Back from Hawaii

I am back from Hawaii, and given the weather difference (among other things), regretting being back.

Hawaii is truly paradise on earth. The trip was very relaxing and even a little life-changing, as being away from the rat race (and the crazy events of this past fall) leads to introspection. I feel somewhat recharged and will look to 2009 and beyond with a fresh focus.

I plan to post again actively but I am a little behind in my market analysis. I still believe that we are in a bear market rally until proven otherwise and I remain about 10% invested. I am looking to get to 20% or 30% possibly over the upcoming weeks and months possibly.

Big picture, I suspect that the rally will last into early spring (March/April) before another retest (and probably break of the November lows) into late spring/early summer. The clincher to the end of the rally will be when the prevailing wisdom will be that "the central banks and governments have rescued us from another Great Depression and that they have acted wisely". I used this sentiment reading fairly well back in May 2008 when the prevailing wisdom was the worst of the credit crunch was over (even the esteemed Warren Buffet said it). In hindsight, at that point, the truth was "you ain't seen nothing yet!".

Maybe I was just early?

I am beginning to think that maybe I wasn't wrong but just just early and I have been edging back to the long side (8% long). I plan on buying on any dips but I doubt I'll ever be more than 40% long in this rally. I also got out of most of my US dollars on Monday.

I suspect that the worst of the liquidation is over for now. This means that maybe funds and institutions are still selling but perhaps slightly lower amounts (or at least not ever-increasing amounts). The market has now rallied for about 4 days straight, which I believe is the longest since late July.

I am positioning for a rally into late January to mid March timeframe that could retrace a decent part of the September-November decline. I am now looking for a rally that could take us to roughly 1000-1100 on the S&P. I also expect commodities (and TSX) to participate nicely in this rally and oil to hit $80. The Canadian dollar could get back to the upper 80s.

Risk is still high on a longer term basis, and I expect us to revisit the November lows sometime in 2009 and probably take them out. I doubt that 2009 will be as bad in the stock market as 2008, but I fear that it will much worse on Main Street Canada, and I suspect that it will be another negative year for the markets overall, especially if we rally into year end 2008.

I will probably not be posting for the next 2-3 weeks as I am taking a little time off. I had planned this back in July but when I booked it, although I predicted this to some degree, I had no idea that how exhausting this market meltdown would be.

Time to recharge the batteries. Hopefully, this will also allow me to focus on the challenges and opportunities that 2009 will bring.

Minus 52%

S&P down 52%. I believe this now outdoes all the bear markets since WWII, and it just over 13 months (from the October peak) or 16 months (if you measure from July 2007).

Unbelievable! As bearish as I was, and I was looking for about 50%, I did not think that it would happen this fast. The speed of this makes me think that we are ultimately going to go to ridiculously low levels. For the time being, 738 is the next target. I did not think that the way we magically bounced off 777 in the morning would hold as it seemed too easy.

What did I do today? I sold some more Canadian dollars (too late possibly) as I can see a scenario where the loonie goes lower. And if it goes higher, I may just buy it back.

The silver lining is that we are probably more than half way through time-wise the longer term bear market (2000-present) and definitely more than half way in price (over 50% from 2000 highs). We are setting up for another 15-18 year super bull market with all this market carnage. I don't think it starts for another 5 years+ (2013-2016?), but when it starts, you may be able to make 15%-20% or so for years and years by basically phoning it in from the beach! When this thing is finally over, no one will want to invest in stocks (as was the case in 1982) and in the first few years, people will basically ignore the huge returns in stocks.

Deficits

Back in March, I warned about this.

After the election in October, I brought it up again.

In the throne speech, this week, it became official. Deficits are back. Harper is claiming that they will be short term and are not structural. How can he say this? Sure, deficits are somewhat natural in a recession, but maybe those surpluses were not structural. In recent years, a lot of the surplus was due to record corporate profits, record commodity prices and cheap interest rates via a credit bubble. Those are all gone. Exactly like the US surpluses in the tech bubble. Those never came back, as the surplus was not structural.

