Market Discussion

[kslifka]

As a contrarian...I like the pessimism that I'm hearing.  The time anyone should have dumped any stocks was last week or the week before when it was clearly topping out.  The Dow was the first to indicate the topping...then the Nasdaq followed. We probably still have lower to go but by no means are we anywhere near a bear market.  The chart doesn't lie...

Right now the DOW could tag the 12800 trend line.  The Nasdaq has a little further down to go (%)-wise to just under 2500.

People are fearful now...whether it's valid or not...I don't quite think so.  Notice how some of the beaten  down-financials are slowly starting to turn upward....although I wouldn't quite buy those yet.

I will wait for complete investor apathy and a bounce off the trendlines to jump in with both feet.  I think this will come within the week to 10 days.

[capricho]

Sorry about the grammar in that last sentence. My computer posted it prior to me finishing my typing...I think you get the gist of what I said.

I do hope the 3SOF does indeed finish up 30% for the year but I personally think the odds of that happening in this environment are slim.

Capricho

[stocky]

If you are investing/trading based on fundamentals then cheaper the stock goes, better it becomes, doesn't it? Now 3SoF main is the same kind. Add to it the Long Term horizon and you would see the today event as a blip. Important thing is whether you are a short term or long term. For that will decide whether you are looking for support or looking for quarter over quarter or year over year numbers. For if you are worried too much about technicals then the main holdings may not be the best place.

The main was initially technical and short term based and for better it evolved into fundamental and long term. I think thats one of the best decisions David had taken. But really whether he sticks to this Long Term is on test, especially after days like this. If he liquidates then giving out 3 yr targets with optimal selling prices just does not mean anything. But again if the main has .OB holdings with some funny warrents or funds transferred through shabby acquisitions then they will melt away in no time.

Just have plenty of time on hands due to Veteran's Day off from work. So thinking out loud here.

[realcoolhead]

There is nothing wrong holding fundamentally good stocks with "strong hands". I strongly believe 3SOF evolved in the right direction.

However, the key words here are "fundamentally good stocks". I sense that David, being a young idealist man, has a natural tendency being honest himself and at the same time believing in others, even with reports from .OB stocks. That, I think, is his weakness.

Another thing is no matter how fundamentally good a company is, there is always uncertainty down the road that can potentially make the company fail, therefore we need diversification. Carefully choosing stocks from different sectors, even all with the same high beta, can potentially reduce volatility because of low or negative correlation. To this regard, I again propose increasing the number of stocks in the main portfolio. Look at this one: http://quicktake.morningstar.com/FundNet/Snapshot.aspx?Country=USA&pgid=hetopquote&Symbol=CGMFX , it returned more than 60% so far this year, yet it constantly has 20-30 holdings. So more stocks to a certain degree don't necessarily kill the performance yet have the potential of reducing volatility.

So in sum, here is my wish list from David:

1. Continue to adopt fundamental approach with long-term view.
2. Exclude .OB .PK stocks for good.
3. hold up to 20 stocks.

Finally, holding long-term view also means we can tolerate poor performance from time to time. Say, if we "only" return 15% this year, so what? Maybe next year it will be +50%. 30%+ annual return is over many years, we don't have to achieve it every year.

[setravis]

All of the near-term trend indicators have sunk into their oversold zones, indicating the market indices are expected to rally soon, but first the market indices are likely to wallow along current levels for a couple of days, so buyers are advised to wait for the bottom to be confirmed when the near-term trend indicators cross up out of their oversold zones and the DJIA rises above 13,200.

The near-term trend indicators can go lower too, but are so close to being in their oversold sub-basements now that a further substantial decline in the market indices is not likely. However, time and time again, experience has demonstrated it wise to wait for a signal and confirmation that a near-term uptrend is in progress. This may take a couple or more days. The signal will occur when near-term trend indicators climb out of their oversold zones and the confirmation will occur when the DJIA rises above 13,200 and stays there.

