RE Bear; Stock Market Bull

[cabinboy]

Nearly everyone who frequents this site is a big-time RE Bear. Count me in. But there’s a divergence when it comes to how well the U.S. stock market will perform in the next 6 months. Powayseller is clearly bearish, and she has done a very nice job of harvesting the best Bear viewpoint articles from the web, making a strong case for a declining RE and consumer spending led recession. Since their seems to be a number of pretty savy folks on this site, I wanted to get some opinions on an alternate view. We all want to know where the next $’s are going to be made; I propose that the place to make them in the next 6 months will be the U.S. stock market.
We all seem to agree that the Greenspan led Fed has pumped the system with quite a strong money supply. For the first time in 5 years, we are entering a period where the smart money consensus is that foreign and domestic RE should be avoided. Furthermore, smart money is currently redistributing itself within the markets away from RE and RE affected sectors, in essence focusing a stable amount of capital across a smaller set of investment candidates.
So, my thought is, isn’t it possible that this “money’s gotta go somewhere concept” will help keep the markets afloat in the near term? With rates flattening, could this August bump may be for real and continue right on through the elections? Bears, Bulls? What do you think?

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

Scroll back and look for comments/posts from me about the upcoming bull move in stocks. The fall of mid term congressional years is the most bullish stock cycle that exists, it begins in the fall. The rally in bonds ( dropping of rates ) has pushed this rally so far in equities.

Whether we get a dip into the fall or not is up to question. Many of these congressional election rallies have begun from upmoves like we are experiencing right now. I will be looking to get heavily long in November.

[powayseller]

cabinboy, you pose an excellent question: where do the investors put their money in a recession? Bonds? Tbills? euros? Gold? Where have they gone historically?

Clearly Chris and I are have opposite views going forward.

Chris, do you know where the big money goes in a recession?

[lewman]

The mid-term rally is one of the most consistent stock market patterns I’ve seen. Amazingly if you look at the S&P500 since the 1950s, your chance of making money was 100% if you follow this strategy. See my previous post where I verified this claim: http://piggington.com/stock_market_rallies_in_mid_term_election_years_2

Quite rightly so, powayseller pointed out that the data set’s not complete because we’ve never had a mid-term year imeediately followed by a recession. I also happen to think there’s a good chance we’ll have a housing-led recession, but what I think will happen is not relevant, at the end of the day I’m hesitatant to go against such a powerful and consistent trend.

For me the ideal scenario is we get a dip into the fall, then the market rally for 6~9 months then get flushed down the toilet in 2007.

Kudos to you for not going along with the herd.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

The big money knows there are still stock opportunities during any economic cycle. It is still beyond me why anyone would look at something that has never failed and take the it is different this time approach. Different this time arguments are not in my techniques so it is hard for me to answer that question any other way. Some of my cronies took that approach last year as non-believers in the year ending in 5 rally (please no discussions on that this one has worn me out already), which has also never failed. They shorted the rally and got wiped out criticizing my long position. The argument was “well we know this has never failed, but this time it will because ……”

One of my good friends blew out of a few million with his different this time argument, ironically he probably did not learn his lesson. Also, he never called to congratulate me on beating the indexes by 19% last year in what was basically a flat year overall, slightly up.

Like I always say, “I may be wrong.” I am never so dead convinced that anything I do is a sure thing, that is a dead man’s mentality as a trader. I play the probabilities which heavily favor a rally, place the stops and move on.

Have you ever considered that there might not be a recession in this time frame? Maybe the political manipulations due to the election will forestall this? Maybe that is why there has not been one before during this cycle? How could you not have considered that? This assertion that no recessions have happened during this 2 year window that begins every four years is false by the way. The trade is a two year hold.

PW – I have thorough coverage of this topic in my newsletter coming out tommorrow. When you see it there may be a few more things for you to consider.

