In the course of a conversation with Matt today about some upcoming projects, he asked, essentially, whether there was any rhyme or reason to the recent flurry of trades I’ve mentioned here and elsewhere. This post is my answer distilled.
The Big Picture:
– John Hussman, Vitaliy Katsenelson*, Jim Rogers, and Tim Knight all believe that we are in a secular bear market that started in 2000. I think they’re right. I also find it compelling that four investors with such varied backgrounds — a Ph.D. economist/mutual fund manager/former options mathematician, a traditional value manager, a great macro investor, and a great technician/trader — are essentially on the same page when it comes to the big picture.
– Secular bear markets can last about as long as the secular bull markets that preceded them. The previous secular bull market (1982-2000) lasted 18 years. So it’s possible the current secular bear market will last for most of the rest of the decade. Maybe longer, who knows. But when it ends, the major indexes will probably be about where they were when it started.
– Secular bear markets generally end, and secular bull markets start, when valuations on stocks are extremely low (because so many investors have given up on stocks by then). For example, at the end of the secular bear market that followed the Great Depression, trailing P/E multiples on stocks averaged about 7x, if memory serves, and stocks had higher yields than bonds, on average.
– Secular bear markets include shorter cyclical bull and bear markets. The current secular bear market has included, so far, a cyclical bear market from 2000-2002, a cyclical bull from 2002-2007, a cyclical bear from 2007-2009, and a cyclical bull market from March, 2009 to (it appears) April 2010.
How I’ve been trying to act on this:
During the cyclical bull market rally phase:
– Bought OTM puts (e.g., trying to buy umbrellas when it was sunny out).
– Didn’t add a lot of net short exposure. Entered some market-neutral pairs trades (e.g., Revisiting an Altman Z”-score pairs trade).
– Sold some long positions into the rally and raised cash (e.g., portfolio pruning). These are my current long equity positions and the reasons why I currently own them:
Biggest position:
AYSI.OB: because I think it has multi-bagger potential from here. My average cost is about 96 cents per share on this, and I haven’t bought any above $2.29 (I also have attempted to quasi-hedge the risk of a drop in Chinese iron ore demand here by buying puts on AYSI’s largest customer, BHP).
Second biggest position:
USEG: because I think it has multi-bagger potential from here. My average cost is about $2.80 on this and I haven’t bought any above $2.85.
Small positions:
TIRTZ.OB: because it has a nice yield
HBM.TO: inertia
PNDMF.OB: inertia
TINY: inertia
BRK/B: One share to keep my Geico discount.
During the last few weeks (what I think has been the beginning of a cyclical bear market.1):
– Shorting stocks (e.g., New short position: AKS).
– Buying contra ETFs in IRAs, in lieu of shorting (e.g., EDZ and FXP).
– (one off) Buying a lottery ticket to bet against gold (“Everybody is bullish on gold”).
– Getting stopped out of shorts (I’m using trailing stops), sometimes for a loss (e.g., CENX) and sometimes for a gain (e.g., HGSI, round one).
– Getting stopped out of contra ETFs (trailing stops, again) sometimes for a loss (e.g., SRS) and sometimes for a gain (e.g., EDZ).
What I would like to do later this year:
– Buy shares of a small stock or two with multibagger potential at attractive prices.
– Buy more of AYSI and USEG iff I continue to believe the respective investment theses are intact and they drop in price.
*Katsenelson calls it a “secular range-bound market”.
1What I think is happening and what the market does are, of course, two different things. I’m not going to argue with it. If we get a spike to the upside in the near-term, I may cover my shorts early and wait it out.
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