The catalyzing factors in recent abrupt trade-term trend movements have been the subprime mortgage debacles involving several large financial institutions. Since the underlying real estate blues continue, perhaps the worrying is not over, but the tenor has changed from shock to recrimination about timing of announcements. Therefore, a period of fewer surprises and thus quieter markets may be in store. In any event, the trade-term trend indicators became oversold late Friday, and thus should rally.

[David Randolph]

I don't see anything wrong in trying to protect my capital and not turning a profit into a loss.

I used to think this way too, but now I invest from a business perspective. Business owners don't sell out their businesses just because the general market turns south.

Motley Fool has an interesting story about this issue. A "star" fund manager sold all his holdings just a few weeks before the 1987 crash, saving investors in his fund billions of dollars. His popularity soared to new highs, the man appeared to know a lot about protecting capital and market timing. But, 5 years later, he was not only under performing the general market, he was also making less money than the people that bought him the shares he sold just before the crash.

No market timer will ever catch a 5 or 10 bagger, there will always be something to worry about ... and no market timer will always make the right calls.

I do hope the 3SOF does indeed finish up 30% for the year but I personally think the odds of that happening in this environment are slim.

Well, in August the Main was up just 2%. Two months later it was up 37%. Now it is up 17%. It can either go down to being up just 5% for the year or move up towards a 30% gain. I bet on the latter, because stocks are fundamentally very attractive and, even though I don't know much about that, I believe the general market is within a trading range and it will end up breaking out on the upside.

Not many people considers it, but I believe globalization and the emergence of the BRIC countries as economic powerhouses is as big or even bigger than Industrial Revolution in the late XVIII century. There are 3 billion new consumers and investors showing up in the World and Americans are worried about their housing market and credit defaults. The negatives are peanuts compared to the positives and yet, everybody is focused on the negatives.

By the way, let me tell you that I think your housing market isn't overvalued at all, I mean, the average American earns 4 times more than the average Portuguese, and I could buy a condo apartment cheaper in the US (on average) than what I can do in Portugal.

I've never seen or studied a Bear Market starting with so much pessimism in the press.

Anyway, focusing on businesses and their price, most Main holdings are good businesses and they've been going down anyway ... consider GIGM, ASTI, IMMR, TBSI ... there's no macro or micro argument to take these shares down. They're going down because they were up. But longer term it will be just a blip ... how can anyone own a stock for a 1,000% gain if he's always getting worried about everything?

I respect everybody's opinion and attitude, of course. It was a tough day, the toughest of all ... fortunately I saved some optimism from that day when it was up roughly 5%.

I'm going to sleep now (hopefully) and will come before the next open to update the analysis on all holdings. I want to read about all those business models and how and why these stocks will go up immensely in good or bad economic times, in bull or bear markets.

[kslifka]

Everytime the market goes into a correction it seems everyone turns into nervous nellies...remember last March and again in August. 

I made some of my best money from late 2001 into  2002 and 2003, when no one I knew would touch the stock market.

This is not a time to panic.  Especially when you look at the long term charts of the nasdaq and dow.  Doesn't look so bad now...does it?

[setravis]

It's all about rotation ... you have to rotate with what ever they are inflating. they can't inflate housing right now, so they will inflate some other asset. Probably stocks. 
If you are in the right asset class at any given time you beat any average.
Preserve you ass... by moving in and out of any asset class. 

[capricho]

It won't surprise me in the least for the Main to pop tomorrow after the recent bloodbath but there the are several reasons for my pessimism.

First, I believe that the American consumer, and not BRIC economies still dominate the US, and by extension, the global economy. Despite the emergence of the BRIC economies the average consumer purchasing power in BRIC countries does match that of the US consumer. Walmart has already reduced pricing of many holiday items down ahead of Black Friday because it senses a decline in 4th quarter consumer spending. I believe that not only will 4th quarter consumer spending be sub-par but much of next year will be as well. It does seem like an act of desperation when I see Christmas displays set up in malls the day after Halloween. And I suspect that most US consumers are already up to their eyeballs in revolving credit card debt.

