Tuesday, August 25, 2009

The Global Guru: Is the Bull Back?

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Nicholas Vardy's The Global Guru
August 25 , 2009
Vol. 4, No. 32

Fellow Investor,

Is the Bull Back?

The S&P 500 is up about 54% from its low point this year. The United Kingdom's FTSE 100 has risen by about 40% since March 9. The MSCI Emerging Markets Index has almost doubled since bottoming on March 2. Although a handful of pundits like Jeremy Grantham and the United Kingdom's Anthony Bolton called the bottom of the market in March, there is little doubt that even they -- both active fund managers -- were caught off guard by the strength and steepness of the current rally in global stock markets. And even as Ben Bernanke, who appears to be headed for another term as Fed chairman, said on Friday night that he expects a "sustained economic recovery," some bulls are pulling in their investment horns. Grantham himself is now predicting seven lean years of stock market returns, all the way to 2016. But no matter what your opinion is on the market today, understanding the current recovery as part of a larger cycle of regular booms and busts in financial markets can help you make sense of the relentless onslaught of today's conflicting opinions in the financial media.

Is the Bull Back? Party like It's 1999

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There's now little doubt that the green shoots of May are turning into the bushes of August. Surprisingly strong sales and prices of existing U.S. homes; improving economic data from the eurozone; signs of robust growth from China and other parts of Asia; and a return of real (if anemic) growth to the economies of Germany and France all point toward economic recovery. Even the United Kingdom, arguably the hardest hit of the world's major economies, is likely to move out of recession and post growth of 0.5% this quarter, as measures of business confidence have moved to positive territory for the first time in two years.

And negative headlines about unemployment notwithstanding, economic growth is trickling down to the company level. Japanese investment bank Nomura recently noted that August has been the fourth-strongest month for 21 years in terms of analysts revising their earnings forecasts upwards. ArcelorMittal, the world's largest steel maker, is re-opening blast furnaces worldwide in response to growing demand. Prices of crucial commodities like oil and copper are soaring as demand for industrial materials spreads from China to other Asian economies on track for a V-shaped recovery. Indeed, by the time the National Bureau of Economic Research, the semi-official recession arbiter of the United States, eventually gets around to declaring the recession's end date, it may stretch back to as early as May 2009.

Is the Bull Back? Show Me the Money, Bears

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The market Cassandras, the perennial gloom and doomers, are shaking their heads in disbelief. Some dismiss the current recovery as a mere "statistical recovery" (as if there is any other kind!). They ominously point out that the market's current retracement of its losses matches almost exactly the stock markets' bounce after the 1929 crash, when in 1930, the Dow rallied 52% from its bottom. Market technicians highlight that the market's current action is a classic "Fibonacci retracement" and is now set to resume its way down. As we approach September, a traditionally queasy time of the year for the markets, and the one-year anniversary of Lehman Brothers' failure, Cassandras are wringing their hands in gleeful anticipation of a market implosion. The price of S&P 500 puts -- a bet on a market collapse -- have been bid up in anticipation of a swoon in the markets in the early fall. Big hedge funds such as David Einhorn's Greenlight Capital have allocated 25% of their funds to bets that would profit from a coming correction. The Cassandras' disdain for the current rally is palpable. As Hugh Hendry, a London hedge fund manager who basks in his crotchety public persona, put it: "So we had a rally in risky assets. Big deal!"

Well, it is a "big deal," and here's why. A hedge fund manager, Cassandra or not, should be able to make at least some money from a 50% rally in global markets whether or not she agrees with its fundamental basis or not. Most investors would gladly trade a pound's worth of doom-and-gloom economic analysis for an ounce of return. Colorful and vociferous pessimism may be entertaining, but in the end, investors prefer just to make money. After all, investors didn't (wrongly) entrust their money to Bernard Madoff because of his metaphorically rich analysis on the op-ed pages of The Wall Street Journal.

The elephant in the room here is that the real story about making money in the markets is not about the accuracy of the Cassandras' economic analysis or whether the government is manipulating statistics. It's ego. And it's a big ego that keeps opinionated pundits from ever admitting that they could be wrong -- or that they were caught flatfooted by the recent market rally. The most counter-intuitive lessons that Cassandras will (n)ever learn about managing money is that their market analysis is virtually irrelevant to their market success. They can be spot on about their analysis, as they happened to be last year, and still lose a fortune for their clients, as many have. Or they can be completely wrong, and be left out in the cold as a 50% market rally passes them by. Contrary to the Cassandras' often self-aggrandizing proclamations, success in the investment game is not about "being right." It's about making money for your clients, whether you are right or wrong.

Is the Bull Back? The Real Lesson

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Listening to opinions about where the market is headed is like eating junk food. It may satisfy a short-term craving, but if your diet consists of little else, it's going to seriously impair your long term (investment) health. The top investors adapt their investment strategies to changing circumstances. The Cassandras' strident pessimism notwithstanding, this time around it has been the bulls who have made all of the money in the markets in 2009. Maybe the Cassandras will be ultimately vindicated in their views. Maybe not. In the meantime, focus on taking advantage of whatever opportunities the market offers you. It's much more lucrative than constantly trying to prove to the world how "right" you were all along.


Nicholas A. Vardy
Editor, The Global Guru

P.S. If you want to take advantage of opportunities in financial markets, wherever they may be, look no further than my trading service Global Bull Market Alert. Having booked profits of 41%, 36.3%, 34.2%, and 21.9% over the past few weeks, I'm looking forward to a strong fourth quarter for Global Bull Market Alert subscribers. Join us by signing up for Global Bull Market Alert today.

P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.

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