Author Topic: The second stage of a bear market?  (Read 2269 times)

meiroy

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Re: The second stage of a bear market?
« Reply #10 on: December 14, 2018, 07:06:22 PM »
Everything is fine as long as zee Fed does not increase on the next meeting or signals that they will not increase the following one.

Otherwise, we're fucked.

Enjoy.

.

I'm buying.


Gregmal

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Re: The second stage of a bear market?
« Reply #11 on: December 14, 2018, 07:09:55 PM »
I think what we are seeing right now is simply foreplay. Yes, volatility is coming back. When the global economy enters the next recession (in another 12-24 months?) we will all be reminded what a real bear market looks like. When unemployment is balooning higher. When consumer and business confidence collapses. When panic is everywhere. When my neighbours swear off stock investing because they are tired of losing gobs of money. When the nighly news is reporting daily on the fall of the stock market. Stocks averages will likely be down +40% from their highs. When you wonder if capitalism is going to survive. That is when you will know you are in a real bear market.

My plan is to continue raising cash on strength. And i am slowly re-training my brain to stop buying the dips. Capital preservation (and locking in the gains from the past decade) is my current top priority. I would be happy to be 100% cash at some point in 2019. But i will be patient on the sell side.

If i am wrong i will miss some gains. If i am right i will set my portfolio up for the next 10-15 years.

PS: i think there is a scenario where the Fed backs off rate hikes in 2019; this may lead to lower interest rates and this may juice the economy (and stock market) one more time. We can only hope :-)

Haven't people been saying this since basically 2011? Why this time? The recovery has been extremely slow and shallow, unlike traditional recoveries, and we've had a bunch of corrections and sector bear markets since (I was just noticing today that the DJ Diversified Industrials is down over 33% from peak) and international markets are already in bear declines, yet everybody seems to talk like it's been only up and to the right since 2009 so we must be getting close to some big thing...

You could be right, but it seems hard to time the market like that. I'd rather own good companies that can benefit from dislocation and let them cleverly deploy capital if things go south, and otherwise keep creating value if they don't. But that's just what I'm comfortable with.

Liberty, buying great companies when they are on sale and holding them for the long term is a proven winning strategy. I applaud those who are able to execute that strategy.

I have, for the most part, been able to ignore ‘macro’ for the past 5 years and it has worked out very well. Having said that, i have been getting more cautious as the year has gone on. The biggest single reason is liquidity. Back when the Fed initiated QE it had a large positive impact on the stock market. Today we have the opposite going on; the Fed is trying to unwind QE. It makes sense to me that it will have a negative impact on the stock market. The Fed is also raising interest rates quite quickly and this is/will also negatively impact the stock market.

If the Fed next week backs of future rate hikes and/or slows QE unwind i may become more constructive on stocks moving forward. However, if the Fed raises rates next week and sticks with 3 forecasted rate increases next year and sticks with QE unwind i think stocks will sell off more.

In the last 5 years zero interest rates has resulted in pretty much everyone levering up.

When the next global recession happens i think there is a good chance it will be as bad as 2008. Europe is a mess and they have no ammo to deal with a recession; their banks are also a mess so there is a very real possible trigger. Japan is also a mess. China is a wild card; they spent like drunken sailors back in 2008 and 2009 but i am not sure they can do the same thing again. Canada has a housing bubble waiting to pop. Of all the regions, i like the US the most but if Europe or Japan or China contract i think it will hit the US as well.

There is much too much complacency right now. People have been conditioned by the past 8 years of slow but steady growth. But it has been juiced by an explosion in cheap debt. Now maybe the economies of the world can keep growing debt and continue the party. The only thing i am sure of is we will be getting a recession. When? No idea. All i know is when it hits i do not want to be fully invested in stocks (or bonds yielding +2%). Cash will be king.

