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Speculating on the Future

by: James Picerno September 30, 2008 | about stocks: DIA / QQQQ / SPY    
James Picerno

James Picerno

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Yesterday's huge tumble in the stock market has spread fear far and wide among investors, your editor included. But focusing on the here and now isn't the answer. This too shall pass, but not anytime soon.

What's a strategic-minded investor to do? Nothing at the moment. If you haven't been trimming back on risk in your portfolio, now's not the time to start. Easy to say, tough to do. But investing isn't easy and panic selling is never the answer. Yes, those are just words, and it's slim comfort when you look at your investments and see only red. But keep in mind that people like Warren Buffett, and institutions like Citigroup (C) and JPMorgan (JPM) have been buying while everyone else is selling. Why? Because they're looking forward, several years down the road.

We'll go out on a limb here and predict that the global economy will survive, and in a year or two it'll be thriving once more. One reason is that there are multiple mechanisms in place to prevent collapse. No, the risk of a deep, systemic failure isn't zero. And, yes, an asteroid could hit the Earth next week. But for those with a medium/long time horizons, the key question you want to ask yourself: What will you think three years from now looking back?

For the 20 or so years your editor has been writing and investing for his personal account there's a recurring theme that gnaws: We didn't take advantage of the calamity. The mind tells us to run when there's danger, and ride with the crowd when skies are sunny. There's some logic to that, but left unchecked it leads to mediocrity or worse over time.

Remember, we're a lot closer to the resolution of the mess that started more than a year ago. True, the factors that brought us to this point have been decades in the making, but the markets have been reacting only since mid-2007. Again, it's possible that the bear market will run for another year or two, but that seems unlikely. The central banks are now in open warfare in attacking the bears, throwing money every which way. Eventually, that money will find a home in the capital and commodity markets and prices will stabilize.

But not just yet. There's still too much uncertainty about how deep the financial damage is for banks. And there's the question of whether Congress will, or won't pass a bailout package. And then there's the bigger issue of how all this will affect the economy. A careful study of the numbers strongly suggests that we're looking at a recession for the coming quarters.

Nonetheless, markets are forward-looking animals. We're mildly optimistic that a bottom is near, although that's just pure speculation. But if you're sitting on large allocations of cash, it's time to seriously look at the opportunities. Strategic-minded investors should be prepared to make selective purchases of asset classes now and over the next year. If you're really risk-averse, you may want to wait a bit more.

There's no rush to buy today, this minute, of course. For all we know, the markets could go down much further from here. But this much is clear: The prospective returns of asset classes look dramatically better today than they did a year ago, or even six months ago. The catch is that the payoff probably won't show up for three to five years, maybe longer.

The global economy is now knee-deep in upchucking the excess it swallowed over the past 20 years. It's ugly, it's frightening, and it's necessary to purge the system of the financial and economic toxins. The recovery process will be long and slow. But it's just this kind of climate where opportunity reigns supreme.

In short, it's time to think strategically about buying. Slowly, cautiously and with an eye on making a series of purchases over, say, the next 24 months. Pace yourself, but by all means think about what you want to buy to round out your portfolio, and at what valuation.

There are no easy answers to winning the money game, mostly because emotion gets in the way. But letting what may be the biggest opportunity in a generation pass you by is hardly a winning notion.

If you find it hard to act, try this: Make a small, symbolic purchase in an asset class you're underweight the next time prices dip sharply intraday. Why? To break the mindset of fear and inaction. The first purchase in times of crisis is the hardest. In fact, it's worthwhile to extend that thinking by making a commitment to add to your strategic portfolio once a quarter or two times a year from here on out.

It all boils down to whether you can look forward or not. There are better days ahead. Surely you'll want a stake in that future, if only modestly. As frightening as that may be now, the alternative is much worse, as everyone will realize a few years from now.

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This article has 20 comments:

  •  
    Sep 30 12:47 PM
    This is a very sunny article, from a macro economic perspective the worst have yet to come.

    Indeed the worst has yet to come;
    The entire US financial sector picked up 1500 billion US$ new debt in the period Aug 2007 - July 2008. That is the largest year over year new debt increase in the entire period since we left the golden standard.

    The new debt of the first year of this credit crisis will be the toxic debt of a few years from now, just like large parts of the mortgages from 2005 are growing toxic now.

    Today we had new Case Schiller index; 17.5% YoY decline in the 10 city statistic and 16.3% in the 20 city thing.
    The house price decline is still accelerating and thus house decline is not even halfway.
    Only when another 7 trillion equity in US family homes has gone, long term house affordabillity is restored again.

