"The Low"

2nd_Ave notes that Brinker thinks that March 10 was the low. Could be. Richard Russell recently disclosed that we were in a massive bull market from which we only took a breather. I no longer look to market technicians or pundits to accurately predict which way the market winds will blow. I remember when BC in November of 2006 basically 'guaranteed' that we had seen the top. We hadn't. After Cara, Pring, Murphy among others were wrong on their top calls (though Gary K hit it right on the money), I became an agnostic. I don't say any of that to be "nanny, nanny booh-boohish" in any way. I merely want to point out that there are lots of smart, experienced, people we should listen to because they have good insights. And, those people make predictions--some will be right and some will be wrong. The market is very good at making a fool out of most folks from one time or another.

Will we be in a prolonged recession? I believe that we are in a recession, and I believe that it is in the early innings. I still believe that home equity borrowings shore the gap between what people make and what people want to buy. How can the average consumer's liquidity get more robust in the next 12 months--outside the fiscal stimulus--with credit contracting and collateral values declining?

If we are in the early innings of a recession, then we will see the bad news unfold over time. Bad news is (1) pitiful job creation; (2) increasing unemployment; (3) greater jobless claims of longer duration; (4) earnings misses. I will remind readers that last year retailers AFFIRMED their forecasts even though they missed on Q1 and Q2. It was not until August of 2007 that they came clean. Whatever the true depth and breadth of the recession, we will know as it unfolds over quarters--not weeks. Until the evidential matter piles up, I think that the market will use the interim as a time to get busy going up--and create the stories around it to be plausible.

Remember, too, that we've not seen the full effect of loan losses yet on the bank's financials. We've seen the asset writedowns for specious loans. And, to be fair, we may very well experience the dynamic that the asset writedowns may in fact have been too much--for that reason, there is no future performance on the loan that could be any worse than what was already wrung out. None of us would have any possible way of knowing that. But the market tends to overshoot. All I'm saying is that I still believe that the bank graphs that I shared earlier will come to pass, but the severely marked down assets held for resale (remember, those assets are not marked down into a reserve) will be written up and that will fund future loan losses on loans held to maturity. I could be wrong, but I think that it is more of a plausible chance of being right.

As the market is comprised of more than 30% financial institutions, and you can see the severity of that accident on those stocks, there may be a very good chance that so long as retail and banking reflect the worst of a the credit crisis and recessionary sales performance respectively we may very well have seen the worst. See, there's a story for you!

I think that this week will be a big tell for we don't have options expiration coupled with the first earnings reports as we did last week. The reactions to some earnings surprised me. I think that the psychology of the market is to have willed the past problems away. And perception becomes reality does it not?

If we are in a recession, and I believe that we are, likely we are in the early stages of it. I learned from mid 2006 - mid 2007 that the market's cognition of problems is a slow one and one of short duration. We've already had cautious statements from Fed Ex and UPS. Rail traffic is down though they are getting their due by charging fuel surcharges (and the market loves it). To me the most important numbers that we will need to watch is job creations and jobless claims/unemployment. Those numbers speak to the prospective health of the consumer.

So long as we get no nasty earnings surprises AND we don't get any news about slowing growth in the areas that are current the pilot light of the global economy, then the market may have a quarter of making hay. With so many underinvested, this is likely to create a feeding frenzy among stocks. You know what else we have not seen? We've not seen small/midcap companies being snapped up by foreign companies. The minute that starts to happen in a meaningful way, it will be an elixir that will cure all of the market's ills.

I think that the devil still needs to be given his/her due. But that devil is a patient one and is content to watch others revel while tapping out time.

The book that I mentioned, Value Investing, has some very good (and surprising) insights on recession and p/e expansion and contraction over market cycles. (I'm not equipped to discuss it yet, though, having not fully formed my thoughts on it).
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Gemmastar: In only buying companies that are 60 years old.....I forget the book that I read some years ago, but the average age of a corporation is 75 years. I wouldn't use the company's age as a criteria for investing, but rather look at the historical ability of the company to create shareholder value through a full range of a market cycle.

I do think that there is such a thing as too much diversification in a portfolio. In fact the PM's who are contrarian investors tend to have more concentrated portfolios.

I think that listening to conference calls and reading the 10-K (as opposed to the annual report) are critical if you are holding for the long term (traders typically snort at these). You'll learn alot about the industry--plus you can see how forthcoming management is in the analyst round. That being said, though, I take all management commentary with a grain of salt.

Ultimately, for the companies that you chose to own, you have to be able to answer the question of how does the company create shareholder value and how do you determine when that value creation starts to slow relative to others--meaning that there are more efficient vehicles to re-deploy your capital. Also, you should know what risks they have (country, customer concentration, product obsolescence, commoditization of product/service, product/regulatory liability, barriers to entry, access to funding....). You'd be interested in knowing that in the Value Investing book VK speaks to dividends being the primary creation of shareholder value during range bound markets!