Saturday, November 8, 2008

Thinking Long-Term: Secular Bear Markets

Fear has gripped world markets, world governments, and pretty much everybody around the world. This economic disaster is the result of the excesses that the world enjoyed throughout the 80s and 90s. We are now paying for the leverage and lending bubble that developed, as people tried to keep the party going. Now, everyone's scared that the world will end up in a long-drawn recession, or much, much worse (I'm just as worried as everyone else). If you've been reading this blog, you can see that I hedged myself against a market meltdown, which we experienced over the last 6 weeks. Contrary to most, I'm feeling much better now than I did then.

I have been a proponent of the "Dow Theory". Essentially what this stipulates is that the market goes through cyclical ups and downs over the short-term, and secular ups and downs over the long-term. These cyclical movements can result in 3 month to 6 year trend movements in the markets, whereas longer term secular movements can result in 7 to 25 year longer term trends. In a secular bear market, the markets can move in cyclical bear or bull markets, but ultimately the market cannot break its former highs. Make no mistake of it, we are in a secular bear market, and have been in one since the dot-com crash in 2001. The S&P 500, the 500 companies deemed to represent the U.S. economy best, has not been able to break the 1,580 to 1,600 mark for the last 8 years. Over this time, the world economies have been growing dramatically, but as a result of huge P/E ratios and expectations in the late 90s, early 2000 period, we are going through a period of consolidation in the marketplace. Ultimately, in general, historical P/E ratios reach the single digits before the market can once again proceed forward into a new secular bull market.

In essence, the businesses are catching up to the lofty expectations in the 90s. It's as though the market was the driver in a very serious car accident. While the accident only takes a moment, it takes years to resusitate, rehabilitate, restrengthen and renew the driver and his/her health and confidence before we can move forward. However, ultimately, before the renewal of the driver's confidence, we know that their health is no longer in question. The market will get project this health much sooner than we as individuals get the confidence to fully invest again. We must be willing to step in front of the train with the hopes that it will stop before it hits us smack in the face (figuratively-speaking of course).

I'm not calling a bottom, nor am I saying I have closed all my hedged positions (buying ETF's that move inverse to the markets). What I am saying is this: even in the 1930s, the bottom happened within 3 years of the start of the Depression. If you have a longer-term outlook, you have to be compelled into investing somewhat into the markets. I have been slowly closing hedges, and buying equities. Mostly, this equity is in low debt stocks or large-capital stocks that will continue to sell goods the world needs.

Within the rubble of any disaster lies the tools, lessons and catalysts for the next great growth period. In this market, there are companies that will become the next great stocks to hold as the market starts to move upwards again.

1 comment:

shady said...

nice post, I fully agree, but then you already know that.