So, when is the right time to invest in our current environment?
Almost three months ago the market reached a point (only to be known in hindsight) of maximum downside momentum. Since that point in time we’ve gradually moved higher, those investors with the steadiest of nerves who were willing to reject the potential for European economic collapse have been paid the biggest rewards since risk of this collapse have eased.
Next are the investors who believe that the current recession fears are exaggerated, which is more or less where I am as an investment advisor. Our purchases have been made after the European collapse fears have eased yet before thoughts of a slow growth economy and no recession have become commonplace.
But if you want even more certainty, then I really have no answers for you other than you will likely be buying near a market top. You will be buying when prices are even higher and reward is even less. If you want perfection aka no risk, no potential for Euro default or US recession then expect to buy at the top. This will be when investor confidence is at an extreme and good investors will be selling or cutting back positions.
I believe the S&P 500 has the potential to run another 7% to 10% or back to the highs of last summer. At 1400 on the SP500 would still only be 13 times 2012 earnings of $105 (the current estimate is $108). As a benchmark the 50 year average for the SP 500 is 15 times current year earnings, hence equities are pretty cheap right now.
Investors must learn to balance the need for return and the compatible degree of risk and eliminate the “I’ll invest when the world is not quite so insane.” Waiting for no-risk is a sure fire way to find yourself near a market top when the next issue for markets to contend with arises. And, there always is a new issue.
Every once in a while I receive feedback from readers of this column inquiring why I spend so much time talking about macro events and not about individual “Green” stocks.
The answer is pretty simple: The Macro events in the world today, especially in Europe are dominating every investment thesis. In addition, in the US we face a potential crisis as our debt looms larger to the point where it may be unsustainable without a sharply weaker Dollar or lower Yuan.
These are issues that are so large, larger than most of us have ever faced in our lifetime that they overwhelm any individual stock analysis, including those of “Green” stocks. Plus, for years I’ve been warning against Alt energy names that relied upon government support. Only a nitwit could fail to see the link between shrinking budget outlays and the high risk that support for Green projects could disappear.
Investing should be viewed though the lens of a realist not through one jaded by hope or wishful thinking.
Our retirements deserve no less.
Eventually this time will pass which will allow us to focus on individual stock selection but in the meantime if you wish to entertain yourself there are a number of website solely devoted to Green Stocks. Just keep this in mind: We eat our own cooking at RMHI.
No positions
When markets start to change character as they are right now, its wise to revisit and possibly change your perspective. I’ve been outright bearish for quite a while but long term data suggests that the type of strength we’re seeing in US equities could be the start of something substantial.
My belief is that investors are coming to grips that we are not about to plunge into recession soon and that stock prices had built into their values a full fledged recession. Hence stocks are adjusting to valuations of slow growth. In addition many measures of sentiment were down at March of 2009 lows…..need I say more?
There no room for ego here and discipline trumps conviction. My TZA was closed out today at $39.75 for a loss of $6. However in its place we are reasserting our customized portfolios for what will hopefully be at least an intermediate termed rally. My expectations are a rally into January.
Stock selections include:
TESS
CLUB
HIT
CRD.B
DK
NTL
FRP
SUSS
IEP
Long all positions
Brad
If it isn’t enough to bear after hearing the news that Ashton Kutcher no longer follows Demi on Twitter the esteemed Economic Cycle Research Institute says we’re in a recession. Surprisingly this has met some very intelligent opposition in none other than Doug Kass who believes the current data does not support the case.
To be a good investor IMO means that we should be realists and face our reality and consider that hope is a four letter word.
With current earnings estimates for the S&P 500 for 2012 at $110, a stagnant low growth economy could bring them to $97-$100 range and its my view that if that is the case then the markets will likely make further lows.
According to Sentimenttrader.com the average peak to trough for the S&P 500 is 23.9% while our current loss is 17.9%. If we get real particular and factor in only recession induced bear markets within the painful confines of secular bear markets then the average loss drops to over 40%.
Personally, I don’t know if we’ll drop another 20% but I think its likelier that John Lackey shows composure on the mound and regains his old winning ways than the S&P 500 holding its August lows.
Looks like we’ll be trading on the Darkside for the downside for a while to come.
Long Terry Francona
Short John Lackey
We are still holding the TZA which is now at $52.9 in most client accounts, for a very nice $8 gain in just a few days. At present I’ve entered a stop order to sell at $52.5 to preserve our gain in case the markets give up like the Red Sox in the 9th inning.
The current trading environment is very similar in nature to what we experienced in 1987 and 2008 post crash. Back then we experienced a sawtooth trading environment with weekly whipsaws reflecting economic news changed daily, not a place for long term investors to add new positions. Markets need time to heal and its very very rare for them to simply bounce back up after a significant selloff.
I’ve been very hesitant to talk about individual stocks for a couple of months since we have very few full positions for client accounts. As the recent TZA trade reveals, the last two best trades I’ve made have been in Inverse Exchange Traded funds. Stocks still seem heavy to me and our investment models are still bearish, earnings are still coming down and in my opinion still have a much greater downside.
In the meantime I’m quite content to make money with Inverse ETF’s while the 11000 – 12000 trading range continues for the SP 500 index.
TZA sold just now at $52.5 nice
Formerly long TZA
Short Red Sox
Long San Francisco
Evergreen Solar bankrupt….Solyndra bankrupt….Was it possible to see the collapse in the Solar stocks coming? Yes it was and I’ve mentioned this frequently for better for the better part of three years. It all boils down to the fact that you don’t want to own investments that rely heavily on government subsidies for their survival. You especially don’t want to own those investments during periods of financial austerity. The solar stock industry relies heavily upon subsidies from the US, China and Europe, with all three in either recession/depression or on the brink this outcome was inevitable.
For as long as I’ve been practicing SRI (over 20 years) I’ve been uniform and adamant that investing proactively is contradictory to effective long term investing. Investing including Socially Responsible Investing is about handling risk intelligently and dispensing with the rose colored glasses. Eventually every investment will turn against you and how you decide to cope with this inevitable turn will largely dictate the degree of your long term success. Being emotionally married to an investment is a sure and quick way to the poorhouse, you’d have been much better off supporting the company as a consumer not an investor.
Is there a survivor and a longer term winner in the bunch? Probably First Solar
Investing in Solar or Alternative energy now is nothing more than a spectator sport for the time being.
No positions.