    Hard to see how stocks can rally two years from now.

    That does not take away it is funny to read such sunny side of life articles!
    Reply
  •  
    Sep 30 01:03 PM
    Ironically it is the Republican's to deny the bailout package at a time Bush needs it most. This raises a flag with me. The McCain shows up to be the man of the hour and is told to not get involved. (The Lady protests too much methinks) Now McCain is coming up with a plan for Bush to alleviate this mess with the stroke of the pen. Is McCain going to single handedly get us out of the credit crunch only to take the election from Obama at this late stage?
    If so, the bailout will be denied again on Thursday so hang on investors.
    The stage is set for McCain to be the man in the eleventh hour.
    Only it's so elementary school it's laudible.
    And on a further note, it was the BBC to explain to America that if the FDIC rate was not increased from $100,000 to a larger amount there would be a run on the banks.
    What are US financial officials doing for their salaries?
    We should get them to read foreign news to find ideas for their think tanks!
    Reply
  •  
    Sep 30 01:19 PM
    Warmie ... perhaps Republicans, and many Democrats, believe that no one in government has the right to use taxpayer money to immediately confiscate mortgages and property owned by the taxpayer, all under the cloak of an "Emergency" to save the economy from collapse. There are alternate ideas.

    A better plan will emerge and will pass. Congress should be applauded for stopping the Paulson plan.
    Reply
  •  
    Sep 30 01:20 PM
    You are also assuming the politicians don't gum things up in 2009. Assuming an Obamanation, we will see higher taxes, potentially over-cooked regulation of financials, union empowerment, some form of gov't health care entitlement (even more gov't spending), and interference in the normal housing price adjustment process known as foreclosure. If his entire program is passed over say 2009-10, it will not be good for the U.S. market at all. BTW we're likely to get at least some of the above even if McCain wins. Maybe invest for dividends but IMHO it's another 5 years at least on this bear market.
    Reply
  •  
    Sep 30 02:01 PM
    Ya! The future is roses... LOL!

    I want everybody to THINK about some of the WORDING be used and WHEN most of these bail-out plans were announced, or hoped to have them announced.

    * If you really pay attention to the words they are using it sounds like we are being held hostage and the $700 billion is some ransom. This comes from a friend of mine who is a professor of linguistics.

    * The bail-out pressure seems to be before the business day in Asia.

    Although I have an undergraduate degree/graduate degree in economics I'm a long way from practicing in that field. I contacted an economist friend of mine in Germany (PhD-level) who works for a multinational German firm and he's had Asian long-term postings. Essentially, this is how he puts it:

    MEMBERS OF THE G-7 ARE THREATENING TO TOTALLY CUT-OFF CREDIT TO THE UNITED STATES BECAUSE THEY WERE LEFT HOLDING A LOT OF BAD DEBT THAT WAS SUPPOSED TO BE SAFE. IN OTHER WORDS, THIS IS BILL IS TO RECOUP MEMBERS OF THE G-7 WHO WERE RIPPED-OFF BY WALL STREET

    He then went on to tell me that the United States is sadly mistaken if they think the G-7 will free-up funds even after the bail-out (if it ever passes). Credit lines to the United States will be severely restricted and if anything gets through the points will be astronomical.

    Bail-out, no bail-out, the song remains the same. But we will have saddled everyone in this country with a massive public debt.
    Reply
  •  
    Sep 30 02:13 PM
    This is a GLOBAL crisis. Look around!

    it ain't gonna get better with my money!
    Reply
  •  
    Sep 30 02:18 PM
    Reinko, I always enjoy reading your well thought out and insightful posts. I don't know your age, so this may date me as an old man, but...

    Has anyone thought of the Pablo Escobar bail-out plan for our government? For those of you younger contributors, Pablo Escobar was a leader of a drug cartel in Columbia. In the 1980's Pablo Escobar told the President of Columbia that he would pay of the nation's debt if they just left him and his cartel alone.

    This is what our nation really needs... A Pablo Escobar bail-out plan... There MUST be some cartel leader in Columbia or Mexico with $700 billion around, or enough connections with other cartels to scrape-up the necessary cash. The DEA could agree to look the other way whenever their shipments arrive.

    It makes sense to me. Where did all of the cartels' money come from in the first place? Drug-addicted, cocaine-snorting Wall Street high fliers... This would be a way for the cartels throughout the world to give back to Wall Street. It would keep the Bush tax monkey off our backs. Win-Win! What to you think?

