Saturday, September 12, 2009

Barrons's & David Rosenberg/Democratic Party and Student Loans

1. Barron's Features -AGAIN-the Moving Target Bear David Rosenberg: It is important to keep track of the moving target predictions of a bird like David Rosenberg, who has almost been single-handedly elevated into a stock market guru by Barron's and Alan Abelson, the magazine's Ghoul in Chief. Maybe I have overstated the cause and effect. If you predict often to the press, one of your predictions will come true, at which time you will be elevated into a savant, a fortune teller par excellence, and no one would be so uncouth as to mention the ones that did not turn out so well. But, with David, I am trying to keep track of what he is saying now since Barron's gives him such prominence.

After a 50% or so rally off the March lows, David is now saying that he would be much more interested in the market upon a pullback to 840-850 from the current level of 1025. (Page 3: Barrons of interview). Okay, so would just about anybody other than Abelson who is still waiting for a retest of the 1932 lows. But you have to remember what he was saying just before the market took off. He was recommending treasuries back then, arguing that an S & P 500 at 660 or so did not fully discount all of the bad economic news that David saw in the world. In short, he recommended against buying stocks in March 2009 at a much lower level than 840-850. I would recommend reading Alan Abelson's column again from the March 9th weekend that quotes Rosenberg and his interview with Business Insider later that month, where he said that he would not be surprised by a fall of the S & P 500 into a 475 to 650 range for an extended period. Both are linked in some earlier discussions made in my blog:

Link to March 9th Abelson Column: Barrons.com
Link to Rosenberg's interview predicting a fall to S & P 475 to 650: Rosenberg
Rosenberg continued his bearish commentary on stocks in Abelson's column from May 31st: Barrons.com

This is a link to a Fast Money Video in late June where Rosenberg was still singing his bearish tune: CNBC.com He then expected a "fractionally positive" GDP in the 3rd quarter of 2009 due to restocking, and then a relapse in the 4th quarter. Though he was reluctant to stand by his March prediction of an S & P at 600 by October which was starting to look asinine.

As you would expect none of those forecasts are mentioned in this weekend's puff piece from Barron's.

I thought that I would just note a few other Rosenberg predictions. He forecasts anemic GDP growth in the 1 to 2% range in 2010 and a decline of "roughly" 2.5% in 2009 (page 1, at the bottom). He contends that we are about half-way into an 18 year secular bear market. (page 3) This would mean that he is starting the bear market in 2000. In a long term secular bear market, rallies have to be "rented", not "owned" according to Rosenberg. In other words, Rosenberg is saying: do not buy long term positions in a secular bear market which is just silly. Lastly he then asserts that it is in a secular bull market where corrections are opportunities to build long term positions. That is true up to a point.

I would ask those familiar with long term stock market patterns to think about David's advice about when to take long term positions. First, I agree with him that individuals need to be far more aggressive traders in a long term secular bear market. Long Term Stock Risks and Situational Risk/Managing Lost Opportunity Risk in a Long Term Secular Bull and Bear Markets/ Novartis or Sanofi And, the investor has to be more willing to own bonds regardless of their age and risk tolerance. On the other hand, it is during the worst phase of the bear market that long term positions need to be acquired and held for the next bull market. The real money is made not so much by buying a 20% dip as in October 1987, and then selling the position. Instead, the real money is made by buying after a 60% decline during the secular bear market, and then waiting for the next long term secular bull to show its age before selling or paring. That does require strong hands and patience.

