The Stars

Unfortunately in life, there are days like this.  An important key to being happy is to minimize these awful days.  There are no surprises in life.  Nothing "just happens" out of the blue.  There is always an event or a chain of events preceding the "surprise".  Still, it hurts a lot when your dreams in life are busted.  It hurts incredibly more when you see the dreams of people you love being busted and there is nothing you can do.  These intense emotions are part of being human, I guess.  In a recent email message, Greg Mortenson of the Central Asian Institute (CAI) quoted this ancient Persian saying: "When it is darkest you can see the stars."  I am seeing a lot of stars tonight, but it is difficult to appreciate their beauty right now.  It does not help that my portfolio has been getting relentlessly clobbered for 8 months now.

Euphoria & Despair

The S&P 500 is setting yet another new high today, around 1350.  The VIX has fallen to about 15, which is still above its low of 14.30 from last week.  The investing world is full of complacency and euphoria as it is a given that stocks are going higher.  Of course, this means my portfolio is getting absolutely clobbered and I am feeling despair.  My portfolio has been getting hammered for 8 months now, and there is still no sign of letting up.  This is awful and is difficult to deal with, but unfortunately I have gotten used to this.  To rub more salt in my wounds, TLT is up again today at around 93.5.  I was considering selling my losers and purchasing TLT around 89 in February, but decided against it.  This is difficult to take.    P.S. I private email received today from a Senior Vice President (Investments) at UBS ended with the following:   "P.S. Our technical analyst, Peter Lee, who has a great track record going back 20+ years, predicted this AM on a break-in call (VERY unusual) that we will see S&P 500 at 1440-1450 probably by the end of summer !!. That's nearly 10% in 4-5 months on top of the 100% gains since March 2009 ! Did Brandon predict that huge bounce off the bottom ??. Did any of the scaremongers ??.   Bernanke has set things up for an eventual bubble in equity prices but you can't live in a hole waiting for an eventuality while there is so much money lying on the table."

Chinese Real Estate Bubble

China currently has the mother of all real estate bubbles.  As pointed out in earlier posts, this bubble is already starting to burst.  With it, wealth of a nation and the price of world wide risk assets will eventually burst as well.   It is fascinating to look into the factors that created this bubble, and this article is excellent:   http://www.nytimes.com/2011/04/15/world/asia/15bachelors.html?pagewanted=1&_r=1   Decades of the "one child policy" has left China with a large imbalance of men to women.  Therefore, women can be very discerning in their relationships, and they demand a man who owns an apartment.  If you are a Chinese man and you do not own your own pad, then chances are you are single and you will stay that way.  This is incredible!  Chinese women value wealth and real estate over anything else.  Emotionally, that creates a huge incentive to own real estate at any cost even though prices are exorbitant.   In addition, the article correctly points out that the Chinese do not have anywhere else to invest their capital.  Their money will lose purchasing power if it is put into the bank due to negative real interest rates.  The only other option appears to be housing.   The article is interesting for a number of other factors as well.  It points out that over 70% of women in China value money over any other qualities in a man, while 50% of men value beauty the most in a woman.  In addition, by the next decade, there will be 24 million single men without a partner due to the shortage of women in China.  I believe this is insightful into the Chinese psyche.  Given these facts, it makes perfect sense why things like "business ethics" or "saving the environment" do not appear to be important priorities in general for the Chinese when it comes to doing business and earning money.

Morgan Stanley Fund Defaults

Today, there is news that a Morgan Stanley real estate fund has defaulted on a 3.3 Billion USD debt payment for a building that they "owned" in Tokyo, Japan.  The real losers will be the investors who bought the repackaged loans from the fund:   http://www.reuters.com/article/2011/04/15/us-morgan-stanley-real-estate-idUSTRE73E63E20110415 In June 2007, the first cracks of the bubble appeared in the form of defaults of two different highly leveraged real estate funds that were managed by Bear Stearns.  That was the first sign that the economy, and particularly the real estate bubble, was starting to come apart at its seams.  The news was dismissed by nearly everyone, including Jim Cramer, and the markets recovered and made new highs.  However, all was not well below the surface and we know how the story ended.   Last week, we learned that Chinese real estate prices plunged 26.7% month over month, and now we learn of this large default by Morgan Stanley.  The nuclear situation in Japan is deeply saddening, and this has hugely negative consequences not only for the people  but for the global economy as well.  Anything can happen in the short term, but this is not going to end well.

