Craton
Mostly passive, contrarian.
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- 6 February 2013
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Thanks McLovin, food for thought right there especially for those with a long term view.
Just BTW, that thread might want to consider the imbalance between the shape of the Australian economy and the earnings in the index before drawing tight outcomes from the analysis and macro settings like GDP/Capita etc. Need to allow for resource demand not being Aust sourced and additional capital requirements for banks etc. Might already be obvious to them.
XAO & lots of other markets are looking reasonably grim
However I'm not sure they will be come home to roost until the next global recession hits, which U.S indicators suggest is not happening anytime soon.
Since October, the economic evidence has shifted from supporting a growing risk of recession, to a guarded expectation of recession, to the present conclusion that a U.S. recession is not only a risk but an imminent likelihood, awaiting confirmation that typically only emerges after a recession is actually in progress. The reason the consensus of economists has never anticipated a recession is that so few distinguish between leading and lagging data, so they incorrectly interpret the information available at the start of a recession as “mixed” when, placed in proper sequence, the evidence forms a single, coherent freight train.
While I’m among the only observers that anticipated oncoming recessions and market collapses in 2000 and 2007 (shifting to a constructive outlook in-between), I also admittedly anticipated a recession in 2011-2012 that did not emerge. Understand my error, so you don’t incorrectly dismiss the current evidence. Though not all of the components of our Recession Warning Composite were active in 2011-2012, I relied on an alternate criterion based on employment deterioration, which was later revised away, and I relied too little on confirmation from market action, which is the hinge between bubbles and crashes, between benign and recessionary deterioration in leading economic data, and between Fed easing that supports speculation and Fed easing that merely accompanies a collapse.
Much of the disruption in the financial markets last week can be traced to data that continue to amplify the likelihood of recession. Remember the sequence. The earliest indications of an oncoming economic shift are observable in the financial markets, particularly in changes in the uniformity or divergence of broad market internals, and widening or narrowing of credit spreads between debt securities of varying creditworthiness. The next indication comes from measures of what I’ve called “order surplus”: new orders, plus backlogs, minus inventories. When orders and backlogs are falling while inventories are rising, a slowdown in production typically follows. If an economic downturn is broad, “coincident” measures of supply and demand, such as industrial production and real retail sales, then slow at about the same time. Real income slows shortly thereafter. The last to move are employment indicators - starting with initial claims for unemployment, next payroll job growth, and finally, the duration of unemployment.
Memo today from Howard Marks: What Does the Market Know?
https://www.oaktreecapital.com/insights/howard-marks-memos
fair and I will add oil debt default so 2018 target probably right1 reason to be a long term bull, is that the ASX Total Returns has quadrupled your investment within 10 to 30 years at every moment in history (from around 1900 onwards).
At the same time I don't like the cycle phase for the next 2-3 years. Factors such as Interest Rates, US Market Valuations, US Earnings / Margins / ROE, Australia World Record Years Without Recession, Australia House Prices and Mortgage / Debt to Income Ratio, Bank Bad Debts etc...
I think I'll be an XAO bull in about 2018.
Hussman has been calling for it for 5 years.
He could possibly be right (I do believe in a lot of the indicators he uses) but his timing has shown to be terrible.
Not saying I know any better, but track records are what they are.
In late-2008, with the market down more than 40%, we made an initial shift to a constructive position, though still advising a line of index put option defense, which helped enormously in what followed (see Why Warren Buffett is Right and Why Nobody Cares – and read that piece carefully if you incorrectly believe I am a “permabear”). That shift was based – not surprisingly – on a significant retreat in valuations coupled with an early improvement in market internals. The problem was that measures of “early improvement in market internals” which proved quite reliable throughout the post-war period proved to be inadequate during the credit crisis of late-2008. As we discovered when we took our methods to Depression-era data, they performed fine overall, but they were repeatedly whipsawed in that data and allowed intolerably deep - if temporary - drawdowns along the way (as did popular trend-following methods).
So our partial shift to a constructive position was followed by an awkward stress-testing transition to ensure that we could navigate Depression-like outcomes (we called this our "two data sets problem" at the time). The immediate effect was a significant “miss” in the interim that both our pre-2009 methods and our present methods – had they been available at the time – could have captured. That transition was further complicated by quantitative easing, which required us to essentially reintroduce certain bubble-tolerant features of our pre-2009 methods. That said, nothing in the historical record indicates that we should be tolerant of present extremes.
The reason we repeatedly discuss our stress-testing challenge earlier in this cycle is not to excuse the missed returns that resulted. Rather, the point is to underscore that investors should not infer, based on that miss, that present market risks can be safely ignored. I’ve got very thick skin for criticism of what I viewed as a fiduciary duty to stress-test our methods earlier in this cycle. Go at it, but understand that none of those criticisms alter objective historical market evidence, or make the present situation any less likely to result in deep stock market losses.
I sat down and read this and while most of it is commonsense market understanding that people should absorb, I actually disliked the article.
So OakTree went long in 2008 lows based on their assumption the market was over-reacting and it paid. Good for them. But the way the article portrays it is as if this was anything other than a big fat assumption (read: gamble) and that it made more sense than following along in the panic.
Of course Mr Marks can say that kind of thing now, and appear a brilliant contrarian stoic in the face of the average investor hobbled by crowd psychology.
