December 29, 2009
Looking Ahead to 2010
Longer term, most of 2010 looks to be a “muddle through year” at best for the stock markets. Recessions and bear markets for stocks have regularly begun in decadal years – those that end in a zero, like 2010. Investors who charge brashly into the kind of historical pattern that 2010 presents are fools looking to be parted from their money.
We are still in the early stages of what will likely be a decade long hangover from an excessive buildup of debt. The prosperity of the past 30 years was largely built upon borrowed money that now must be paid back. Paying back means less money is available to buy cars, vacations or investments, and this means weak demand and weak markets for those items.
I call these long periods that are required to unwind earlier excesses “generational bear markets”, not because they last so long (the average is 14 years) but because they either wipe out a whole generation of investors who refuse to accept the reality that times have changed, or so discourage them that they will never invest in anything again.
The last “generational bear” lasted 16 years, from 1966 to 1982, and produced 4 individual bear markets, defined as a 20% or more loss in the stock markets. The one before that, the 20 year “generational bear” that lasted from 1929 to 1949, produced 5 different bear markets, back to back to back to back to back. Just about the time when investors felt like they were recovering from one bear market, another would strike.
We have only encountered two bears so far in this one, so now you know why I invest defensively so often these days. There’s b’ars in them thar woods!
Buying and intending to hold for long periods is insane, since we are clearly in a “generational bear market”, and history suggests we will see 2 or 3 more vicious downturns before we are done.
About the best thing going for the stock markets as we enter 2010 is the fact that investors are still shying away from real estate, and bonds are priced higher than they have been in 30 years (and, remember, the idea is to buy low, not buy high) as you can see from record low interest rates all around you. There are just not many other places for investors to put money than the stock markets, and this will be good for stocks. I just don’t know if it will be good enough.
However, there is also a four-year stock market cycle centered around the elections. This cycle has operated during virtually all administrations over the past 100 years or so, and there is nothing on the horizon to suggest that this time it will be different. The honey moon period will be over for the current administration and its economic stimulus plans, and the mud-slinging should become extraordinary as we get closer to the November elections, and all that is likely to drag the markets down.
I mentioned in my last newsletter that the market had been in a very tight sideways trading range as it repeatedly ran into “overhead resistance” which kept it from going higher. The last time we saw this after a big market rally like 2009’s was in 2004, and that year it took ten months for the market to break out from its overhead resistance. Ten months would put us right at the November elections and the time when the down leg in the four-year cycle typically turns up again. Coincidence? I think not.
This suggests that making investment gains during the next 10 months will likely be very difficult for investors without well crafted strategies to move in and out of the markets. However, Hepburn Capital’s Adaptive Market Strategies are ideally suited to this type of market because, while markets as a whole may not make any gains, there is always a bull market in something that we can strive to take advantage of.
I believe that my simple system of moving money into investments that are going up, and out of investments that begin going down, is the best way to make money in the markets that I am expecting.
I use modified buy-and-hold systems, meaning I hold only investments that are going up and sell ones that start to go down. By moving your money into rising investments, even if only for a few weeks or a few months, and then prudently retreating to the relative safety of a money market fund early in any declines, we can stay invested while avoiding big declines.
Off and Running
Son Matt, age 19, has garnered just about every award available to young drummers in this area, including winning State in marching band, Jazz Band, Jazz Combo, being captain of the State champion marching band drum line, and twice being selected for the Sedona Jazz on the Rocks Youth Band.
This past year, two groups of older musicians enlisted Matt to play in rock bands (his real passion) and he is now headed off on tour with his “Partners in 818” group that is opening for Andrew Jackson Jihad. (I just love that name.) This professionally produced tour will have Matt playing 17 gigs in 17 days from San Diego to Seattle and back to LA.
Here’s the schedule in case you have friends (young ones) in these areas who might want to see some up and coming musicians.
1.1.10 San Diego, CA Che Café
1.2.10 Highland Park, CA Juanitas MATINEE (4-7pm)
1.3.10 San Pedro, CA Harold’s Bar
1.4.10 Fresno, CA Starline
1.5.10 Stockton, CA Plea for Peace Center
1.6.10 Santa Cruz, CA The Crepe Place
1.7.10 San Francisco, CA Bottom of the Hill
1.8.10 Portland, OR The Artistery
1.9.10 Olympia, WA The Overcast Project
1.10.10 Seattle, WA Healthy Times Fun Club
1.11.10 Seattle, WA The Morgue
1.12.10 Bremerton, WA The Charleston
1.14.10 Sacramento, CA Luigis’s Fungarden
1.15.10 Santa Barbara, CA Biko Garage
1.16.10 Ventura, CA Billy O’s 21+ MATINEE (2pm)
1.16.10 Riverside, CA Back to the Grind
1.17.10 Echo Park, CA Echo Curio
On the Light Side: Top Ten Hints that the Economy is Bad.
10. I got a pre-declined credit card in the mail.
9. I ordered a burger at a fast food place and the kid behind the counter asked, “Can you afford fries with that?”
8. CEO’s are now playing miniature golf.
7. McDonald’s is selling the 1/4 ouncer.
6. Britney Spears had to fire her nannies and learned her children’s names.
5. A truckload of Americans was caught sneaking into Mexico.
4. Dick Cheney took his stockbroker hunting.
3. Motel Six won’t leave the light on anymore.
2. Exxon-Mobil laid off 25 Congressmen.
And, the #1 hint the economy is still bad ~
1. Ben Bernanke wants another term as Fed Chairman so he doesn’t have to look for another job right now.
What we were saying a year ago.
As we now know the market did rally strongly beginning March 2009.
What’s Going On In Your Portfolio?
Stocks have been giving a very spotty performance the last couple of months – up a percent or two and down a percent or two, but gaining very little overall. Investing in stocks has just not been worth the risk over the past two months, so we have steadily reduced our exposure to the stock markets during that time.
There are many low volatility income funds available, and we have been using them more lately while out of stocks, even in our Careful Growth* accounts.
Interest rates have risen strongly over the past month, hurting traditional bond funds. Our Inflation protected bonds were only being held back more than hurt, with either small gains or small losses over the past few weeks so that particular investment allocation was moved into funds that will benefit from a rising dollar. The value of the dollar, much maligned over the past few years, has been rising for the past month. Yes, Virginia, there is a Santa Claus.
High Yield bonds, a big presence in Careful Growth* accounts, continue to do well, and our floating rate loan funds have been slow but steady gainers for us.
The only stock holdings in Careful Growth* accounts right now are 10-15% in telecom stocks. 30-40% cash holdings in our Careful Growth* accounts give us buying power as we wait for opportunities to present themselves.
Flexible Income* accounts continue to be fully invested in high yield (junk) bonds. I know it is boring not seeing any changes in your accounts for months and months, but I’m guessing you are going to like your year-end statements. If it ain’t broke I’m not fixing it.
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