Thatâ€™s right: Iâ€™m leaving! Iâ€™ve seen enough of this market, and Iâ€™m getting out. By the time you read this column, I will have negligible exposure to any stock or mutual fund dedicated to our U.S. markets. I refuse to play and wonâ€™t be significantly long or short in this market. Why should you consider doing the same thing? First, Iâ€™m not planning to sit on loads of cash. I will continue to use aggressive allocations in stocks and funds, but I have given up trying to wring gains from a market defying all logic considering the preponderance of economic data indicating that stocks should be falling hard.
Of course, by the time you read this, our stock market may have resumed its downward trend, one that began about nine years ago. The secular bear market, which has been in force this entire decade (save a couple of months), appears to me to have years yet to run. However, Iâ€™m not saying that making money is impossible in this market environment. What I am saying is this home market isnâ€™t worth the effort or risk involved!
Making money in a long-running bear market requires what many professionals are now advocating: short term tactical trading. This approach requires attempting to time your way into stocks at cyclical bottoms and scale out near ensuing tops. Do you know anyone who consistently does that — successfully?
The more we trade, the more mistakes we are bound to make. And frequent buying and selling refute the idea that we have long-term goals and makes traders of us all. Also, this method is inefficient, especially in taxable accounts, since gains may be taxed at higher income tax rates as opposed to lower capital gains tax rates. I saw that result from my own efforts last year with large amounts of short-term gains from short sales that paid off nicely.
But finding ourselves with a big tax bill for a year when our overall portfolios lost value isnâ€™t something we hope to accomplish. Even if you managed to make money overall, the tax bite can shave large chunks from your results. Not good!
What else convinced me to abandon the domestic market? I have no doubt at this point that the U.S. stock market is in the throes of a long-running bear market. Weâ€™ve seen these before, most recently from 1964 until 1982. At the high point in 1964, the S&P 500 was just over 86. At its low in 1982, before the new bull market began, it was about 102.
The patient investor would have sat quietly with his index fund portfolio (had one been available then) and seen a gross return, excluding dividends, taxes, fees and trading costs, of about 19%. For an 18-year period, thatâ€™s not too good.
We may very well be seeing the same type of market now, and the S&P 500 could remain about where it is today — for five or 10 years! History proves that secular bear markets work that way — lasting about as long as the preceding bull market, as it happened in the previous case, about 18 years.
Of course, with the U.S. now known as the worldâ€™s biggest debtor nation as opposed to its biggest creditor, many big variables have changed since that last cycle. We are a nation in decline — no longer the richest country in the world. Weâ€™re broke at many levels, especially at the federal level — with a projected Federal budget deficit for the current fiscal year of nearly â€” gulp! — $2 trillion!
An even more dire fear is that we could be in the same type of stock market morass as seen in the worldâ€™s second largest economy, Japan, where the stock market has endured the most frightful 20-year period imaginable. That index, the Nikkei 225, sits today at just under 9,000, far from its 1989 peak of 39,000! Do you think that couldnâ€™t possibly happen here? Do you think anyone in Japan thought it could happen there?
Another cause for concern is the growing number of realists, more commonly knows as â€˜â€™Bears,â€™â€™ who are deriding the goings-on in our home markets as more signs of manipulation and corruption at the highest levels. I think they have a point.
Look no further than the most recent report on our countryâ€™s Gross Domestic Product. Recently, we heard that economic activity fell by over 6% against expectations of a 4.5% decline. So the number came in worse than expected and, theoretically, worse than stocks prices reflected at the time. Even more worrisome was that our exports fell by 30%, imports by 34% and business investment by 38%. These are not typical recession numbers. They are what we would expect during a depression, yet the stock market rallied on the news!
Somehow, that report data was spun to show embedded signs of economic recovery, such as a small rise in consumer spending. But with each weekâ€™s announcement of massive job losses and new records set for the number of workers collecting unemployment benefits, does a sustained rebound in spending seem viable to you?
We also learned this week that Chrysler has filed for bankruptcy protection and hundreds of dealers will go out of business. GM will cut hundreds of dealers, too. Does this news smack of recessionary — or depression-like — conditions? Yet the stock market rallies on — even with the S&P 500 sporting an average P/E of more than 50, according to the most recent Barrons magazine!
So Iâ€™ve seen enough already! Trying to scalp short-term gains before getting out of the market just isnâ€™t worth the effort. And Iâ€™m not crushing sour grapes. Since Iâ€™m not allowed to divulge my performance without significant documentation, letâ€™s just say itâ€™s about flat so far in 2009.
Now that you know what I wonâ€™t be doing — and where I wonâ€™t be investing, what will I do? Of course, what I do shouldnâ€™t matter one whit to you. Weâ€™re all essentially on our own and responsible for our own decisions. But just in case youâ€™re curious, Iâ€™ll give you a clue.
Of course, anyone whoâ€™s read this page for any length of time would guess that Iâ€™ll be loading up on international and emerging markets shares. You may have noticed that my much-maligned â€˜â€™decouplingâ€™â€™ theory seems to be gaining traction. Many of the larger international markets have seen strong rallies so far this year and are now in positive territory. This includes those â€˜â€™BRICâ€™â€™ countries that were hammered right along with our home markets last year.
I will also keep shares in precious metals producers and, yes, one or two domestic energy companies. And since any major domestic sell-off could cause reactionary selling in other markets, I will hedge my long-side exposure with short funds like EEV and UVPIX, which for most of you — and I mean YOU! — should be off-limits, given their ripping volatility and uncanny way of losing money when holding periods extend more than a few weeks regardless of what the markets do. Iâ€™ve seen quite enough of a market that moves higher on bogus employment numbers from the Bureau of Labor Statistics, the usual blatantly bad economic spin from Wall Street types who dominate the financial media, and economic policies like cutting taxes while running record-setting deficits, which some consider bullish.
Better, safer, less corrupt alternatives for investors exist. This is truly a great time for investing, given the sheer number of options to consider. But take heed: if you follow this lead and lose money, youâ€™re on your own, since Iâ€™ll likely be losing much more than you in that scenario!
But Iâ€™ve seen all I need to know, and few, if any, reasons prompt me to invest domestically with hope for profit. Secular bear markets are bad enough, but when they are coupled with the enormous weight of corruption and manipulation, my resolve is sealed.