What will the trigger be (that will be ‘the cause’ of the next recession). No idea. But it will be pretty obvious after the fact. Buffett’s line about we will see who has been swimming naked once the the tide goes out. If i had to guess i would say debt will be the trigger. Here in Canada we have a housing bubble waiting to pop. In the US it sounds like corporate debt is a likely trigger. In Europe the banks are not in great shape (i.e. DB or Italian banks). These things tend to get started in one area and then they morph and get ugly.

Viking I love your thought process and rationale and it resonates with me. I do have a few things hopefully you'd care to expand on.

1. Maybe the Canada housing bubble is obvious. I kind of agree. But isn't part of the bubble process widespread euphoria and enthusiasm? I've hardly seen that in the Canadian housing market, especially over the past 3 years. Almost everyone I know is negative there.

2. Why does the next recession need to be a replica if not worse of the GFC? There's plenty of reasons we could have a recession that pales in comparison to 2009. I think 2009 was a once in a lifetime series of events... I mean almost everyone was asleep at the wheel. Whereas the past decade there have been scores of people hoarding cash and waiting for the first 2% decline to scream about the next big one. Recency bias at it's best IMO


perulv

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Re: The second stage of a bear market?
« Reply #12 on: December 15, 2018, 12:32:35 AM »
When the next global recession happens i think there is a good chance it will be as bad as 2008. Europe is a mess and they have no ammo to deal with a recession; their banks are also a mess so there is a very real possible trigger. Japan is also a mess. China is a wild card; they spent like drunken sailors back in 2008 and 2009 but i am not sure they can do the same thing again. Canada has a housing bubble waiting to pop. Of all the regions, i like the US the most but if Europe or Japan or China contract i think it will hit the US as well.

My reasoning has partly been the opposite: Since Europe is a mess, and US is firing on all cylinders, I see more upside potential in European companies. If it is a mess, and everybody agrees it's a mess, the prices will likely reflect that. And if US companies are generating all time high earnings, partly because of corporate tax cuts (which is my limited understanding, please let us keep this to economics not politics), that is also baked into the price.

That being said, my reasoning this year has so far left me with only (unrealized) losses. And I find it much easier to find great companies in the US than in Europe.

Earlier I thought that if I owned a company with a strong balance sheet, long and positive earnings history, high returns etc, that would partly insulate me from market downturns. It still makes sense to me. In a downturn the stronger company will not only survive, but it could strengthen its position by buing other companies, its own stock, etc. But in practice, I feel that the "A rising tide lifts all boats" works both ways. In the short run, the stock of "great companies" fall just as much when the market turns sour (*I have no data on this, would love to be proven wrong). Then again, as long as one does not realize the short time losses by selling, it doesn't really matter I guess. But this makes me more reluctant than I used to be, to buy what I believe to be low priced quality companies in a too-high-priced market.


Cigarbutt

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Re: The second stage of a bear market?
« Reply #13 on: December 15, 2018, 06:41:10 AM »
...
For the last couple of weeks, I've been wondering if perhaps we are easing into the second stage of a bear marked now. One could argue that it fits nicely with the recent (current?) long bull-market, with high valuations (https://www.starcapital.de/en/research/stock-market-valuation/) and plenty of leverage. Actually, I have no source to back up the "plenty of leverage" claim, and I would love for someone to provide one.

The funny thing is that even if I _knew_ I was right, I'm not sure what I  would do about it. Most of the stocks in my portfolio have decreased quite dramatically in price the last months, and I still believe the companies and the underlying business to be sound. So selling now seems foolish. On the other hand, buying would not be such a great idea either, if we are in fact in the second-ish phase of a bear market. I think we are far from " everyone’s convinced things can only get worse". And since the business I've invested in doesn't exist in a vacuum, there's no reason they wont be dragged down if the market falls (further).

The best move I've come to right now is to sit on my hands for a while. I see more reasons for future returns to be bad, than good. If I am right, there will be better buying-opportunities down the road, and I might have accumulated some cash (I'm a regular person with a regular day-job income, this is my hobby). Of course, if I'm wrong I lose out on not being fully invested.