The easy days of more spending, more tax cuts and more debt repayment are gone for a long, long time. I just hope that these deficits don't get completely out of hand as they did in the 70s, 80s and early 90s. It was stupid cutting the GST as that is the worst type of tax cut (income taxes are the way to go) and a time when Canadians were already overspending and undersaving. Income tax cuts timed at the right time, when the economy is slowing or needing stimulus is a much better way (as was the case in 2001).

If the Liberals had any guts and a true leader, they would topple the Tories on this. They would claim that the Tories hid a deficit at the election and the GST cut ($12 billion) caused it. It may not be 100% true but I think that it would work.

I wuz wrong

I was 100% wrong last Thursday to leave the bear den (after about 3 hours). I smartly got out to avoid the bull stampede on a key reversal day, but instead of it being a reversal day, it was actually a short term top. It was a great entry point to short with 20/20 hindsight.

I went a little long (15%) by Monday, but as of today I am back to 97% cash. I took a little hit on one of my gold share longs and broke even on the other.

The morale of the story: It is OK to be wrong, just try to be wrong small.

I now think that the market is going to at least test the 2002/03 lows (around 777) and probably will undercut them. Something around 738 (1997 lows) is possible, and even a move to sub 600 can not be ruled out.

The selling is relentless. I attended a fantastic conference call today by Lowry's, the oldest (and best) technical analysis firm out there. I am a subscriber and they are one of the reasons that I have not lost money in this bear market. They put a major sell signal out on July 26, 2007 and have not looked back since. Their selling pressure is at record highs. I don't want to talk too much about their views as they are a paid service (worth every cent) but they share my pessimism. They were also correct in calling a new bull back in March 2003. They have been right in recent weeks (while I have been somewhat wrong) and I will put even more trust in their service.

I don't listen to anyone who has remained 100% invested and has been calling bottoms all along in this bear market (except to do the opposite, such as Cramer, Abby Cohen, Bob Doll, Ned Riley, etc..) I do listen to those who have been warning about this and who have been mostly right (Barry Ritholtz, Gary Kaltbaum, Todd Harrison, Jeff Cooper, Roubini, John Hussman, Jeff Saut, etc...). And what I am hearing from those who have been right is generally not good. Listen to yourself and your gut in these tough times.

Do you short here? It is very risky as 1000 pt days/2000 pt weeks are always possible. I will probably stay in cash but I would love to put some shorts on as risk remains high.

Name Change

I have changed the title as the question mark is now beyond question, and I wanted to expand the title of the blog to reflect the expanded scope of the blog.

I think that whatever we are in right now is historic and in my mind at least, will be the greatest recession since WWII (and hence since the Great Depression). I do not believe that we are going to top that horrible decade of the 1930s but this will top all other recessions since then. The Japanese experience since the early 90s may be a better proxy but I believe that it will not last quite as long as that one did. The closest proxy in the Canada or the US will be the 1970s to early 80s where we had a string of severe recessions and stagflation although I don't believe we will have stagflation this time (more deflationary). I have called in the Great Recession to make it different from garden variety recessions. I have put 2008-2010 as I believe that the severe recession will technically end sometime in late 2009 or early 2010, although I expect things to "feel bad" for a long period after that.

I hope that you like the new title and I welcome your comments.

Quebec and the rest of Canada

I live in Quebec. Presently, I see little impact from the economic tsunami (in Bill Gross of Pimco parlance) here. I see it only in people in the financial services industry. The rest of the province is in a bubble. Politicians talk about increasing already generous social programs. People seem to be spending for Christmas as if nothing special is going on. The housing market is probably the strongest on earth as we are still positive YoY.

If anything, Quebec should be hurting more than other provinces. Our population is older, less educated and our workers work less. To top it all off, we drive away business with regulations and language polies, we have the highest taxes in North America if you make a middle class income and we have a crushing debt load that keeps increasing despite supposedly balanced budgets.

And yet, I don't see much worry here. Much less than in the US or in the rest of Canada.

I suspect that only once unemployment goes up (and it will unfortunately), the Quebec population will wake up! I am very worried about the economic future of my province and by extension, the political future of the rest of Canada. An unhappy Quebec is a problem for all of Canada, as we saw from 1990-1995. The fact that we were in recession around that time is not a coincidence in my opinion. I am surprised that political analysts are not examining what the political fallout of this recession from a national unity perspective.