1. 1982 or 1974: I have been drawing parallels recently to earlier stock market bull and bear cycles, and comparing those to the current patterns. This is more than a historical exercise. The cyclical bull cycle of 1974 to 1976 was a temporary respite in a long term secular bear market. It was the worst phase of that long term bear market cycle (i.e. between October 1973 to October 1974), but there would be another six years from the end of the cyclical bull around mid-1976 before the bear market would give birth to a long term bull market in the summer of 1982. In 1973 to 1974, the S & P peaked at 120 in January 1973 and slid to a low of 62.28 by October 1974. dshort.com A cyclical counter-trend rally ensued that took the S & P 500 into a double top formation in 1976 at 106.8 in September and 107 in December 1976. Just measuring the percentage gain in the 11 months from the 62 low in October gave me a 72% gain. Where was the S & P 500 almost six years later in July 1982? The average was floating around the same level of 107 in the summer of 1982 as the double tops reached in 1976.
The lows in the summer and fall of 1974 would have been a time for long term investors to take some positions for the long haul, provided they had strong hands and even stronger stomach to weather another six or so years of long term bear cycle. By long term bear cycle, I am referencing a period where the market has a lot of up and down cycles but ends up after more than a decade about where the prior bull cycle topped out. So, a bear cycle started in the 1960s, as the bull market which started after WWII petered out. In November 1968 the S & P 500 hit 108 where it ended up in July 1982. That is a long time going nowhere on a wild roller coaster. I would start that bear cycle earlier, in January 1966 when the S & P hit 93 looking at a long term chart with monthly closing data, so almost a 16 year bear cycle from January 1966 to August 1982. Based on the way that I am defining bull and bear cycles, this is the way I break down the periods since 1950:
1/1/1950 to 1/1966 Long Term Secular Bull Market:
1/1966 to 8/1982 Long Term Secular Bear Market
8/1982 to 11/1997 Long Term Secular Bull Market:
11/1997 to Current Long Term Secular Bear Market
(the data from YF starts with 1950 but I think the bull start a few months earlier) I would suggest drawing charts of the S & P 500 with the time frames outlined above and you will see what I am talking about here. When I look at it this way, the cycles are about 15 to 16 years in length. So that would mean the end of the current one in 2012 to 2013 rather than 2018 as suggested by David Rosenberg in his interview in Barron's this week. Rosenberg refers to 18 year cycles, which can not be made to work from my point of view. Barrons's & David Rosenberg/
So, the question that I am posing, and no one can answer with any degree of certainty, is whether we are in a pattern now similar to the one in 1974 or one similar to the onset of a new long term cyclical bull market as shown in a similar spurt off the August 1982 lows into 1983, which was just the first of many legs up.
Anyone trying to predict the future is guessing. The first and most important question to ask yourself is whether the world has repaired all of the problems that caused the bear market, and the damage left in its wake? The origins of, and fuel for the current bear cycle, and the primary impetus for the last bull cycle, are one and the same-growth generated by borrowing ever increasing sums of money. Item # 2 What Will Produce Growth after the Age of Leverage? Consumers may need years to repair their balance sheets, and it is difficult for me to see how the American consumer can resume spending in such a way as to fuel a sustainable degree of GDP growth for at least three years, and that assumes a continuation of the current trend where consumers increase their savings and reduce their debt. The U.S. government can not continue spending every year 1 to 2 trillion dollars of borrowed money to fill the void left by private demand, as the U.S. lives beyond our means by devouring the world's accumulated savings. And all of those trillions of toxic assets are still out there. So, those factors in a big picture kind of way suggests that the current rally will end up being more like 1974 to 1976 than the start of a long term secular bull market circa 1982. The main difference is that the 1974 to 1976 rally occurred mid way into the bear cycle whereas the current rally is hopefully closer to the end game.
If I am correct about the parallel to 1974 to 1976, then the current rally may continue with a continued flow of positive information through the remainder of 2009 and into 2010, maybe as far as the Fall of 2010. A continuation of the rally into 2010 will have to be far more subdued, perhaps another 10 to 15% gain through the middle of 2010. Then, the question will become what will replace all of the government spending worldwide, from China and Japan to the U.S.? One avenue of growth, reckless spending by debt ladened Americans, does not appear to be a likely source of that renewed growth.
The worst is probably already behind us, which was the case with the low hit in October 1974. Once the current cyclical bull market has run its course, it will not be replaced by another move to the March low but by much meandering up and down in a channel for two or three years, possibly in the 900 to 1100 range for the S & P 500, with a spurt or two to 1200. This would mean that the bear cycle will end in two to three years somwhere in the 950 to 1050 range. Looking back when we are in 2012 or 2013, we will see that we had returned to where we were in 1997. If anyone tries to predict the future, predict often which will improve one's chances of being right once, but that is my current prediction for the next three to four years.
Historical cycles have a way of repeating, though it is difficult when you are living through one to see the big picture unfolding. When you look back on what happened in the housing and mortgage market in the U.S. between 2002 through 2007, was it really that difficult to predict the end game? Wasn't it obvious? These bull and bear cycles repeat themselves because humans, as a collective, fail to learn from their mistakes, though a limited number of Cassandras will always be out there warning of the dangers and suggesting ways to avoid them in the future, which unfortunately will be ignored, or forgotten, or repealed with the passage of time even if implemented, as were many of circuit breakers and rules promulgated in response to the frailties of human beings learned by the WWII generation from the last Great Depression. So 15 years is a good rule of thumb to use, based on historical evidence, for the time it normally takes for the world to recover from the problems arising in the bull cycle.