Thoughts?

Going tabula rasa on this topic for the next few weeks.

If your leverage question has to do with corporate leverage, here's a relevant and balanced link (focus on figure 1,2 and 3):
https://www.moodysanalytics.com/-/media/article/2018/weekly-market-outlook-middling-ratio-of-net-corporate-debt-to-gdp.pdf

Keep in mind that the average numbers for net debt may be skewed because an unusually low number of firms have an unusually high level of cash. Why is that?

Another consideration is that the leverage ratio tends to rise in recessionary conditions because of effects on both the numerator and the denominator and those who suffer most are the ones that, perhaps, did not prepare sufficiently for adverse scenarios.

Off-topic remark:
Good Times Roll is one of my favorite songs by the Cars. When they released it in 1979, the stock market was about to enter one of its greatest runs and today when I considered putting a YouTube link to the song, I have to watch a publicity showing a trader in his private jet ready to share his success recipe in options trading.

Viking

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Re: The second stage of a bear market?
« Reply #14 on: December 15, 2018, 10:37:44 AM »
Gregmal “Viking I love your thought process and rationale and it resonates with me. I do have a few things hopefully you'd care to expand on.

1. Maybe the Canada housing bubble is obvious. I kind of agree. But isn't part of the bubble process widespread euphoria and enthusiasm? I've hardly seen that in the Canadian housing market, especially over the past 3 years. Almost everyone I know is negative there.

2. Why does the next recession need to be a replica if not worse of the GFC? There's plenty of reasons we could have a recession that pales in comparison to 2009. I think 2009 was a once in a lifetime series of events... I mean almost everyone was asleep at the wheel. Whereas the past decade there have been scores of people hoarding cash and waiting for the first 2% decline to scream about the next big one. Recency bias at it's best IMO”

Gregmal, here are some further thoughts:
1.) i bought my house in 2010 for $600,000 and today it is worth about $1 million. During this time average incomes have grown only modestly. Affordability is as bad as it has ever been. Housing, as a % of GDP, is at all time highs. All the stats that i have seen are all flashing red (bubble territory). Perhaps the most likely scenario is prices go sideways for the next 5 or 10 years while inflation runs 2.5% and we get a silent corection in prices. However, i think there is a reasonable chance housing has a hard landing at some point in the next couple of years. Trigger? Not sure. Timing? Not sure. (Inventory is one of the keys; it is currently growing 40% year over year; if inventory continues to climb at a high rate as we get into the spring we may see prices start to correct more aggressively.)

2.) in terms of what the next recession looks like, i really have no idea. However, what is Europe going to do when it hits? They already have massive QE and negative interest rates (during the good times)? What are the Italian banks going to do? Populism is just getting started; does anyone think European governments are going to preach austerity in the next downturn? My view is we are entering uncharted territory. (Time to start reading up on what happened in the 1930’s.) i think Japan’s situation is equally precarious.

My view is simply given all the risks there is a decent chance we will get a nasty recession. Too much debt is what caused the last recession. We ‘solved’ it by issuing even more debt (free money). When the next recession hits I am not sure how we will solve it. And the global rise of populism is a new wrench that will limit government options.

Dalal.Holdings

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Re: The second stage of a bear market?
« Reply #15 on: December 15, 2018, 11:57:02 AM »
Believing the next recession will be "as bad as 2008" is classic recency bias. True financial crises are rare beasts (that's why the Great Recession and Great Depression are so far apart). A true financial crisis involves the failure of banks which leads to systemic fallout throughout the economy (bank runs, credit drying up as no one is willing to lend, foreclosures, etc) which is exacerbated by vicious cycles (negative feedback loops). It takes a long time to emerge from such an event (hence why latest recovery has been slow despite monetary easing), but it also takes a long time for risks to build up in a lead-up to such a crisis (ie. poor risk management at banks). And so, they are rare and occur with long intervals in between.