Second, the real estate bubble in the US is finally going through a correction and I really don't see much end in sight for the short-term. The last time we had this type of price depreciation was about 1990, and it took 7-8 years after that time for many regional markets to finally rebound. An increase in interest rates by the Fed (which could very well occur) and continued weakness in jobs, not to mention resets of adjustable loans can only worsen the downturn.

Third, no one knows the extent of the credit crisis and what the extent the financial and insurance industries are exposed for further losses. The stock market will continue to behave erratically as long as the actual amount is not evident and the fear of the unknown persists. I may sound cynical but it's hard for me to feel sorry for Wall Street brokers who may have to forgo their $5,000,000 Christmas bonuses this year.

Fourth, gas prices. A steady rise will can only incite inflationary pressures and interest rate hikes. It is a fairly safe bet that with the continued destabilizing situations in Nigeria and Venezuela, and the power struggle between Russia, Kajikistan, Iran and Europe for the Caspian oil reserves that price pressures will probably continue to increase. Not to mention any further saber rattling from Bush and co.

Fifth, the dollar's weakening value. Of course this is a double edge sword, as US exports become more attractive to foreign buyers the devaluing of the greenback will also place further pressure on China to continue to divest, fueling pressure on the Fed to raise interest rates.

And finally, US jobs. It is a sad state of affairs when the US economy is being driven by the US consumer and that for the most part the only job sector with any growth is low wage service jobs.

Oh, and did I mention the US account deficit?

With all of these hurdles it just seems like a perfect storm brewing for a serious recession and it's not exactly the kind of environment that inspires a positive attitude towards the stock market.

Okay call me a nervious Nellie but that's how I see it.

[hyhl]

Everywhere?? That is really good news!! 

Everywhere I read the so called experts are saying to be defensive and to dump small caps right now in preparation for the inevitable downturn to take place in '08. The last few sessions has certainly been a testament to this. Despite David's opinion that the stocks in the 3SOF Main are so undervalued and fundamentally sound to warrant long term positions I still don't buy the argument that one must be oblivious to the overall market in general and to maintain a buy and hold strategy. The market so far has not been kind to this approach. I have become quite pessimistic about the global economy and the risks to equities. I can't help but think that as we move forward the bears will continue to devour small caps like the ones in the Main.

After 4 terrible sessions I finally pulled the trigger and sold off 50% of my portfolio at a horrible loss. Yes, this may be a mistake.

I could be wrong but I do not see this period as a buying opportunity for equities and especially for small caps.

Good luck for those willing to weather the storm.

[hyhl]

and at the same time believing in others, even with reports from .OB stocks. That, I think, is his weakness

David. That is also what I worry about. I do appreciate your effort and admire your talent. But I do not like the fact that you trust those reports and CC too much.

There is nothing wrong holding fundamentally good stocks with "strong hands". I strongly believe 3SOF evolved in the right direction.

However, the key words here are "fundamentally good stocks". I sense that David, being a young idealist man, has a natural tendency being honest himself and at the same time believing in others, even with reports from .OB stocks. That, I think, is his weakness.

Another thing is no matter how fundamentally good a company is, there is always uncertainty down the road that can potentially make the company fail, therefore we need diversification. Carefully choosing stocks from different sectors, even all with the same high beta, can potentially reduce volatility because of low or negative correlation. To this regard, I again propose increasing the number of stocks in the main portfolio. Look at this one: http://quicktake.morningstar.com/FundNet/Snapshot.aspx?Country=USA&pgid=hetopquote&Symbol=CGMFX , it returned more than 60% so far this year, yet it constantly has 20-30 holdings. So more stocks to a certain degree don't necessarily kill the performance yet have the potential of reducing volatility.

So in sum, here is my wish list from David:

1. Continue to adopt fundamental approach with long-term view.
2. Exclude .OB .PK stocks for good.
3. hold up to 20 stocks.

Finally, holding long-term view also means we can tolerate poor performance from time to time. Say, if we "only" return 15% this year, so what? Maybe next year it will be +50%. 30%+ annual return is over many years, we don't have to achieve it every year.

[hyhl]

I used to think this way too, but now I invest from a business perspective. Business owners don't sell out their businesses just because the general market turns south.