I always remind myself not to fall in love with my own opinion on things, if I do I should not fall in love with my money because it will be leaving me. I fail to see why it is so important to determine if there will be a recession or not. All that means is two consecutive qtrs with negative GDP growth. BIG DEAL. Plenty of money is made during down cycles also, just shift assets away from overvalued classes(RE) to undervalued ones. Most of you are so intelligent, get rid of the deer in the headlights due to the recession mindset and put that brain power to work.

I see some of that, but more fear of the recession than action plans of what to do about it.

[powayseller]

Chris,

Actually, you are the one saying this time is different. You think that the stock market can rally when we are heading into a recession.

The data set you are using is incomplete, because you are not looking at any mid-year cycles where the median yoy housing prices decline nationwide, a precursor to recession (Edward Leamer). We have never had this happen, so the data doesn’t exist.

Your data set that you are using, the years 1930 – 2002, has a few differences from the current year (Bill Fleckenstein said the last 2 recession you mentioned have no relevance, bec. it was a different env’t with interest rates and debt).
Mainly, this time is the biggest budget and account deficits in history, consumers so far in debt they are using equity in their homes to pay for gas, and the biggest asset bubble ever, with even the FDIC and Greenspan concerned about systemic financial risk to the GSEs and our entire economy.

For the first time since the Great Depression, median year over year home prices have dropped in all areas of the country except the South. Median yoy home prices are up .3% and .9% for resale/new. (Remember how Lereah kept saying home prices nationwide have never dropped and never would? Well, it’s happening now!)

I will watch the stock market closely, but it is beyond me why anyone thinks the stock market could rally in such a precarious economic time.

The stock market rallies when earnings are up, and loses when earnings are down. With the slowdown in consumer spending finally affecting the bottom line of many companies, lenders and builders starting to issue warnings, investors are going to put the Fed-is-done rally behind them, and wake up from their slumber to realize the seriousness of the slowdown. The stock market is the same: when earnings go down, the share prices follow.

Has the stock market ever rallied going into a recession?

My estimate is that your technical indicators will not line up for you to make that trade this fall.

[davelj]

At some point over the next 2-3 years, all of the major stock market indices will be lower. We’re headed into a slowdown, if not a recession. Corporate profit margins are near an all-time high – they will mean revert. Valuations are also quite high – they will mean revert. The housing slowdown will ultimately filter through the rest of the economy. Betting on which direction the guessers that guess what the other people are guessing will push the market in the short term is a sucker’s bet over the long term. Invest in what you truly know and understand (for most people, that’s cash and short-term treasuries); stay away from everything else.

[cabinboy]

I agree with Chris. To talk about a recession as a foregone conclusion is not consistent with the views of many economists. Most recessions are preceded by RE drops, but recessions are not foregone conclusions after an RE drop. Keep in mind that during other RE drops, RE was at least fairly connected with underlying fundamentals. As we’ve all pointed out repeatedly, it is currently completely detached from any fundamentals whatsoever. This means RE’s current drop is not a reflection of some other poorly performing aspect of our economy. In essence, most here seem to perceive that RE is causal, where as I view it as effectual. It’s detached from fundamentals and it’s losing steam. So what? Now I know where not to put my money. And so does everyone else.
By removing oneself completely from the stock market, history tells us you are realizing about half the annualized gain you would make in a well managed value fund or Russell Value Index Fund. My favorite value fund has returned 2% in the last 10 days. 40% of my assets are in stocks. Come December, I bet ‘ll wish it was much more.
If a company misses earnings, it’s stock will go up if there is still a greater demand to buy its stock than there is to sell it. When companies miss earnings, the stock typically goes down, because institutional investors sell off portions of there holdings and put it into a company that did meet expectations. The net effect on the market is a wash. After the NASDAQ crash, when the market collectively decided to correct the P/E ratios awarded to tech companies, people gave up on stocks and went to residential RE. Now they’re going to give up on RE, putting upward pressure on other places to make money.