Banks are well capitalized now and such a crisis is extremely unlikely. What's much more likely is a smaller recession of shorter duration (it's easy to forget all the "small" recessions that occurred between the 1930s and 2008, but there were plenty in different shapes and sizes). Corporate debt problems would resemble such a small recession, not a full blown financial crisis.
« Last Edit: December 15, 2018, 12:02:49 PM by Dalal.Holdings »

cherzeca

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Re: The second stage of a bear market?
« Reply #16 on: December 15, 2018, 08:58:25 PM »
I have been looking for incipient crises since 2008, understanding this is the result of recency bias but, as woody Allen once said, just because you are paranoid doesn't mean someone isn't out to get you.  and we have had plenty...greece, Brexit, trump (at least if you read Krugman), all incipient but as it turns out overblown.

what do we have now? a strong economy with interest rates going higher, yes, but still low. political gridlock likely for next 2 years which is always good for the economy.  trump investigations which is not good for trump but keeps congress from creating mischief for all of us as opposed to trump.

trillion dollars of student debt and overburdened municipalities, yes, but how long are those fuses?  riots in Paris bring those old enough back to 1968 but only in Paris, no urban mayhem in US. 

there has been a correction, but is that good news or bad news?  if you have an objective (ie build assets for retirement, or preserve assets in retirement), then you should pursue that objective in a disciplined manner.  if you don't have an objective, then you are the ball in a pinball machine.

Viking

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Re: The second stage of a bear market?
« Reply #17 on: December 16, 2018, 01:31:09 AM »
Believing the next recession will be "as bad as 2008" is classic recency bias. True financial crises are rare beasts (that's why the Great Recession and Great Depression are so far apart). A true financial crisis involves the failure of banks which leads to systemic fallout throughout the economy (bank runs, credit drying up as no one is willing to lend, foreclosures, etc) which is exacerbated by vicious cycles (negative feedback loops). It takes a long time to emerge from such an event (hence why latest recovery has been slow despite monetary easing), but it also takes a long time for risks to build up in a lead-up to such a crisis (ie. poor risk management at banks). And so, they are rare and occur with long intervals in between.

Banks are well capitalized now and such a crisis is extremely unlikely. What's much more likely is a smaller recession of shorter duration (it's easy to forget all the "small" recessions that occurred between the 1930s and 2008, but there were plenty in different shapes and sizes). Corporate debt problems would resemble such a small recession, not a full blown financial crisis.

Dalal, i agree with your comments. However, i would also add that just because we had a big recession in 2008 it does not mean the next one will be a small one. It just might be a big one. We simply do not know. 1929 was not when things really got ugly in the Great Depression; it was 1932 when it really got really ugly.

Today the central banks may have everything figured out and QE, negative interest rates in much of the world, and more and more debt may be the new normal that leads us all to a prosperous future. I am sceptical (and i am normally pretty optomistic) :-)

CorpRaider

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Re: The second stage of a bear market?
« Reply #18 on: December 16, 2018, 07:17:38 AM »
Quicker than doing a post:

The market is expensive and has negative momentum/trend.  Historically, returns "blow" when that is the case, to use a technical term; but not always. 

I think I've got to be systematic about these things or my monkey/lizard brain will severely harm my net worth either now or when I sit on the sidelines for the next big bull run.  The system could be to allocate 60% to equities and rebalance periodically, btw.

We don't need a GFC (or even a moderate recession) to get another ~50% drawdown, simply based on a mean reversion in valuation and/or corporate profitability/share of GDP (see, 2001 - 2003).  I think both are likely to come at some point, which you can explain either based on behavioral factors or risk/based classical economics [returns vs. supply and demand for capital] theory.  But making predictions about the timing of this is a fool's errand.
« Last Edit: December 16, 2018, 07:25:10 AM by CorpRaider »