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U.S. Stock Markets Strike Fresh Lows; Cooler Heads Stand Up?

Posted on | November 19, 2008 Time: 10:38 pm |

All the major indexes sit at fresh multi-year lows Wednesday, as the crosscurrents of a seemingly endless wave of negative news has uncertainty levels (as measured by the VIX) one push away from new all-time highs.

The Secular Trends Portfolio has given back all the alpha that seemed so well-earned just two weeks ago on Election Day. But I truly get it now…in the words of Cool Hand Luke, “I got my mind right”, and have learned to not bother either boasting or lamenting short-term relative performance. Alpha isn’t alpha if it can be lost in a few days, and this market has the volatility to do just that.

Goldman Sachs, my barometer for the fear of tail risks to the economy, is down over 50% in the past month. That’s a raging pass (read: failure) of the fear test. Citigroup’s slide is akin to watching an iceberg slide towards an inevitable landfall; the stock was down 23% today, closing at $6.40. Sometimes you’ve just gotta’ say ‘wow’.

Also within the financials, Bank of America, Wells Fargo, Merrill, and JPMorgan were all down over 11% today. As they enter new phases of hyper-fear, other sectors are bound to fall. Citigroup alone has over $2 Trillion in assets. And while there are scary spreads forming within commercial real estate right now, it wouldn’t have been hard for short-sellers to get around the financials again. All the technicals were set up perfectly, and as I noted in a few days ago (“Inside The Numbers: Redux“), there hasn’t been any sign of the major sideline capital re-entering the market to this point.

What To Do, and Where To Go?

I’m frankly quite thankful that the Secular Trends Portfolio has still modestly outperformed the S&P 500 since inception. I made multiple mistakes that, in hindsight, look like those made by a fool.

I went after the industrials and materials names first, when underlying commodities were in mid-rampant decline. Performance has been boosted (saved) by gains in Bristol Myers (BMY), Amgen (AMGN), Schering (SGP), and Pfizer (PFE). Many other names have been relative, if not absolute successes.

I still love every name in the Secular Trends Portfolio. But in the present environment, all the focus is on right now and shortly forward, with brief pauses in between to wag fingers at the past. Nobody cares about demographic trends and the long-term beneficiaries of them. Hell, we don’t even know if we’ll have 3 auto makers by Christmas.

I will contine to use the fundamentals, even if I’m the last reed out here in the wind. I’m able to put huge margins of safety around all the 2009 estimates, and many stocks still look dirt cheap.

Parting Shot:

All level-headedness aside, I will be having some serious, faith-testing looks at all the holdings, with a renewed hawkish stance for any potential risks or permanent changes to the landscape. The over-arching goal of the Secular Trends Portfolio is to see the landscapes as they will be in the future, and hopefully to “reverse-engineer” the companies that will take us there. And that function, difficult to do in calm markets, is so very nearly impossible now, maybe more than at any time in history.

Ryan Barnes

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Comments

One Response to “U.S. Stock Markets Strike Fresh Lows; Cooler Heads Stand Up?”

  1. The Market Traders
    November 25th, 2008 @ 3:32 pm

    Which Companies Are Set to Benefit from the Obama Response?…

    Ryan Barnes submits:I just finished listening to Obama’s press conference announcing the new economic team, and the market seems generally disappointed by the lack of juicy details. We wanted to hear how big the stimulus package would be, and we …

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