[powayseller]

cabinboy, I wouldn’t rely on economists to predict a recession. Not a single one predicted the 2000-2001 recession, in a poll conducted in Sept, 2000. This was after the stock market crash. The main economist predicting a recession are Nouriel Roubini, Dean Baker, and Ed Leamer. Leamer has a chart showing each time housing starts fell yoy, we went into a recession (exceptions: big war spending in Korea and Vietnam).

I am 95% cash. The stock market is the worst place to be now, but thanks to suckers buying into the Fed-is-done rally, and the misled investors who buy into the “buy and hold” and “dollar cost average” theories, contrarians like me, and technical pros like Chris, make money. It’s a zero sum game; we need the herd to move in the opposite direction to make money.

[cabinboy]

I would say that residential RE would be the worst place to be right now. The DOW is going to explore 12000 soon, while housing heads for the basement.

[davelj]

Actually, technically, it’s not a “zero sum” game; it’s a “market sum” game, less frictional costs (spreads, commissions, etc.).

[PD]

Could there be a rally? Sure. I am not going to jump in feet first, however, as the threat of a recession creates significant doubt in my mind. If we move into a recession, I think it is going to last far longer than two quarters and may even flirt with depression numbers. I am long medical, water, and alternative energy stocks. I am short or have puts on homebuilders and lenders. I also have a few puts on Best Buy. I do not think they can keep up with their earnings. Fewer people are going to be pulling money out of their houses to buy plasma TVs. I think Christmas sales numbers are going be way down from last year. I have some calls on eBay as I think they might do very well in a recession as people are going to be looking for bargains. They made some changes in the Spring that were a bad move (I sold my position at that time) but seem to correcting their mistake.

PS, I don’t think you need anyone to help you out unless you plan on really making big trades. I think you are going to have to look for a LONG time before you find someone who knows enough to pass your test. You are smart and you have the data. Trust yourself and go for it. Apply for options trading. It took almost two months for my brokerage firm to approve me, which irritated me a great deal.

[ybc]

Chris,

I like your way of thinking. It seems that your trades are rather short-terms — days, weeks? Yet you’ve really studied the long-term trends and cycles. So do you make long-term investments (years)? Just curious.

I respect whoever takes a sensible approach that’s appropriate to his/her strategy. I consider myself to be a long-term investor, but once I had a couple of opportunities to talk to Richard Dreyhause, who is considered as the father of momentum investing (very eccentric personality!) Interestingly enough, while he practices rapid trading and hyper turnover, he has a good sense of long-term cycles and where we are in that cycle. His performance has been very good too.

[rseiser]

I think these opposite views on the stock market over the next months are really interesting. Just from that we can confirm that indeed nothing is a sure thing. It will be interesting to revisit this in a few months after we know how it has played out.
While everything is possible due to short-term fluctuations or sentiment, investors would probably avoid highly priced stocks, while traders might as well go for it. Then there is of course a third group trying to short stocks. Everyone has to set his priorities, time-frame, conviction, and risk (e.g. stop-losses).
One thing I am always looking for are inconsistencies in the popular opinion. This is certainly the notion that money will now flow out of real-estate into stocks. What money, I would ask. It already has been flowing out of real-estate, with lower and lower payments and cash-out refinancings. Chances are that money has to start to flow into real-estate to bring up people’s equity or get out if they are under water.

[rocketman]

Short term = Oil

I am going into undervalued oil stocks until the PM’s make the necessary corrections and start upward. I like basketball because the game moves fast, I can’t stand baseball but will go to a game and enjoy the crowd.

I am starting to find PM’s fascinating and I am trying to learn as much as I can before the next rally. One thing is for sure, I am listenting to the experts Chris J, Zeal. Even as I am watching the HUI move up this week – it’s tempting to jump in but the pros say the indicators are not there yet. So I’m going to play oil – especially since hurricane season isn’t over yet and Iran is misbehaving (at least for the Bushed admin).

[Author]

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