Unfortunately, Mr Marks glosses over the large subsidy paid into his coffer by the Government bail outs, pump ups, guarantees and changes to the rules of the game. Where would he be if FASB had not suspended mark to market? Probably not enjoying an audience for newsletters of his carted out fund. Does he really believe that it is a coincidence that the day of the rules of the game being changed is precisely the same day that risk bottomed and reversed to form a 5 year low?
I call horse**** on that whole attitude, which IMHO should be significantly less smug and significantly more cognisant of the massive role of the Government sector in influencing outcomes.
As someone with some experience in quantitative analysis, who has looked over the evidence, I also think the dismissal of "basing ones actions on what the market knows" is equally horse****. The market knows plenty and there are reams of supporting evidence for such a claim.
Is the low in?
My very basic understanding in this area makes it think it is for the medium term.
ASX heavily weighted to the resource industry and the banks. Commodities appear to be finding support and the "housing bubble" seems like it may never pop.
A few big IF's, but appears the falls in commodities are priced in and there is little downward pressure on the banks. Until something changes like a new credit squeeze the low is in......maybe.
Looking at a chart I get a very different feeling
Is the low in?
Is the low in?
My very basic understanding in this area makes it think it is for the medium term.
ASX heavily weighted to the resource industry and the banks. Commodities appear to be finding support and the "housing bubble" seems like it may never pop.
A few big IF's, but appears the falls in commodities are priced in and there is little downward pressure on the banks. Until something changes like a new credit squeeze the low is in......maybe.
Looking at a chart I get a very different feeling
XAO is still in a downtrend at the moment nothing has been confirmed as yet that the move down has completed.
Although we have also been moving in a sideways pattern as well starting back in August 15 and trading in a range of 4900 and 5400.
As Craft also mentioned that it did break lower but did manage to close above the 50% retracement level.
My view at this stage is that we need to stay above a close of 4896 for the XAO and close above 4880 on the XJO otherwise we will head lower.
Downtrend?
You must be lost and not realise you’ve wandered over to the long term threads. A little change of perspective and you might just spot a century plus uptrend.
A counter-trend to the uptrend – perhaps I could concede that.
A little while ago breaking of the August lows was the signal for all the chart predictors to call for lower prices (and we may still get them) – but in watching the price action instead of trying to predict what’s next, I find its resilience here in the face of lots of gloom and a technical chart break that was seen as significant at the time (before it didn’t follow through) as interesting. But maybe I’m just searching out confirmation of my reasonable value at these levels bias.
Some significant buying against the prevailing mood must have occurred to have price return to the range - why would they do that if the only thing that matters is the "current" trend is down? Oh wait there- its because its technically oversold of course - that's why I bought.
A little while ago breaking of the August lows was the signal for all the chart predictors to call for lower prices (and we may still get them) – but in watching the price action instead of trying to predict what’s next, I find its resilience here in the face of lots of gloom and a technical chart break that was seen as significant at the time (before it didn’t follow through) as interesting. But maybe I’m just searching out confirmation of my reasonable value at these levels bias.
Some significant buying against the prevailing mood must have occurred to have price return to the range - why would they do that if the only thing that matters is the "current" trend is down?
Oh wait there- its because its technically oversold of course - that's why I bought.
As you mentioned, this is a (your) long term thread, so I'm wary of derailing. However, some care is needed when qualifying the aggregate statements "for all the chart predictors". Personally I watch the US markets (especially S&P500) as global risk proxy so most of my analysis (re breadth, vols, etc) are in that regard, even though I'm holding only a small amount of US stocks relative to mostly AU stocks.
It's pretty clear at this point that things aren't moving in lockstep. e.g.:
NASDAQ-100: Jan lows a full 5% above Aug lows.
S&P500: Jan lows pierced the Aug lows and held.
Russell 2000: Broke down pretty severely from the Aug lows in Jan by more than 10%.
S&P ASX 200: Jan lows pierced the Aug lows less severely than the S&P500 and held.
Nikkei 225: Jan lows about 10% lower than Aug lows and lots of intervention jawboning from BoJ.
FTSE China 25: Jan lows also down about 10% from Aug lows.
etcetera. So in some cases the "gloom" was less misplaced than in others and the significance of the Aug lows depended entirely on which chart, but you are reading it all and interpreting through the lens of your own portfolio which probably resembles most indices in only a minor fashion.
Obviously in that instance the utility of a random selection of ASF predictions will be quite low for you, especially in providing any form of confirmation of anything.
Do you mind explaining why it must be significant buying? Why not a cessation of selling pressure and drift higher? Or short covering which must necessarily abate? Or whatever. Strange to hear you referencing a mystical "they" after reading the OakTree note you linked which tries to hammer home the point of aggregate market pricing.
FWIW, in the interest of clarity, I define "oversold/overbought" rather simply as the position of current closing price in relation to the 20, 2.0 bollinger band and look at that across 3 timeframes (daily, weekly, monthly). It's a useful technical description of the location of the current price.
What one does with that description is entirely a matter of the strategy employed - a quantification, not a prescription - OB/OS will be close to breakout levels for some, a fade entry for others, signal to rebalance for some and ignored completely by others.
I guess one mans horse**** is another mans gold (and visa versa)
I spotted the following 2009 article linked on ZH today and immediately thought of my horsegold rant.
Will just leave this here...feel it applies just as equally to the likes of Mr Marks/OakTree.
http://blogs.reuters.com/rolfe-winkler/2009/08/04/buffetts-betrayal/
I read the false break as one small piece of bullishness which is out of sync with the rest of the generally prevailing mood.
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