One reason to think a lot about the big picture is that any successful asset allocation has to move from the top down. Simply defining a period as a long term secular bull or bear market will impact my trading strategy. I become much more sensitive to shedding stocks in a long term secular bear market during cyclical up moves which may last less than a year, though longer periods of an up cycle are possible followed by a loss of those gains when the bear reasserts itself. All of the gains in the last cyclical move between 2003 to October 2007 were lost when the bear reasserted itself. We are currently below the level in the S & P 500 reached on January 2, 1998. In the summer of 1997 the S & P was meandering in the mid to high 900s. Asset classes that are strongly positively correlated during a cyclical up cycle in a bear market will need to be assessed together for possible trimming unless there are strong reasons for separating them. An example would be emerging market stocks and U.S. stocks during the cyclical bull phase between 2003 to 2007. Emerging Market Currencies and Bonds as Non-Correlated Asset Classes/Links to Performance Data on Target Funds & More on Their Many Failures A high correlation to U.S. stocks led me to eliminate all but 100 shares of one emerging market fund prior to 2008.
2. Mueller Water (owned-LT): Mueller was able to sell 32.28 million shares at $4.75, and stated that it will apply all of the proceeds to reduce its indebtedness under its credit agreement. Mueller Water Products That is fine with me, since I view debt as the problem with MWA.
3. Preferred Stock Dividend Declarations: Glimcher, S L Green and Lexington Realty declared their regular preferred stock dividends, going ex later this month. I have mentioned the GRTPRF at $2.9 several times which results in a 75% annualized yield based on my cost, with the quarterly penny rate at $.5469. The S L Green Preferred shares have been bought and sold several times with my current position in the "C" series with a quarterly penny rate of $.4766. I also still own the common shares which have just about quadrupled from my buy at $15, closing yesterday at $43.42, though I am down to just 25 shares on a chicken buy during the dark period earlier this year. Add 25 SLG/DD, VZ, GLW/PIS The preferred shares have about doubled from my buys at $10.5 and $11.39 Bought SLGPRC: Buys ... SLGPRC The annualized yield is around 17%. The Lexington preferred is a LT bought at $7 with a quarterly penny rate of $ .4719 and an annualized yield at my cost of around 27%. Buy 50 LXPPRD, Lexington Realty At some point, I was contemplating selling it to buy the common which is trading in the $5 range but have not made a decision yet.
I also noted on the WSJ dividend page the one of the closed end funds that I own which pays a monthly dividend, EOI, from Eaton Vance goes ex dividend on Monday at the current penny rate of $.137. I am not 100% sure but I think that one was bought in late 2007. It was part of a strategy that failed miserably soon after the Lehman failure. I have discussed this saga before several times. I correctly anticipated a bear market but did not predict its severity. So, I sold stocks and mutual funds and used some of the proceeds to buy closed end investment funds that pay good dividends that I would reinvest to purchase shares during the down cycle if one materialized. I would emphasize also funds that used options to control or limit downside risk which is the case with EOI. If I was wrong about the bear coming, then I would still be able to participate. If I was correct, then I would be buying more shares frequently during the down cycle which would later prove advantageous. Maybe the strategy worked okay to October 2008, then it failed big time, with the closed end funds suffering a double whammy, a fall in asset prices and a widening of their discounts to Net Asset Value. Some with leverage suffered a triple whammy. CLOSED END INVESTMENT COMPANIES: Hopefully Lessons Learned and To be Applied Buy High & Sell Low /Retrospective on the Good & Bad But, I stayed with EOI because it has maintained its dividend, though I did quit reinvesting the dividend a few months ago. I would not touch it now however since it is selling at a premium to its NAV. Eaton Vance Investment Managers - Enhanced Equity Income Fund This is a link to the SEC filing for EOI containing a list of its holdings as of 6/30/09: nvq The covered call options are written on individual security holdings rather than indexes which is what ETW, also owned, seeks to do. (see page 12: Eaton Vance Tax-Managed Buy Write Opportunities).
4. Zion's Capital Raise: Zions announced that it has hired Goldman to sell up to 250 million in common stock, which the company "may" offer to sell from time to time. Prospectus Supplement Zions Zions will also seek to sell some senior notes to mature in 2014. This is a link to the preliminary prospectus: Prospectus Supplement
I own 100 shares of ZBPra, an equity preferred issue bought at $7.8 and 50 shares of a Trust Preferred recently bought at $19.9, ZBPRB. I checked the current ratings on ZBPRB and it was rated as junk by the rating agencies, with Moody's giving it a Caa1, Fitch at BB+, and S & P at B. Welcome to Zions Bancorporation This is a link that explains default risk by rating for S & P and Moody's: Default The Zions issues are high risk, and I may not add to the small current positions by buying 50 ZBPRC as I contemplated doing if the price fell closer to $20. I will probably wait until I have an opportunity to read the next quarterly report before making a decision on buying just 50 shares of that high yielding equity preferred stock.
It is only a question of time before one of these junk type credits blow up in my face. That is one reason for keeping my exposure to them low. It is not a reason to avoid them altogether. Some of largest gains in the bond area have come from junk credits, including Hertz, Ford Motor Credit, and the preferred stocks rated well into junk.
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