Is it time to get back into the market?

Posted by: Michael Mandel on September 17

Is it time to get back into the market?

Let me start by being honest. We’re in the fog of war right now, and I don’t have a clue what is going to happen next week or even later today. AIG’s purchase by the Fed was not on my radar screen at all. For all I know, Paulson will nationalize the auto companies next.

So let’s turn to a different question: Is it time to get back into the stock market? I shifted most of my funds into low-risk assets last December….is it time to shift back?

Another way of asking the same question: Do I expect the U.S. and global economies to be in decent shape 12 or 18 months from now? The Fed has effectively put a massive shot of monetary stimulus into the financial markets. So if the economy is basically going to be okay, that should mean a stock market boom.

Let’s think this through. What happened over the past ten years or so was a massive debt binge by both the household and the financial sectors. The two were intertwined, particuarly in the real estate market. Since 1997 inflation-adjusted debt in both sectors has basically doubled

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By contrast, debt growth in businesses and the federal government has been much slower.

So. The deleveraging of the financial sector has just begun. If that feeds directly into the household sector, we will see a massive decline in spending, which will hit imports and U.S. sales. That will take more than a year to play out. If that happens, it’s not time yet to get back into the market.

The other alternative is that the underleveraged sectors—the feds and businesses—step up to the plate. For businesses, that would mean offering credit directly to borrowers, rather than going through the financial system. For the federal government, that means taking on some of the financial system debt itself. That will cushion the blow, and probably means that the stock market is near a bottom.

Based on what we are seeing now, the feds will take on this role. So I am leaning towards getting back into the market. I’m not quite there yet, but almost.

Correction: I’ve replaced the chart because the original was slightly wrong—I pulled data from the wrong years.

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Reader Comments

Wes

September 17, 2008 03:44 PM

Hi Mike,

I wonder if you could comment (here or in another post) what you think of the impact of all these bailouts will be on the federal deficit (obviously much higher) and what this will mean for US treasuries and the US dollar.

From this latest post, it seems that you may think the federal government has a little more fiscal wiggle room than some think.

Kartik

September 17, 2008 04:05 PM

Michael,

It depends which sector.

I think it is certainly a superb time to get into Small/Mid Value, and Financials. This means, going long on :

IWN or IJJ
XLF

It is not yet even close to going long on International stocks, particularly emerging markets. All India/China/Emerging markets indices could easily go down another 20%.

I have gone long on IWN and XLF, and presently have no International/Emerging markets positons.

Mike Mandel

September 17, 2008 04:34 PM

I'm in a situation where I can only make broad market investments. The real question is whether the decline today is enough to make the market attractive. Not quite yet, I think.

Kartik

September 17, 2008 04:39 PM

"I'm in a situation where I can only make broad market investments."

So even a style ETF like IWN, or a sector like 'Financials' (XLF) is not allowed?

I think the S$P500 at 1160 or less is attractive, and is a once-in-5-years opportunity. Any period of time below this level is likely to be brief, barring some yet-unforeseen catastrophe.

Jim D

September 17, 2008 04:50 PM

The time to get into the market is not when the indexes are all trading below their 50 and 200 day moving averages.

It's also not time to get into the market while the 50 day is below the 200.

These numbers aren't magic: they just mean that the general trend is still down. Why buy something which is still headed down in price? You won't know it's the bottom until you can see a genuine uptrend. If you're going to gamble, go to Vegas - at least there, they give you free drinks.

One golden rule: it's easier to make up on a missed opportunity than it is to make up a loss.

Me, I'm short on everything. It's been a great couple of days. Too bad I'll probably be unemployed by year end at the rate things are going in the economy.

Kartik

September 17, 2008 06:18 PM

"It's also not time to get into the market while the 50 day is below the 200."

Dead wrong. The best buying opportunity of the last decade, in Sept-Oct 2002, was when the 50 was below the 200 exactly like it is now.