    (I just had to lighten-up on the most dismal prospects for our future...)
    Reply
  •  
    Sep 30 02:24 PM
    Warm_Paw, I used to get the BBC World Service on my Canadian TV system until they turned-down and redirected the satellite footprint... The United States is the only country in the world that will not allow reception of the BBC World Service over their satellite systems. So much better than that BBC America crap...
    Reply
  •  
    Sep 30 02:48 PM
    To Curbs-In.

    Thanks for the compliment!

    Now I am 45 years old and indeed now you bring up this Pablo Escobar bailout somewhere in the deep caves of my memory it says the fact is true: Pablo indeed offered to pay for Columbia's debt.

    Your Pablo bail out plan is very funny; years ago I suggested that the Pentagon should take a Nasdaq listing so they did not need all that tax funding. Remeber: Taxes = stealing jobs.

    After the US military is a privite international militia, they could use the Iraqi oil revenue's to pay for the dividends...
    Reply
  •  
    Sep 30 03:15 PM

    Curbs-in gives a good point. What is happening now is basically the repudiation of a big chunk of America foreign debt. Congress decision on the TARP bill is the nearest statement institutionally made endorsing the repudiation. With al bonds worthless America will write off 3 trillion of foreign debt, most of the current account deficits of this decade. Now we know how the sustainability of the current account deficit and the external debt gets "solved". All of us were wondering in the past years how all this was going to turn up. How the "reserve money" country handles all this. Now we know the "trick" works. Not that all of this was cleverly masterminded -nobody is so clever to devise such a perfect scheme- but the end result is what eventually matters. America has now joined the nations that have defaulted on the external debt and it will join in the text books the likes of Mexico, Russia, Thailand, Argentina... only that the amounts are one order of magnitude higher that the combined repudiated debts of the former countries.

    What will happen in the future I do not have a clue. If the current external default gets clouded in the total mess that is has created in the international market, camouflaged as a credit crisis o liquidity crisis (or greed crisis or whatever) perhaps foreign creditors will blame themselves and forget soon. Dollar of course will be higher (no more debts), America will continue importing, current account deficits accumulating again...exporting countries will be pretending they are selling and the US pretending they are paying. Till next round. In fact this is the third time since 1985 that the "trick" has worked; only that now is too obvious.








    Reply
  •  
    Sep 30 03:35 PM
    Foreign countries have some culpability in this too. They now will know that they too left themselves overexposed as one of their largest clients has stopped paying.

    solution: we should all learn from this. they wanted to move product as they did... it's time they took their medicine. problem is, the pill may no longer fit in their mouth.

    If we remove socialistic principles from our 'free market' we will recover sooner than the rest and soon again be back on top with dollars... key here is to make those dollars worth something and that requires CHANGE!

    our country grew too quickly and we were exposed
    Reply
  •  
    Sep 30 03:41 PM
    it's time we put "capital" back in capitalism
    Reply
  •  
    Sep 30 04:16 PM
    It's not just the G-7 either... Countries throughout the world have been burned (more likely deep fat fried) by all of this. What seems to be going on behind the scenes and described as a "clog" (that needs $700 billion Draino) is that central banks throughout the world are embargoing, if you will, the flow of cash into our country. (S. Korea, BTW, has become almost totally protectionist in their money system and they are putting the guy who suggest that the S Korean Development buy LB on the slow roast oven setting. So it goes well beyond the G-7 circle.)

    Ya, Talin, we may have defaulted, or will shortly be in default of our loans, except we reserve the word "default" to developing nations.

    Reinko - GREAT IDEA!

    We could have ticker symbols like:

    DOD Military

    SEN Senate

    HOU House

    EB Executive Branch

    USC US Courts

    Oh! DOD stocks to a hit and came in well below expectations in the war in Iraq. LOL! Too many shorts on all of them...

    Hey... To brighten things up a bit DOW is UP almost 500 NASDAQ almost 100. This was the day the sky was supposed to fall according to Paulson, but it didn't.

    Here is Bush JUST TWO MONTHS ago on our economy:

    news.bbc.co.uk/1/hi/bu...

    You could go on and on forever finding video of Bush and Paulson both saying there is not a serious problem with our economy that couldn't be managed. These *fancy financial instruments* that Bush laughs about have given US a $700 billion hangover! Not Wall Street -- all of us.
    Reply
  •  
    Sep 30 08:19 PM
    Curbs - anyone that bought the junk got what they deserved. Buyer beware - I think that existed before the US ever came about.

