Today the stock markets are closed to honor George H. W. Bush’s passing. Our 41st president was the last politician to actually pay for lying to the public when he plainly stated, “Read my lips. No new taxes” and promptly raised rates when the Democratic controlled House sent him a bill with new taxes, which he signed. Oops. He lost his next election. I’d like to see our country hold politicians responsible for their promises, and lack of action on those promises, more often. But, perhaps I am getting old and wistful longing for “better times” before we accepted the demise of our political leaders and system.
While you are enjoying a day of not trading or worrying if we are going to drop another 3% Thursday or Friday, I’d encourage you to read the latest Market Letter posted by John Hussman. Short term action in the market isn’t easily predicted, but over a 12 year time horizon, he has proven to be right much more than wrong. I have provided the link above to get you right over there. Here is an excerpt:
Quantitative easing wasn’t about creating more “liquidity,” or encouraging more bank loans, or any of the other excuses tossed around for it. What quantitative easing really did was to replace interest-bearing Treasury bonds held by the public with a mountain of zero-interest money that was so uncomfortable to hold that it drove investors absolutely crazy. But they couldn’t get out of it in aggregate. Whoever held it could only toss their hot potato to someone else by trading it for some other security, regardless of the price. Every time someone used their zero interest money to buy stocks, they got the stock, and the sellers of the stock got the zero-interest money. So the cycle continued, until every asset – stocks, bonds, everything – was priced to deliver long-term returns remarkably close to zero. And here we are.
Overall, market conditions for bonds and precious metals shares appear reasonable even here, though I’m inclined toward a moderate stance, using price weakness to nibble at additional exposure until we observe signs of emerging economic weakness.
In stocks, I continue to believe that the market is positioned for rather violent losses over the completion of this cycle, though undoubtedly punctuated by periodic rebounds that are fast, furious, and prone-to failure. These tend to emerge in the form of what I call “clearing rallies,” which relieve short-term oversold conditions. They should be used to make any needed portfolio adjustments. While I don’t herald every tactical response to those conditions, the important consideration at present is to maintain a safety net in any event, because when those rebounds fail, they can fail spectacularly. This comment from December 4, 2007 offers a good sense of how I view these periodic recoveries.
“Last week, the stock market enjoyed a typical clearing rally from an oversold low – ‘fast, furious, and prone to failure.’ This presents a good opportunity for investors to reduce positions that they would not be able to tolerate through a complete market cycle, with the S&P 500 only about 5% below a record high.
“Let me preface this analysis by stressing again that my intention is not to drive investors out of well-considered investment plans. There is nothing wrong with a buy-and-hold approach provided investors are aware of how strong the impulse is to abandon that strategy only after deep declines. I appeared briefly on CNBC last week to discuss recession risk, but beforehand, I was asked to put a positive tone on my comments, to which I responded – ‘Look, my interest is in making sure that investors have positions that they are able to hold through the complete cycle… If they’re carrying more risk than they could endure through the course of a bear market, they should cut back now. I’m not going to wave my arms around about doom and gloom, but I think it’s a crucial time for investors to think about the risk they’re taking, and if you don’t want me to say that, please don’t have me on.’ Well, I went on, and though we ran short of time, that’s still my message.”
Dr. J’s Thoughts: Keep watching the ANALOG posted in the PROTECTED posts, follow the Market Alert Signal for long term investments, and stop by regularly as you know I post my thoughts often when the market is moving around violently.