IT’S THE 90S ALL OVER AGAIN, ACT ACCORDINGLY.
Performance for 2016 is going to be greatly determined by how investors treat this sell-off. Per the usual routine of buffonery brought on by memories of past painful episodes, those seeking gains will misallocate assets, most likely by an overallocation into cash. This is a developed market led global economy. Developed markets run on technology and finance. Therefore, the reasonable conclusion is that technology and financials are where the greatest potential for returns lie. The great commodity bull, while being oversold and ready for a bounce, is now a misallocation play. Meaning that it will take some time before the assets that were irresponsibly allocated into this segment unwind. During an unwind trading becomes sloppy, investors become frustrated and it is generally a shit shoe, marked by periods of severe angst. This is the 90s all over again. Tech is king. The US is the growth engine. Emerging economies are risk-laden. Commodities are something you eat and put in your car. Most importantly, dips brought on by emerging market fears are to be bought hand over...
IF YOU’RE NOT DEPRESSED, YOU HAVEN’T BEEN PAYING ATTENTION
The market is supposed to be depressing at this juncture. It is meant to be dissuasive, seemingly dishonorable and unworthy of investment dollars beyond what one would consider allocating into a keno tournament. There is no other way to put in a sustainable, mind-numbingly solid long-term bottom in a secular bull market other than to undergo the conditioning process we are facing at present. If you are not depressed by the market action at this point, you are either a) not watching the markets closely or b) completely incapable of normal human emotion. I'm as bullish as can be going over the long-term and I've found myself drifting off into visions of the bliss that would be a job that doesn't involve red and green fluctuations in wealth. Anything but wondering when normal price action, sensible observations and a propensity towards discounting fear instead of embracing it will return to the markets. The separating factor between the winners and losers of the current act of monetary malice is very simple: Those who come out ahead are the ones who will realize that their depression is a necessary part of the process. In other words, those who realize that their emotions are converging along consensus extremes, deciding to move in direct opposition to that consensus will secure a substantial victory in the form of outsized profits. Those who allow the markets to manipulate them along consensus extremes will end up with conventional returns going forward, which are far below any major benchmarks. And this precisely describes the plague of the current financial community that is hindered by convention masked as...
AUGUST CLIENT LETTER: EVACUATION STATION, DECISIONS OR A LACK THEREOF
What follows is a section from the “Thoughts & Analysis” portion of my monthly letter to investors at T11 Capital. Evacuation Station Equities have experienced nothing less than absolute evacuation during the month of August. The intolerance of individual and institutional investors for increased volatility and risk is abundantly apparent as memories of past crisis situations incinerating capital are still fresh in the mind of many. It has been quite sometime since I have witnessed such a symphony of fear as measured by various indicators and surveys. Here is a brief list along with the appropriate matching illustration: 1. Inflows into money market funds are skyrocketing. 2. Flows out of equities have been massive during August. This has been the largest 5 day outflow in 15 years. 3. Investor exposure to U.S. equities has only twice been lower in the past eight years according to Bank of America. 4. This according to Bespoke: “Following this week’s decline, bullish sentiment has now been below its bull market average of 38.1% for 21 straight weeks, which is the longest streak of the entire bull market. Taking a longer term look, bullish sentiment has been below 40% for 25 straight weeks now. We haven’t seen that long of a streak since August of 1994! “ https://www.bespokepremium.com/think-big-blog/bullish-sentiment-back-on-the-decline/ 5. The put/call ratio has now recorded the most bearish reading of this entire bull market to date as expressed by the 2 & 5 day moving averages of the ratio. What we have experienced is a wholesale evacuation of stocks into illiquid trading conditions brought about by late summer disinterest. A vicious cycle, if you will, of self-fulfilling despondency that is more based upon nightmares of past investor experiences than any semblance of economic reality. What this means for investors is very simply opportunity. Contrarian theory works exceedingly well during secular bull markets, both in terms of predicting points in fear that deserve additional allocation AND points of greed that require the raising of cash in a portfolio. To date we have experienced numerous points of excessive fear, with August being the most substantial example. We have, however, been reluctant to witness any real greed driven, speculative excess as is the hallmark of true market tops. Given the rapidity with which investors are prone to terror, it may be some years yet before we experience such excesses in greed warranting any...