Come on, David. This reasoning is not right. Business owners know more than you do about their companies. Plus, they sometime simply can not get out.

Motley Fool has an interesting story about this issue. A "star" fund manager sold all his holdings just a few weeks before the 1987 crash, saving investors in his fund billions of dollars. His popularity soared to new highs, the man appeared to know a lot about protecting capital and market timing. But, 5 years later, he was not only under performing the general market, he was also making less money than the people that bought him the shares he sold just before the crash.

The manager is simply not good enough. There is nothing wrong to protect the capital according to market timing, whether HE can  do it well is another story. I think oblivious is similar to over sensitive.

No market timer will ever catch a 5 or 10 bagger, there will always be something to worry about ... and no market timer will always make the right calls.

5 or 10 bagger is not important. The only important thing is whether the portfolio can go up big every year. As the portfolio is well diversified, one 10 bagger will not help a lot. And maybe this 10 bagger can be achieved only in 10 years.

Not many people considers it, but I believe globalization and the emergence of the BRIC countries as economic powerhouses is as big or even bigger than Industrial Revolution in the late XVIII century. There are 3 billion new consumers and investors showing up in the World and Americans are worried about their housing market and credit defaults. The negatives are peanuts compared to the positives and yet, everybody is focused on the negatives.

I strongly agree with this part. Long-term wise, these negatives are nothing.

I've never seen or studied a Bear Market starting with so much pessimism in the press.

haha  Can not agree more, especially when the pessimism has been there for a long term.

Anyway, focusing on businesses and their price, most Main holdings are good businesses and they've been going down anyway ... consider GIGM, ASTI, IMMR, TBSI ... there's no macro or micro argument to take these shares down. They're going down because they were up. But longer term it will be just a blip ... how can anyone own a stock for a 1,000% gain if he's always getting worried about everything?

I respect everybody's opinion and attitude, of course. It was a tough day, the toughest of all ... fortunately I saved some optimism from that day when it was up roughly 5%.

I'm going to sleep now (hopefully) and will come before the next open to update the analysis on all holdings. I want to read about all those business models and how and why these stocks will go up immensely in good or bad economic times, in bull or bear markets.

[tokyopua]

Wow, I took a 8.5% hit today myself, that is a record lol! 

But that is part of playing this game.  I didnt really feel bad today at all, I am trying something new here with David doing the long term approach, and it makes sense to me even on a day like today, its all about state control.  I allow myself to enjoy those up days, but dont panic on the inevitable crazy down days like today. 

If we go into a bear market from here I may wind up regretting the decision, but I believe that human ingenuity and progress is advancing around the globe and in the US in particular, and that this will drive the markets even more over the coming years than even just "globalization".  We are on the knee of the curve, in my opinion, and we will make more progress in the next 20 years than in all of the last century, then equal that amount of progress in the next 10 after that, etc..  The rate of accelaration of our progress is itself ever increasing now, its no longer on the linear part of the exponential curve.  Biotechnology, nanotechnology, etc.  these types of advancements are going to create phenomenal wealth which will permeate our planet, and the US will still be one of the nexus points for these revolutions. 

OK, I got waaaay off on a tangent, time to go to bed lol.  tomorrow is another day for all of us, hopefully much better in monetary terms! 

[tokyopua]

Just downloaded the Fisher Investment take on where the market is heading, they viewed the Q3 correction as normal, predicted a possible bumpy ride in Q4 with a resumption of the bull market into end of year and 2008.  Here was a good quote:

"Thus we believe it is better to remain invested during corrections than to try to navigate around them."

[setravis]

The market indices made a third and fourth attempt to get out of their oversold cellars yesterday, to no avail. They wallowed along, trying to form bases upon which to launch near-term rallies. The former support level of DJIA 13,200 is now the ceiling to be exceeded before a near-term rally can be confirmed. A fifth try to start a near-term uptrend is likely to happen this morning, but the real deal is probably still a day or two away.

The only solace for the bulls is that the market indices seem to have leveled out at the 13,000 level. However, the intermediate-term trend still has some room to become more oversold.