Comments: It was a pretty quiet week....
Ok, not so much. What can you say, depending on the indexes it either the worst week of all time or the 2nd worst (the other being in the Great Depression). We have repeatedly used the words "historic", "unprecedented", "never before" in the blog over the past year ... and so it continues. The previous week the indexes were down a mind numbing 10%, and this week at the worst we were down 22%+, but with a late day "rally" we finished down "only" 18%ish. Staggering. To lose 1/5th of all value in an index in 1 week, a week after losing 1/10th is simply (insert adjective here - I can't think of an appropriate one).
I've been negative on the economy since day 1 in the blog warning of a very stern adjustment period - I did think the market would have a very tough time over the coming years, and for long time readers you have seen me scratch my head repeatedly wondering why the market did not see what I was - and why it was holding up so well. But like a dam (of denial) it all burst at once it appears - denial turned into recognition in a span of weeks.... the pace of stock destruction is far beyond my wildest imagination. I thought we'd be "here" sometime in mid to late 2009, but we've reached (a) an emotional stage and (b) a liquidation stage - when mostly due to levered hedge funds stocks are sold at any cost to raise funds... the lag effect now will be some selling in mutual funds but since they are not "on margin" I can see that happening at a more pedestrian pace. Even the hedge fund liquidation I thought would happen throughout the fourth quarter as hedge funds closed up shop either by choice or not by choice. But since it has happened so rapidly, I have to say for the first time in a while I am bullish in the INTERMEDIATE term (that does not mean we won't have more rocky weeks ahead) Once panic and forced selling subsides, there will be a point where people see stocks overshot to the downside, at least in the near term. So I do believe some upside is ahead in the coming months - as stocks are not worth zero and every company in America is not worthless. But after this intermediate bullish period we still have what I believe to be coming - the first consumer led recession since the 1970s/early 80s. That won't be pretty either but at least the market has faced that before...
While I would of much preferred the right type of regulation for companies, incentive packages for CEOs, and sensible practices by our leadership which would of averted much of this - that is in the past and we are left with what we have. The result is it took something of historic proportion to at least wake up people to a lot of the "shady" practices going on for years. The upshot is, the cavalry is fully engaged, and everything is being thrown at the system. Also the populace is finally paying attention - will they keep their attention once we pass crisis stage? Of course not - but at least for a few weeks they are seeing what decades of neglect and bad policies has created.
Every time we try to fix a bubble we create a new one down the road and have no illusions - the "solutions" of today will create a dislocation of dramatic proportion somewhere down the road which we'll suffer from in 5-7 years. But at this point, this iteration of the problem is so severe, we do need to do pretty much "anything and everything" to make sure a financial system is intact. Because a world running on cash only will take us back about 50 years. Our problems now are not about liquidity - there is liquidity in saver nations (mostly Far East and European); the problem is now about trust. Rebuilding that is a difficult thing to do but the path we're going on is to literally backstop (with government) everything in the global financial system. This leads to a myriad of issues down the road, but we'll have to address those when we get there. I write all the time in the blog that as Americans we do not face issues until they are emergencies - and then they are so traumatic the cost is overwhelming. [Jun 19: America - the Land of Never Addressing Anything Until Its a Full Blown Emergency] This one is a version that is costing the whole world, not just us. But 10 years of savings has been completely wiped out for normal Americans. And I'd say it is a lot worse than that because a lot of "safe" stocks are completely being destroyed. So we're paying for it in many ways - both as the problem infests and then in our solutions. The knock off effects of this will be measured in decades, not years. And once again, sadly there are a select few who benefited for the way things were and their ability to "create" the system and then "pay" so the rule makers kept things in tact for their transfer of wealth; they will escape scot free with their profits from the era while everyone else pays for it. A few will serve the "perp walk" so the angry populace is satiated and we'll go back to things as normal in 3 years. It always is the same.
I will repeat once more than the monster we are creating in Medicare is going to dwarf this one, but once again until it overwhelms the system we won't address is - instead of paying "now" we are going to pay much much more down the road. In fact, I openly question if we'll have the ability "to pay" and if that is the time we default on our debt as a nation. But no one has listened the past 10 years, and I anticipate no one will in the next 10. Sometime in the 2020s we'll have an epic episode similar to this I'm afraid. But hey, I guess we'll try to make some money between then and now.
Lost in this mess is we enter the heart of earnings season, and I am not sure how much it will mean because without a normal functioning credit market - no one will believe forward guidance. On that topic, I do believe we will know within 3-5 months our path for the next 2-3 years; if after literally guaranteeing every bank in the Western world that the government is behind them, the banks still won't lend - well we are effectively going back to the 1980s level of credit (i.e. far lower than what we've enjoyed the past 15 years). Judging from what is being done with the capital injections both in the UK and it looks like the US I now thing that is unlikely - further the steps the Federal Reserve took this week (while "unprecedented", "historic" and just plain "amazing) are opening the spigot of money supply like nothing in history. At some point this amount of money is going to overwhelm the system and lending will happen. But as we spoke of above, with every "solution" comes "problems" - the future problem of what we are doing now is the specter of a period of (hyper) inflation if this liquidity is not drained from the system in exactly the right moments and to the right degrees. With central banks and governments pulling the strings - you know that won't happen. So we now have a war between deflation (think 1930s) and an era of potential systematic inflation - but the former as I've written countless times is (a) the one harder to reverse and (b) feared by those in power ---> those with assets. The last thing the upper percentile want is to see their assets (riches) deflate, so that will be fought with every tool in the arsenal. Either way, I feel like I'm living an Economics 401 class in real time.
Fun facts of the week
- Two more small banks go this weekend
- The national debt clock runs out of digits - now that we surpassed $10 Trillion for the first time, they are going to have to order a new clock :)
The S&P 500 & Russell 1000 with ALL the gyrations this week amazingly both lost exactly the same amount this week: down 18.2%. I hope in the next 30 years I never see a week like this again. Rising Tide Growth avoided the carnage and only lost 2.6%. While still down on the week, the hedges paid off this week and if I had kept them on a week ago Monday during the House vote when they first shot down the bailout bill, we really could of had a great two week stretch. Still kicking myself on that one.
*** Year 1 Results here: +10.1% vs -14.0% S&P (+24.1%)
Year 2 Metrics
Price of Rising Tide Growth: $8.430
Year 2 Performance to date (vs Aug 1, 2008): -23.44%
Comparable S&P 500: 899.2 (-28.65%)
Comparable Russell 1000: 486.2 (-29.56%)
Fund return vs S&P 500: +5.2%
Fund return vs Russell 1000: +6.1%
Last week's results here.
Since the market cap of the median stock in the Rising Tide Growth fund (median $7.1 Billion as of April 08) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of July 2008.
Basis for indexes for year 2 is closing price August 1st, 2008.
SP500 : 1,260.3
Russell 1000 : 690.3
Please click here: fund performance for previous updates
