can be established. Think in terms of years, not weeks, and your expectations will be in order. To be clear, there are still significant risks of further losses in the stock market. However, the long-term rewards of being patient and disciplined as the U eventually develops can be high. As for the near-term, we are reminded of one of our favorite lines in the history of the movies. In Kevin Costner's "Bull Durham," Costner is playing a minor league baseball catcher. After his pitcher (played by Tim Robbins), throws a few pitches that are nowhere near home plate, and nearly knock the batter down, the batter looks down at Costner, as if to ask what's going on. Costner replies, "don't look at me, I don't know where its going." THAT is today's stock market, even if you follow it closely.
That is why, while we continue to be vigilant against near-term market risk, we are now spending a lot of energy thinking about how to benefit from the ultimate recovery. Or to use yet another sports analogy, this is like a boxing match: you defend yourself first, with your gloves up, but keep looking for openings to go on the offensive. That's been our strategy for the past 12 months. While we often don't keep up with the biggest up days in the stock market, the very competitive results we've achieved over the past several months and beyond are a testament to that approach. It is OK to lose battles, just win the war - the war is the maintenance or enhancement of your lifestyle.
· Why is the market so crazy on the down days lately? Our best guess: hedge funds raising cash for redemptions. Hedge fund managers are paid very well with the expectation from many investors that they will make money in any environment. Their negative returns this year have been most disappointing to their investors, many of whom have requested to get their money out. While there are various liquidity policies with hedge funds, the standard we've seen is the ability to redeem at the end of any calendar quarter, and with 45 days notice. Redemptions in the third quarter of this year were fairly heavy, and from what we hear, they will be much larger in this fourth quarter. It is at worst an eerie coincidence that on July 15th of this year, the S&P 500 hit what was then its intraday low for the year at 1200. We say eerie because that is right around that 45 day notice mark before the end of the September quarter. The index then rallied about 7% from mid-July until the end of August, before the dramatic drop from near 1300 to the recent closing low of 900 occurred. Does that mean that the period around November 15th will have some significance? Who knows, but at a time when months worth of "normal" market movement seem to occur within a couple of days, it makes it an interesting piece to add to our market-watching efforts.
· Final thought for today: the stock market usually leads the economy. That is, stocks tend to start their move up or down before the economy heads in the same direction. We suspect this time will be no different.
We have been asked whether our market outlook is based simply on charts and analysis of market history and psychology. While we do talk about that a lot, it is more because we think it is easier for us to write about those and more enjoyable for you read about them. They are more direct answers to the kind of questions we believe investors ask themselves, as opposed to analyzing whether nonfarm payrolls data, P/E ratios or CPI inflation translates into meaningful market ideas. Most often, those things are offered up as backward-looking explanations by market pundits, or excuses for what happened.
At the end of the day, what moves the price of an investment is what someone is willing to pay to buy it or sell it. There are certainly fundamental reasons for everything we do in our portfolios, but they have more to do with big-picture issues than the never-ending data chase conducted by the media. There are enough good economists and quant analysts that the world does not need another one. We try to add a dimension to the discussion that is often overlooked by mainstream commentators. We'll have more on this in an upcoming issue, where we'll summarize our recent portfolio changes.
The information herein has been obtained from sources believed to be reliable, but Emerald Asset Advisors, LLC ("Emerald") does not warrant its completeness or accuracy. Prices, opinions and estimates reflect Emerald's judgment on the date hereof and are subject to change at any time without notice. Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Further information on the firm and its advisory fees may be obtained from the firm's Form ADV Part II, which is available without charge upon request. Complete descriptions of all Emerald's products and benchmarks are available upon request.
