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January 21st Presidential Staff Meeting

Please pardon the language but I could not resist posting the cartoon above. Hopefully things aren't so dire for the new administration, but it's nice to have a chuckle none the less...

Investor Complacence?

A lot of individual investors have been significantly impacted by the simultaneous drop in housing, stock, and bond prices over the past year. Almost to a person, their investment strategy has been to stick with their investment mix, convinced that "things will eventually turn around".

The key word, of course, is "eventually". Stocks didn't overtake their 1929 highs for decades; by 1982, stocks--on an inflation-adjusted basis--had lost well over half their value relative to 1966. Japan's Nikkei stock average, depicted above in the chart from Decision Point, has made recent lows, having lost about 75% of its value since 1989. That's going on 20 years of severely negative returns.

In all of those markets, there were solid countertrend rallies offering attractive opportunities for traders and active investors. Among those investing over the long haul, however, I detect a shocking complacence and a complete absence of planning for worst case scenarios. Although Japan's long-term experience with going into profound debt in the name of quantitative easing has not been a formula for favorable stock market returns, U.S. investors seem singularly unconcerned about a replay.

Bursting of the Oil Bubble

It took only 5 months from the $147 high hit in July, but crude oil is now at 7 year lows and has declined 76% from it's all time highs. This bubble burst is on par with the Nasdaq bubble of the 1990s (Nasdaq fell 80% although it took it 2 years to do so).

Risk Management (the Dilbert Way)

The expected return on stocks looks better now than it has in decades. The chart above shows the rolling 10-year annualized return on large cap U.S. stocks. As you can see, the most recent 10-year annualized returns on large cap stocks through Sep 30th were very weak at around 2% (through Nov 30th they were roughly flat). Large caps have touched these levels 4 previous times since 1827 and each time the fortunes of large cap stocks were to turn quite strongly for the better. Like the economy, the market tends to move in cycles.

Bailout Socialism

Sign of the times?