    Yes, the end game is higher rates, but they will be higher everywhere, not just here.

    Reply
  •  
    Sep 30 09:18 PM
    I'm going to make this short and to the point.

    Text of the bailout plan (from the NY Times):
    graphics8.nytimes.com/...

    Sec 109c line 14 "principal write downs" of mortgages
    Sec 110-2 Modifications (to mortgages)
    (a) Reduction in interest rates
    (b) Reduction in loan principal

    Now think about this example:
    There are two neighboring houses.

    In the first house, Peter was prudent, saved his money, lived within his means, worked hard, and could afford his mortgage.

    In the second house, Paul took on too much debt, lived beyond his means (possibly even taking out a HELOC or two to "live the good life"), worked just enough, and frankly cannot afford the mortgage he got himself into.

    The aforementioned sections essentially say that the tax money that Peter has paid will go to help his neighbor Paul. Truly robbing Peter to pay Paul's mortgage!!

    On top of that, everyone else who knew they couldn't afford a house and thus are renting... their tax money goes to help Paul too!!

    That is f***ing ridiculous.

    Sec 113a1. "Minimizing negative impact" -- This section is pure fluff but does clearly say there *will* be a negative impact, which they will attempt to minimize (ya right). None of "the gov't might actually make a profit" absurd punditry.

    Here is a graphic showing who in the House voted for or against this absurd, Socialist bill:
    www.nytimes.com/ref/wa...

    I will vote for, and contribute to, the incumbent campaigns of those who voted against this bill.
    I will vote against, and contribute to, the challenger campaigns of those who voted for this bill.

    As a taxpayer, one who lives well below his means, and an American, I am utterly furious that House Speaker Nancy Pelosi, D-Calif., Senate Majority Leader Harry Reid, D-Nev., Paulson and House Republican Whip Ray Blunt, R-Mo could come up with this absolute garbage.

    Moreover, the fact that Henry J Paulson originally asked for $700,000,000,000 without any oversight at all, just a "trust me, I'll spend it right" attitude, is completely un-American and goes against our democratic system of checks-and-balances. He is a snake, a complete failure at his duties, and should resign immediately.

    I implore all of you:
    PLEASE send emails, write letters and tell your Senator and Representatives that you-- as a financially responsible homeowner-- REFUSE to help pay the mortgages of your financially irresponsible neighbors. They don't need to be very long-- just a paragraph or two to get to the point.

    Tell them you will send money to support the challengers to kick out the incumbents to voted for this bill.

    And tell those Representatives who voted against this bill that you wholeheartedly support their vote, and will be contributing to their campaigns.

    They need to know: Vote for this bill and they will be out of office.
    Reply
  •  
    Sep 30 10:33 PM
    The vote is tomorrow. It probably will pass now that all of us can breath a sigh of relief that the FDIC will insure up to $250K, god that had me worried. Of course I assumed that anyone who can amass $250 and keep it around as cash in a savings account is smart enough to figure out how to move it into a couple of FDIC insured accounts.
    Reply
  •  
    Oct 01 01:57 AM
    Put James' sunny article beside Reinko's sober article and decide who has a better case. The judge has to be the market value of the "average " portfolio which is bleeding. The winner by this very narrow but realistic criteria has to Reinko. Maybe better be cautious and just trade some till things settle down.
    Reply
  •  
    Oct 01 08:20 AM
    My plan is to sit tight on the sidelines in cash and gold. I don't care what happens tomorrow or next week or next year. Maximize income and FDIC insured savings. If the markets are open in 2010, there will be plenty of time to reconsider what to do.
    Reply
  •  
    Oct 01 10:20 AM
    I am with Alan.
    For months cronies in Washington and idiots on TV have been telling investors that the "fundamentals of the economy are strong" and "leave your money in the market, it is a bad time to sell", and "don't panic", and HELLO!!! Look where we are!!

    How much better off would you have been if you had got out of the market months ago, bought gold and silver on dips and be sitting on cash ready to buy when this market actually bottoms?

    The key is not to listen to the idiots who not only caused this mess but then denied we were in one and now don't have the brains to figure out how to get us out of it...

    Reply
  •  
    Oct 01 02:45 PM
    I speculate that investors will move quickly to secure their assets in European strongholds like Switzerland and Liechtenstein...

    www.contrarianprofits....
    Reply
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