Random Thoughts on the Sh*ticane MarketOctober 16, 2008 10:04 pm Uncategorized
OK, before we get started, I have to be completely upfront about the content of today’s post. Does profane language leave you squeamish? Do you object to an expletive-filled tirade? If you answered yes to either of these questions, then this edition of the Market Guy is definitely not for you. Go away now. Here’s a link to the Disney homepage. For those of you who appreciate the occasional 4-letter word, then buckle up because we’re about to delve into what I call, The Sh*ticane Market (notice how I use “*” instead of “i.” Clever, eh? I have tenure).
Over the past few years, I have derived an inordinate amount of satisfaction from the Canadian reality TV sendup, Trailer Park Boys. It’s the story of Ricky, Julian, and Bubbles, three young inhabitants of a Nova Scotian trailer park. Each episode typically finds the boys scheming on how to achieve financial independence via a program entitled, Freedom 35. Simply, they want to hit the big score so they can retire while young. Their schemes have involved smuggling, pornography, trafficking, ATM theft, kidnapping, drinking, firearms, and lots of lots of dope.
Their efforts are always being thwarted by the frequently inebriated and typically malevolent park supervisor, Jim Lahey. But to be perfectly honest, I enjoy Lahey for one simple reason: I’m fond of the various ways in which he uses the word, “sh*t.” I find it immensely satisfying and I’m not going to apologize for it. Plus, it’s a word that best describes the current state of our financial markets. So with that, I now present several of Leahy’s quotes and some ideas on what we can learn about investing in tough times.
1. Lahey: “Boys this could get rough, we’re in the eye of a sh*ticane.”
It started as a tropical sh*tstorm, gained in strength, and was upgraded to a full-forced Sh*ticane. Yes, welcome to the Sh*ticane Market. Note that such a market can also be regarded as terrible, horrible, no good, and very bad (as described in a previous column). Although I have to admit that I’ve become surprisingly used to 700-800 point drops and 1000 point intra-day swings. The other day I was speaking with Bouch in Embrun and he asked, “what’s the market doing today?” I replied, “it’s down about 500.” He countered with, “only 500?” Meanwhile, Stephen Colbert over on Comedy Central offered, “The Dow dropped 500 points today. I didn’t know there were 500 points left.”
2. Lahey: “Ricky, you are climbing along a sh*t rope in a river of sh*t.”
These are fast markets. The other day, the Dow moved over 300 points during a BNN commercial break. Insane. This makes buy and sell executions treacherous, especially when using market orders. For example, last Tuesday I was watching the international markets put in a healthy advance and decided to follow the XINs, an exchange-traded fund that mirrors the MSCI Europe, Asia, Far East index. A closer look revealed the following chart:
Here’s what I think happened. An investor put in a market order at the open while the bid-ask spread was huge. The order was filled at $25, even though $25 was a super ridiculous price to pay for the stock. The next trades came in around $17 and the investor in question took a 30% haircut in a matter of minutes. Hey, if you’re dumb you sometimes have to pay the Dumb Tax. The lesson? In a fast market, be very careful when placing market orders, especially on relatively illiquid stocks. Sure, adding price conditions to your order may result in no-fill or a partial-fill. But with $9.99 trading commissions offered by most discount brokers, who cares if you need to place a second order? I spend that amount on double-cheeseburgers each week.
3. Lahey: “We’re sailing into a sh*t storm, Randy. Better haul in the jib before it gets covered in sh*t”.
Readers of this space know that over the past couple of years, I’ve been taking profits. In early August, I expressed concern over $150 oil and suggested that it could easily retreat to $85. Well, it’s now under $70. This concludes the “thanks for being a know-it-all, you arrogant twit” portion of the column. To balance the karma, I should mention that I deployed some of the profits into financials and international issues and these have been smacked hard. In any event, the important lesson is that it’s vital to remain diversified and if any sector comes to dominate the portfolio, then it’s time to rebalance. It’s also vital to recognize the importance of fixed income investments (bonds, GICs, high-interest-savings, etc.) in any sensible portfolio. I know so many investors who ignore this relatively boring asset class, preferring to go all-in with equities. Bad move.
The parings have resulted in a cash position of over 25%, which has helped to buffer the portfolio from the brutality of the current market. The S&P 500 is down 38%, the TSX is off 33% and my portfolio is off 15%. Yes, the situation leaves me nauseous, dyspeptic, and on the verge of plunging my head into a box of angry bees. It’s never pleasant when money is destroyed. But when faced with a good market, it never hurts to take a few profits along the way. This helps to buffer the portfolio from the dark times.
4. Lahey: “When you’re getting pelted with sh*tballs, you gotta get a sh*t bat.”
In a market such as this, it pays to have some cash available. Not only does the cash preserve capital and buffer the portfolio from market volatility, it also leaves an investor able to pick up bargains along the way. For example, with Rothmans being taken out, I’m looking for an investment to replace the steady stream of wonderful, glorious, life-giving, dividends. In other words, I’m experiencing withdrawal and I need a fix…real bad. What about Altria Group, the makers of Marlboro cigarettes, Miller beer, and my personal favourite, Kraft dinner? These guys specialize in addiction and have being doing so for several generations. As you know, I don’t consider the ethical angles of my portfolio. Sure, I find smoking to be repugnant and I rarely drink. However, the point of investing is to make money and Altria knows how to get it done. Plus, in an uncertain economy, people still drink beer, they still eat Kraft dinner, and they still smoke up. The stock is definitely on my watch list.
