"When I was a kid, my dad used to joke about the habitual gambler who finally heard about a race with only one horse in it. He bet the rent money on it, but he lost when the horse jumped over the fence and ran away. There is no sure thing, only better and worse bets."
- Howard Marks
Is characterizing the current state of the economy an act of speculation?
One mainstream media-driven phrase that is cropping up with unusual regularity is "the new normal." How normal is it for the U.S. stock markets to be up 60% this year since March, whilst the U.S. shed 2.5 million jobs? In Rosenberg's newsletter, Rosenberg describes this phenomenon as jobless prosperity. He goes further to ask who is actually doing all the buying:
If hedge funds are characterizing what is going to happen next in the market, then hedge funds are speculating. Any act that attempts to forecast or predict what will happen is both dangerious and risky. After all, we now know how a "can't fail" one-horse race may still lead to losses.
FT quotes data from TrimTabs showing that only $2.5 billion in net inflows has gone into U.S. equity funds and ETF’s since the March lows. Inflows into bond funds have been ten times as strong. We know that corporate insiders have been net sellers of size. And the buying power from short-covering subsided months ago.
The answer, and this validated by the FT on page 16 of yesterday’s edition, are the hedge funds. And once they begin to see signs that a V-shaped recovery is about as real as Santa or the tooth fairy, watch out.
If the markets continue adjust on the downside this month to account for actual unemployment figures, look for the tide to wash out companies with weak balance sheets. "Simply" invest in companies that are able to produce steady or rising profit margins not achieved through one-time cost cuts.
How? Bring your two warriors.
As Leo Tolstoy said, "The two most powerful warriors are patience and time."
On a personal note, 660 kaChing users following my online virtual portfolio are probably wondering what steps will be taken next. The portfolio activity reflects an IQ score that is 30/200 points from qualifying (140 points) to be mirrored by interested investors.
The strategy continues to be:
- Don't lose money
- Exploit significant spreads between the intrinsic value and current market value of companies