I currently classify the last long term bull market in stocks as starting in 1982 and ending in 2000, but I am starting to lean toward starting the current bear cycle in 1997. The bull cycle which started in August 1982 replaced a bear cycle where the averages hardly budged from the mid 1960s to 1982. When these dominant cycles get long in the tooth, which usually means 15 to 18 years (no requirement on length of time), then that is one reason to change an asset allocation by moving more into stocks at the 15 year mark in the bear cycle and out of stocks in the 15th year of a super bull cycle. The VIX Asset Allocation model that I use to assist me in making allocation decisions would have flashed Trigger events in 1997 and 1998, and 1997 was fifteen years after the start of the secular bull cycle in 1982. The 1997 to 2000 period, which was the death throes of the secular bull, is discussed in this Post: BEEPRA/ VIX/BOUGHT LXPPRD/ More on VIX AND ASSET ALLOCATION The Trigger Events in 1997 and 1998 disrupted the Stable VIX Pattern in existence since 1991: VIX and S & P Compared 1990 to 1997 ( See also,Multiple Confirmations of VIX Model-Canary in a Coal Mine VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern Vix Asset Allocation Model Explained Again, this is not a hard and fast rule, since flexibility is always important, but history does signal a need to be more alert about asset allocation changes at around 15 years into a cycle. Why? Whatever will cause the next bear market has probably already been sowed.

One way that I define a secular bear market is just by looking at what happens with the passage of a long period of time. The S & P 500 crossed 800 in 1997 and recently fell to below that level earlier this year before the rally started in early March. The monthly closing low during the cyclical bear market in 2000-2002 was around 815. So the 800 level looks to me so far at least to be an important number in this bear cycle. If we revisit that level at some point between 2011 to 2013, then I would classify the entire period between 1997 to that future date as a long term secular bear market. I would then recalibrate the start of the long term bear market to 1997 with the long term bull ending in that year. In my definition of a bear market, you go a long time, look back 15 years or so, and see that you really have not gone anywhere at all. You are back to the place that you started in a major average such as the S & P 500. Certainly there was a lot of movement during that cycle both up and down. The up moves during the secular bear market can in retrospect be viewed as countermoves to the long term trend, or just bear rallies or cyclical bull moves in a long term bear market. I try to avoid getting hung up too much with nomenclature. As I have said, some selling needs to be done into those rallies.

However, this is not to say that positions can not be taken during some part of the long term bear cycle and held for the long term. In fact, the most advantageous period for taking a long position would be during that cycle at some point. Such a period occurred in 1974 in the prior secular bear market, even though another 8 years was left in the cycle, and in March 2009 for the current one. In October 1974, the S & P spiked down to around 65 (bottom of 62.28). dshort.com So I would agree with Rosenberg on the need to trade rallies in a long term bear with that caveat. Many of the long term positions need to bought and held during the period of maximum stress, and would view that as an obvious point based on historical observations. A similar statement could have been made about the low hit in 1932.

So, when do you buy for the long term in a secular bear market? Whenever the event occurs, it will be extremely difficult to pull the trigger. That will be one sign. Another would be a rule of thumb of requiring a greater than 30% plunge in the market averages as a bare minimum and to preferably start picking the stocks when the decline exceeds 40% and then ease into it. Another rule of thumb is to start looking for opportunities 10 to 12 years into a dominant bear trend. By opportunities, I mean major spikes down.

2. Obama and Sallie Mae: I have a small position in two Sallie Mae senior bonds, OSM and ISM, with about 3 thousand in total exposure, mostly in OSM which matures in 2017. The WSJ had an excellent editorial about how the Democrats are significantly overestimating the savings by having the government issue 80% of the student loans as of July 2010, up from the current 20%, and underestimating the costs of increasing the Pell grants that are allegedly being paid for by the savings in the government assuming the origination of the loans. There are several references to testimony by Douglas Elmendorf that the savings and costs figures used by the Administration are just not accurate. Obama Whenever I read stories like that, it is easy to see how we end up racking up trillion plus budget deficits and constantly add new programs while doing nothing material to shore up the unfunded liabilities of existing ones. One problem is that the government's accounting would be criminal if done by a private corporation, and this editorial just highlights one area. I do not doubt the Journal's contention that the increase in the Pell grants will be soaked up dollar for dollar by the colleges by increasing tuition and other costs.

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