5. Lahey: “I’ll be watching you Julian, like a sh*thawk; like a sh*thawk!”
To the U.S. bank executives who might still be dreaming of golden parachutes and ridiculous compensation packages. Good luck with that.
6. Randy: “Cops and dope don’t mix do they Mr. Lahey?”
Lahey: “Like sh*t and strawberry shortcake, Randy.”
How about fear and greed? On occasion I bring out Warren Buffett’s famous quote that as investors, we need to be fearful when others are greedy and greedy when others are fearful. However, it takes real cajones to wade into this market. Market Dad has seen his energy investments get slammed, but he’s trying to make the best of it by trading several positions and capitalizing on the volatility. Meanwhile, I’m less likely to trade and more likely to start putting very small amounts of money to work here and there…baby steps. What’s interesting is that we’ve had 75 conversations about the markets this month alone, and not once has the word “sell” been mentioned.
Speaking of that, I have to comment on the recent drubbing being administered to Jim Cramer, CNBCs resident trader and hero for those with attentional issues. He recently appeared on The Today Show and recommended that investors get out of the stock market if they need the money in the next 5 years. He was immediately lampooned by the blogosphere and became the focus of a Fox Business News smear campaign. But Ali Velshi of CNN correctly noted that Cramer hadn’t succumbed to panic; rather, his advice was right out of financial planning 101. If you need the money soon, you shouldn’t be investing in stocks. Go ahead and slam him for his disastrous calls on Lehman, Wachovia and AIG; but on this latest issue, he’s bang on.
7. Lahey: “Ricky started out as a sh*t spark off the old sh*t flint and then turned into a sh*t bonfire and then fueled by the winds of his monumental ignorance turned into a raging sh*t-firestorm. If I get to be married to Barb I’ll have total control over Sunnyvale, and then I can unleash a sh*tnami tidal wave that’ll engulf Ricky and extinguish his sh*t flames forever. And with any luck he’ll get caught in the undersh*t of that wave, sh*t waves.”
Prior to the market collapse, many investors were pre-occupied with the hot stocks and weren’t paying attention to valuation and fundamentals. I have a buddy who over-weighted commodities and has been left wondering what happened to his potash stocks. He originally invested because he heard the sector was hot. By the time we hear about a hot stock, chances are most of the money has already been made. Now that just about everything is getting clocked, it’s a perfect time to reorient and consider the power of dividends, strong cash flows, low debt, and decent valuations.
8. Lahey: “You’ve loaded up a double barreled sh*t-machine gun and it’s pointed straight at your head.”
If I told you how much time I spent narrowing down the list of quotes, you’d be horrified. Anyway, as commodities markets were soaring, it’s important to remember that a trend exists only until it no longer exists. What goes up is not destined to keep going up forever. So basing investment decisions on short-term information is a mug’s game. Keep in mind that I’ve always wanted to use the phrase, “mug’s game.”
Now that I’ve lost 50% of my subscribers and offended all sentient beings, let’s continue this festival of alienation with some photos from our pilgrimage to the financial capital of the world, New York City. It should be mentioned that during a tour of the Federal Reserve Bank and its $200 billion worth of gold, the Market Gal turned to me and said, “it looks as if you’re a little too excited.” Point taken. However, you have to love a place that offers the following words prominently displayed at the entrance:
Money makes the world go round. Money makes the man and money answers all things. Even time is money. We use it everyday, we talk about it everyday, but it remains hard to define what it is and how it works.
Even with the current market action, reading this left me feeling warm and fuzzy inside. Whenever I am plunged into dark times, these words will be part of my psychological safe place. I will bathe in these words and know that I am loved. Thank you Federal Reserve Bank of New York! The mirth continued over at the famous bull statue, the NYSE and the NASDAQ.
Meanwhile, over on Wall Street, the protesters were out in full force and the bailout of the big banks was in the cross-hairs. To be honest, I had complete sympathy for the protesters. As noted by Buzz Hargrove on Squeeze Play and Robert Reich earlier tonight on The Daily Show, the bailout reflects socialism for the rich and capitalism for everyone else. A small number of overly-greedy, self-interested, conscience-deprived people have screwed with my portfolio and threatened the net worth of a great many people. Of particular concern, are those who are close to retirement and have seen their hard-earned savings take a body slam. But I mean if you’re going to head down to Wall Street and spend the day challenging the status quo and balking at the capitalist system, can’t you at least put on a decent shirt?
Speaking of fast markets, there’s nothing like being in Times Square during a market sell-off. In the time it took me to buy a bottle of water, the Dow had plunged another 200 points.
The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets…so do your homework before making any investment decisions. Basing any financial decision on his column would be really, really stupid and would demonstrate that you need therapy (he teaches psych, so he’d know). The Letterman taping was a blast, Spamalot (starring Clay Aiken) was a riot, and the Food Network was bang on with their recommendations. Fun follows the Market Guy around. Follow the fun over at firstname.lastname@example.org