"The time to get into the market is not when the indexes are all trading below their 50 and 200 day moving averages. "

On the contrary, it shows that downward sentiment is peaking.


Dominic

September 17, 2008 06:21 PM

Mike

Why businesses should offer credit directly to households if the fundamental problem is the ability to pay back your debt? What is the difference??
At least the financial system was able, and mostly through smoke and mirrors, to distribute that debt all over for a while.
Like you said before, we overconsumed...we need to boost savings again and this process will take years.
I agree about government spending...but I think it should be directed to strong job creation (for example infrastructure)..stable good paying jobs that will re-ignite consumer spending in the long run....once the house ATM is empty....money spent to support imported goods consumption is not going to take us anywhere in my opinion. Weak job creation in the first decade of the 21st century (and mostly low level jobs) is the elephant in the room.
I'm not sure we are at the bottom yet...

Kartik

September 17, 2008 06:25 PM

Here is the chart of 50 vs. 200-day averages, that covers both the 2002 bottom and today. It shows the S&P500 at 1160 being a very attractive entry-point.

http://finance.yahoo.com/echarts?s=%5EGSPC#chart5:symbol=^gspc;range=20000917,20080916;indicator=dividend+sma(50,200);charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

It is true that the 9/11/01 period was also an entry point, that gave way to a lower bottom in 2002. That is why I say that only an unforseen catastrophe can keep the market lower than 1160 for long.

Joe Cushing

September 17, 2008 07:03 PM

Since we don't know if the stock market will be up or down from our current point over the next severa weeks/months; I would dollar cost average my way back into it. Just devide your investments by 10, 18, or whatever timeline makes you comfortable, and move that much every month. You have already made quite a bit by getting out in December. Even if you get back in and lose some, you are better off than you would have been if you hadn't pulled out.

mark

September 17, 2008 09:13 PM

this blog is the only place left with bulls. short term market is hitting a bottom, but to think that the true bottom is at the 2004 price level? that i cannot agree.

LAO

September 17, 2008 10:46 PM

I thought the national debt was well over 9 trillion, and was about 5 trillion in 1997. If it had grown at reported annual inflation, I believe it would be under 7 trillion. Granted I'm doing this roughly but isn't the real fed debt growth nearer to 40% than 10%? Is it the trick of treating SS surplus as asset rather than obligation?

In any case, it is eye-opening to see that fed debt appears to have grown more slowly than the rest, though that gap may be closing as we speak.

Debt is debt. Business offering of credit has not paid off lately -- GMAC and GE's finance arm. Builders will certainly not be in that arena any time soon. With real wages dropping, job loss increasing, and significant inflation in basic necessities, the squeeze on the consumer surely is becoming critical. There are warnings about more mortgage resets in 2009. I do not see business stepping up to the plate. Government -- too driven by agendas, unless there is a political transformation in November. Democratic administrations have almost always ushered in up markets, but have seldom faced such turmoil. For now, I am even concerned about safety outside of the market.

The squeeze on discretionary spending might not be horribly painful for the economy, except for one thing -- the heavy reliance by struggling state and local governments on sales taxes and commercial property taxes. I cannot think of any solution except crossing the sacred barrier to taxing services.

The credibility of my analysis is suspect, though, since before I became aware of mortgage lender/borrower abuses, I predicted that we could drag this mess out until baby boomers begin to die en masse with more debt than assets. It still could turn out to be the final blow 20 years or so from now.

Mike Mandel

September 18, 2008 02:01 PM

LAO,

The figure refers to the outstanding federal debt held outside the government. It doesn't include the nonmarketable debt held in the social security and medicare trust funds

Brandon W

September 18, 2008 02:41 PM

I've read several articles suggesting that with GAAP accounting rules that the U.S. is carrying $55 trillion in debt.

Even by the government's accounting methods - interesting that they don't use the same accounting they require companies to use - the debt will be $10 trillion by the time GWB leaves office. It has doubled under his watch.

