2. "Research" is to contemplate the possibility that, intuitively, you may not know the answers, and worse still, you may not even know the questions. Information insightfully interpreted will help avoid being caught in a position where you can lose a lot for reasons not understood. Try to avoid making the facts fit the theory, especially in relation to timing. Speculation is not investment.
7. Human behaviour cannot be predicted. Distrust anyone who claims to know the future. Chaos is not dangerous until it begins to look orderly. Beware the historian’s trap, beware the chartist’s illusion.
8. Long range plans engender the dangerous belief that the future is under control. Try to stay flexible, open minded and sceptical. Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognise when you have made a mistake. In a bull market focus on price & momentum, a bear market focus on valuation.
Ecinya Investment Rules #2, #7 and #8. The entire 10 are under Market Wisdom.
People who make their living looking into crystal balls are destined to eat a lot of broken glass.
Larry Williams: "Long-Term Secrets to Short-Term Trading", 1999.
Fascism was really the basis of the new deal.
A misguided Ronald Reagan in exaggerated prose, 1976.
None of us really understand what’s going on with all these numbers.
David Stockman, Budget Director under Reagan, 1981.
It’s a very good question, very direct, and I’m not going to answer it.
George Bush l talking about deficit-reduction, 1990.
The promises of yesterday are the taxes of today.
Canadian prime minister Mackenzie King, 1931.
All of the political quotes above are taken from "Political Babble", 1992.
The impact…. of the problems in the sub-prime market seems likely to be contained.
Ben Bernanke addressing Congress, March 2007.
From a technical perspective the recession is very likely over.
Ben Bernanke, 15/9/2009.
ECINYA COMMENT
INTRODUCTION
Since we penned ‘Time to pause’ on 25 August and ‘Pendulums swing, imbalances ebb and flow; and the band plays on’ on 15 September, the All Ordinaries has risen about 6% and the S&P 500 (our global proxy) has risen 3.5%, and only 7% from its relatively minor pull-back of 2 September. So, in essence, we have been wrong for about the past 4 weeks. This should convince you that Ecinya is NOT in charge of what goes on in the market. However, using our Tactical matrix (outlined below) we have stayed engaged in the market (moving in and out of cash) and the Cactus Portfolio is some evidence of that.
SUMMARY CONCLUSIONS
Progress is not linear; progress is uneven, given to bursts, followed by retracements. As the underlying trend keeps you on the bus, stay alert and awake lest you miss your ultimate stop.
We are (globally) in RECOVERY mode. True, but not without caveats. There are many balls in the air.
- The economic variables are GDP, inflation or deflation, employment, stimulus packages, mooted exit strategies.
- On the bourse itself there is hedge fund activity lacking transparency, accountability, and regulation.
- In central banking we have seemingly cosy connections with elected officials lest we scare the chastened consumer retreating from the abyss of excessive borrowing and minimal savings.
- In commercial banking we have government guarantees and equity recapitalisation to offset loan write-offs. Yet we feel that losses are under-provisioned and central bankers are acting as lenders of last resort; lending at favourable interest rates to allow time for economic recovery to drive profits to further assist bank re-capitalisation.
- American-style banking seems bizarre: of the 8,133 US banks, 2,256 are said to be severely distressed, equivalent to 28% of the banking universe and up from 17% (1,458) a year ago (data courtesy of Institutional Risk Analytics USA). It seems to us that if you are ‘too big to fail’ then you are too big to exist, and we note Glenn Mumford’s article on page 23 of today’s AFR is pertinent to this debate. If America wants to maintain its position as the world’s reserve currency it cannot have a dysfunctional banking system.
- At the corporate level the stress of past mistakes is being relieved by equity injections at deep discounts and a significant number of executives taking comfortable retirement packages to soften admissions of failed strategies through debt-funded acquisitions.
- At the political level there has been major changes in the developed world. The four brothers (BROS) have emerged, each spruiking the concept of global engagement and partnership in response to the FCS ‘crises’ – Financial, Climate, and Security ( terrorism). These brothers in arms are Brown, Rudd, Obama and Sarkozy. If summit verbosity, photo-ops, learned reports and statements of intent were part of global GDP, the growth number would be 5% in perpetuity, rather than the sub-optimal 2% consensus number we are looking at.
President Obama needs to transition from style towards substance, from celebrity status to management effectiveness. We take considerable comfort in this week’s abandonment of the ‘silly’, Star wars European project, which was described by Joseph Cirincoine in The Australian on 21/9/09 as "Obama replaces a system that did not work against a threat that did not exist with weapons that can defend against the real Iranian missile capability". Obama’s decision was supported by Defence Secretary Gates, a George Bush appointee who continues in office under Obama.