The $6,390 Toilet

Near all bull market peaks, there are lots of tales of lavish luxury consumption.  In 2008, I remember hearing about the $1,000 hamburger in New York City.  This hamburger was special because it was "hand crafted" with "exotic truffles", etc.  After the market crashed, we were bombarded with stories about "recessionistas" and "cloth diapers", etc.    Fast forward to today.  A week ago, there was a story about a gold plated car in China.  And today, we learn about the $6,390 toilet:     http://lifeinc.today.com/_news/2011/04/14/6471845-6390-toilet-is-fit-for-a-king   This is a fitting analogy, because over the next two years, the prices for most risk assets will be going into the toilet.  Yesterday, we received news that the greatest real estate bubble in history has begun to collapse in China.  Real estate prices in Beijing were down 26.7% from the previous month:   http://imarketnews.com/node/29203   This is probably the most important financial story at this time, but it is not getting much attention in the mainstream press.  This is the first big dominoe to fall.

Bearish Sentiment Lacking

In the Barron's article from last weekend by Alan Abelson, titled "Where Did All the Bears Go?", he relates the latest Investors' Intelligence poll in which 57.3% of the respondents were bullish, versus 15.7% who were bearish.  The bearish reading is the 17th lowest percentage in the history of this survey which dates back to 1975 (more than 1800 weeks).  The spread of 41.6% between bulls and bears was last experienced in October 1987, when many general U.S. equity indices including the S&P 500 completed their all-time peaks.  The author also cites the recent low S&P 500 dividend yield of 1.86%, which is just above its all-time historic low reading of 1.76% from October 2007.  The author has been derided in the media as being a "perma bear", but these are facts rather than opinions and the comparison with the last bull market peak from 2007 are valid.   Elsewhere, a recent Market Vane survey showed that just 7% of traders were bullish towards the U.S. dollar index.  With this type of sentiment, it is doubtful that the USD can fall much farther.  Who is still left to sell?  Even in the face of all this negative sentiment and news, the USD has so far refused to collapse.  Contrarian investors know that the most overcrowded trades must always fail in the end.  A sharp rally for the U.S. dollar has significantly negative implications for risk assets such as stocks, corporate bonds and commodities including gold, silver, copper and crude oil.   Lastly, I received this short message from a coworker and friend of mine today: "BUY THE DIP IT IS FOOL PROOF!"  The market is down today, and amateur investors will continue to step in and buy what they perceive to be bargains due to the recently lowered price, but eventually the bottom will fall out and prices will go significantly lower.  It is only a matter of time.

Only Yesterday

I finished reading a good book this weekend called "Only Yesterday".  It is a first hand account of the 1920's, and it ends with the stock market crash and the Great Depression.  Some of the parallels between that era and ours are so striking.  They say that history does not repeat, but it does rhyme.  The emotional make up of humans has not changed much in thousands of years, and people are fundamentally the same as they always have been.  100 years ago, they rode horses instead of cars, but their emotional make up was the same as ours today.  Hence, we can learn a lot about the future by studying what happened in the past.  The sad part is that the lessons of the past are mostly forgotten after two generations have passed, so that is one reason why human beings are doomed to keep repeating their same mistakes over and over again.   The most striking aspect of this book, to me, was the concept of "buying the dip".  This concept, today, is affectionately referred to as "BUY THE DIP!!!!!!!!!!" or "JBFD" where the "F" stands for a four letter word + "ing".  The concept is that any market pullback is an opportunity to buy because eventually it will recover and surge a lot higher.  You can look at recent history since September 2010 and see that this strategy has been very successful.  Hence, millions of amateur investors have concluded that this strategy will always be successful.  This can perhaps explain the huge optimism towards risk assets, the low levels of VIX (16.xx), and the extreme bullishness and complacency that currently exists.    In response to a story today that a trader took a large bearish bet in silver which has been surging to close above $41/oz (which is a  31 year high), here is the first quote after the article:   "I'm glad this bet was taken as we can proceed to BTFD. Currently, wouldn't touch a silver long above 39, but hopefully we can see lower price to get back into."   The lesson from "Only Yesterday" is that the Great Depression was full of dips.  And each time investors "bought the dip" and were handsomely rewarded.  There were about four instances of this just in 1928 & 1929 alone.  The market would pull back, people would rush in and buy "at bargain levels", the market would recover and move higher, and these people would make money.  People then, as now, became conditioned like Pavlov's dogs to just "BTFD".  It was very easy and it worked every time...until it didn't.  Investors who bought during the final plunge of 1929 mostly were ruined in the end.   Corporate insiders have been selling stocks at an aggressive pace since last fall.  Amateurs have been buying at all the dips.  History does not repeat exactly but it does rhyme.  We are headed for the worst stock market decline since the Great Depression in the next year or two.  This will not bode well for the dip buyers in the end.