Jim D

September 18, 2008 05:10 PM

Kartik -

You need to backtest a little further than 10 years to get an accurate idea of an entry point.

Sure, a 200/50 inverse was a natural entry point in the biggest stock market equity inflation in this country's history. That's like buying at the 10 hour average on an up day - a no brainer.

But on a down day... or in a secular bear market... it doesn't work so well. In fact, it doesn't work at all - you lose money.

So, if you think this is a secular bull still, despite 14 months of evidence to the contrary, knock yourself out. Hey, who knows? Maybe you're right.

But ask yourself this: Does the gov't have to nationalize the mortgage industry in a secular bull market?

It's all about house prices - this doesn't start to get better until they stop falling. And that's at least a year away. My guess is that it's longer than that, but one year visibility is fine by me.

Kartik

September 19, 2008 03:21 PM

The day I wrote this was the perfect entry point. Both IWN and XLF are up about 15% and 20% respectively, from that point.

Kartik

September 19, 2008 03:30 PM

Brandon W,

"It has doubled under his watch."

Source? (hint : there is no source, as the statement is a lie).

Also, I see you don't comprehend the concepts of inflation, or debt as a percentage of GDP.

By Michael's own chart, Federal debt has risen very slowly over the last 10 years. You ignored the chart in the original post in order to preach your religion.

Knowledge and facts are anathema to leftism, which is why you simply ignore them. This is why leftism is intoxicating to the intellectually insecure.

willianer

September 21, 2008 12:02 AM

i think The time to get into the market is not when the indexes are all trading below their 50 and 200 day moving averages.tiffany jewellery
tiffany Bracelet
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The credibility of my analysis is suspect, though, since before I became aware of mortgage lender/borrower abuses, I predicted that we could drag this mess out until baby boomers begin to die en masse with more debt than assets.

Jim D

September 22, 2008 01:04 AM

"The day I wrote this was the perfect entry point. Both IWN and XLF are up about 15% and 20% respectively, from that point."

On the back of extraordinary gov't intervention.

Good luck with that trade. Their business model's still broken. It won't be fixed for years.

But you go ahead and trade. It'll be it's own punishment.

Brandon W

September 22, 2008 07:58 AM

Kartik,
You make it unpleasant to even try to discuss anything on Mike's blog. Proper civil discourse does not include passive-aggressive insults. Do you have the guts to say what you say to people's faces? I know you don't.

I completely understand debt-to-GDP, inflation, and Michael's chart. It doesn't change that the public debt has almost doubled under Bush, and has grown at a rate that far-exceeds even the ridiculous inflation rate (I'll go ahead and accept the gov't rate for today, even though I think it's badly understated).

Here's a source from the government's own web site:
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm
(This is a link to historical information. Much more data is available by simply taking a minute to look around.)

Using the government's accounting methods:
Debt when GWB took office: $5.6 trillion
The current debt is already $10 trillion, with 4 months remaining and projected to be well over $10 trillion when GWB leaves office.

So your comment "there is no source, as the statement is a lie"... is a lie.

As for the $55 trillion debt I mentioned, here's a little story that helps explain this to you:
http://www.cbsnews.com/stories/2006/10/28/business/main2135398.shtml

Using the kinds of accounting rules that corporations have to follow, the overall debt obligation is dramatically higher. The (now former) head of the non-partisan US Government Accountability Office, David M. Walker, has made it clear that existing obligations create a fiscal debt of over $46 trillion (according to the referenced story). More updated projections have put it in the $50-55 trillion range.

So, Kartik, my numbers are referenced from the US Treasury and the GAO. Where do you get YOUR numbers?

Jim D

September 23, 2008 07:00 PM

I know he won't read this, but...

Hey Kartik, still likin' that trade? Maybe not so much, eh?

Just wait till next week. The wheels are starting to come off the truck as we speak.

We're in a secular bear market - it's a bad time to buy equities. It's a good time to hoard cash.

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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