STRATEGY versus TACTICS
Strategy: Our definition of long-term is 1-2 years, medium-term 6-12 months, and short-term 1 week to 6 months. But all of our views are rolling views, so that we can hold the same 2 year view for the next 5 or 6 years. But, at the moment, we are not comfortable with either our own views or anyone else’s view beyond about the next 2 years. There are always too many variables, and now that hedge funds trade significantly in advanced and liquid markets, volatility is simply a fact of life. At the transition stage from recovery to sustainability, the underlying narrative can swing quickly from bullish to bearish and vice-versa.
Thus, our strategy is to build core holdings over a bullish-cycle and trade around the edges of those holdings to achieve out-performance. At the same time we are likely to buy a few stocks that we do not wish to hold longer-term, but are relatively ‘cheap’ in context of where the market is, at any one time. We tend to sell such stocks early, or if new information unfolds, re-assess their longer-term potential. Many have said “If new information appears, I change my mind… don’t you?”
We tend not to focus on sectors in the Australian market because Australia is such a relatively small market, thus only a few stocks are dominant in any sector. Hence our focus is stock-specific, not sector specific. We do not invest or trade offshore. We don’t have the appropriate contacts or depth of knowledge; currency risk is an obvious impediment. Essentially, we do not wish to ‘lose a lot for reasons not understood.’
Tactics: We have mentioned this on several occasions since the web-site published on 28/07/09. Our tactical stance is –
1. Going with the flow, with conviction.
2. Going with the flow, without conviction.
3. Going against the flow, with conviction.
4. Going against the flow without conviction.
5. Ambivalent, uncertain, relatively clueless.
BULL VERSUS BEAR
We are not ‘bulls’ and we are not ‘bears’. We either believe the market is going UP, DOWN, or SIDEWAYS. If it is going sideways then we will have a view that it is going to break to the upside or to the downside, but generally will not act decisively (with gusto) until that break-out or break-down is confirmed by market action. If we believe the market is going up we describe ourselves as ‘bullish’. If we believe it is going down we describe ourselves as ‘bearish’; being a ‘bull’ or a ‘bear’ is a generic condition and inhibits flexibility. We are not in charge of the world or the markets and our opinions and actions are hardly likely to influence events. But in our modest way we are players and we always remember: “The game is greater than the player”
DAVID BABSON’S RULES:
1. Markets are unpredictable and ill-suited to forecasts
2. Long-term fundamentals are key
3. Investor emotion leads to volatility
4. Valuation discipline should guide investment selection
5. Perspective and patience are rewarded
All of that having been said, we still make forecasts or develop views; long-term fundamentals are under constant review; other people’s emotions should be of benefit to the unemotional; we have a robust valuation discipline; and though we have a perspective we often fail to be patient. Patience is NOT one of our virtues, but we have learned to live with this behavioural imperfection.
THIS ALL LEADS BACK TO THE RECOVERY BUS
The bus is part of the public transport system, often regarded as inherently unreliable. The bus crew is the BROS (the brothers Brown, Rudd, Obama, and Sarkozy). Mr Rudd wants to be the driver but the others know he is from Queensland and so he is just the ticket collector, but he has a smile for all of the passengers and they are feeling good. He has mentioned his experience with Toyota utility trucks, but that has not swayed the other brothers to let him have the wheel.
- Using our global proxy, the S&P 500, the bus started its journey at 676 on 9 March and continued for 43 days at an average of 150 basis points per day. Let’s describe this metaphorically as 150 people went along for the ride.
- The bus paused for 5 days to re-fuel and have a barbeque and resumed its journey on 18 May getting to the next stop on 12 June, a further 60 people came on board.
- There was a 20 day stop-over and 64 people got off to wait for the next bus. Kevin thought about getting off as well so he could drive this bus, but decided to stay with the other brothers. He said ‘In every crisis journey the brothers must act as one, and stick together."
- From 13 July to 21 September (just yesterday) the bus arrived at bus stop number 3 after 51 days with another 75 people on board. The bus is getting a little crowded and though the number of new passengers is half of the first journey, everyone is having a good time, including Kevin because we have landed in Washington.
THE MESSAGE
There is a time to be on the bus, a time to get off; have some knowledge of who is driving; watch for road rage and other erratic behaviour; sometimes get off and wait for the next bus.