Monday, June 28, 2010

Demand Builds as Time Passes

Interesting article at by Clay Fisher, son of legendary investor Ken Fisher of Fisher Investments. Truth be told I thought this was an article by legendary short Doug Kass talking about how he turned more bullish. He called the Generational bottom in March 2009 so I thought this was an article about him turning bullish again. Not really sure how I ended up with an article by Clay, but it was an excellent piece so I'm glad to have read it.

His basic premise is the same as mine. Corrections are very rare and the economic data clearly does not backup a further dip in the markets. If the economy does lead into a double dip, it's because the markets pushed the economy into such a scenario as buyers freeze purchasing assets from the fear of a tri-peat (is that even a word) of 2000 and 2008. That is the fear after all isn't it? If this was 1999, nobody would think for a second about delaying the purchase of a house to see what happens in the market. Where have the buy the dip investors gone? Demand for all assets and especially houses only builds up as time passes.

Some info from Clay on the rarity of corrections and how this drop isn't very normal:

  • Since the Great Depression there have only been 19 corrections more than 10%, but less than 20% (which we call a bear market).
  • The median only fell 12%. This correction is especially unique in that it came just after an 8-9% correction in January-February.
  • Unless this correction turns out to be a bear (which is not justified by this economic data), it has made the infamous top ten list of worst corrections since the Great Depression.
  • Both corrections and risk grinds tend to last about two months. The median of the 19 corrections since the Great Depression was 54 days. We're now at day 60.

Did you catch those facts? Outside the 10 or so bear markets (don't quote that number as I can't seem to find the total) this places in the 10 worst market corrections of all time. And we've only had 19 in the last 70 or so years. Remember all the people calling for a 10% correction. Well, they aren't as common as you'd think. Tomorrow will be day 63 meaning this correction is getting long in the tooth or it truly is going to cause the 2nd Great Recession.

The Wall of Worry is very high considering the lack of any real negative happenings. Europe has been a bunch of noise. FinReg has been watered down and now that might not even get approved with Senator Byrd passing away. Any delay might cause some uncertainty leading to todays decline in Goldman Sachs (GS), but it surely won't lead to stricter regulations. Again, the fear is immense and beyond justification. With anybody taking the other side of the trade in that this could further water down the regulations, it highlights the level of pessimism. Shouldn't GS have soared today on news the Dems don't have the votes?

The bottom line to us is the 30%+ decline in the market since 2007 justified by corporate profits that are forecasted in 2011 to match those previous highs? The manic behavior will keep multiples compressed for now, but it seems unlikely to remain so low. How crazy are the markets is Apple can have 40%+ growth and only a 15 pe? Yes, Apple is massive and that 40% growth won't be repeated forever, but should they really trade at the average historical multiple of mega cap stocks that growth 80% slower?

This correction actually marks one of the worse markets in modern history even though its been blown off as normal. Compared to the 2008 drop it seems like a yawn, but to ignore its impacts on asset purchases is naive. As quickly as the market rebounds so well spending including the purchases of houses. Pent up demand has to be ramping. Housing shortages could be around the corner in 2011 though all but dismissed. It does highlight though how the market is on the edge as a further drop will further reduce spending especially if it hits 20% and causes the media outlets to illicit fear through non-stop maniac bear market coverage. We could be on the precipice of another Great Recession if the market falls from here. A self fulfilling prophecy if you read the news. If cooler heads prevail, this should be an excellent buying opportunity as the US rebounds and global growth pulls us out of any potential tailspin. The fear of a tri-peat seems very overdone. This isn't 2000 with sky high valuation or 2008 with sky high leverage. Its just not close to the same. So why is it trading the same?

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