The Inevitable 10% Correction

[audreyh1]

Ebola and ISIS are sideshows from an investment standpoint. They aren't going to affect corporate earnings.

The big worry I have is Europe and the Ukraine situation. We have a nuclear power that seems willing to burn the world down. That worries me.

It also still seems possible (say 30% chance) that the Euro will end up failing.

But those were both worries a year ago.

Actually, I don't think Ebola is a sideshow from an investment standpoint if we don't stop it outside of the handful of African countries right away. When people stop traveling out of fear, shutting schools down, etc., it causes an economic slowdown. SARS had a strong enough market effect.

 

[ejman]

Setting a wider band for rebalancing means you think that lets you buy closer to the "bottom", which is a form of market timing because you do have a certain expectation.

PS. Basically, we all understand the risk/reward trade-off of investments, and that includes every asset, just not stocks. Rebalancers or market timers both believe the risk/reward trade-off of investments change with price, but they act on that price movement with different mechanisms.

Guilty as charged. I'm always hopping my rebalancing band will let me catch close to the "top" but what actually happens in practice is that I end up rebalancing way before the top is reached because optimism in the market seem to be unbounded (until something happens...). I think a lot more fishers show up at the pond on the pessimist side unless the sky really is falling.

 

[robnplunder]

Ebola and ISIS are sideshows from an investment standpoint. They aren't going to affect corporate earnings.

Actually, IMO, Ebola if it spreads can effect corporate earning big time. People tend to stop doing what they normally do, starting with traveling - airlines and travel related companies will get hit. People stop going to crowded places - retail & service businesses will get hit. More dominos will fall. One of the African nation most impacted by Ebola is already seeing this and they fear that their economy will collapse. Given that Ebola can spread exponentially if unchecked, it can make the first domino to fall for the global economy.

 

[NW-Bound]

Not really. It just means you don't rebalance unless it's a very strong correction or bear market.

Most people rebalance because they want to maximize gains, or in other words to buy low/sell high, although for secular bull markets like the period of 1983-2000 the rebalancing reduced performance.

Some rebalancers say they do that to reduce volatility of their portfolio, but I think we all secretly hope to get more money. They could have put it all on CDs, which have no volatility but no gain either.

Or, why not just look away, and not follow the news or any forum? Historically, you would do OK doing nothing.

Nah! I say we are all greedy and think our own chosen method will get us more money. I am never afraid to say that I like money, even though I may not need more.

Guilty as charged. I'm always hopping my rebalancing band will let me catch close to the "top" but what actually happens in practice is that I end up rebalancing way before the top is reached because optimism in the market seem to be unbounded (until something happens...). I think a lot more fishers show up at the pond on the pessimist side unless the sky really is falling.

Again, if "suboptimal" rebalancing or market timing gets me more money than doing nothing, I feel content enough. Nothing will get you all out at the top, then all in at the bottom, except luck.

 

[clifp]

There is a poker saying "Its always better to be lucky than good." Man have I been lucky. I put 1/2 the money I took off the table a few weeks ago while the DOW was down 400 yesterday.

I have hard and fast rule that I don't write options unless I can get 10% annualized return for slightly out of money calls or puts. With the VIX down in the 10-13 range for most of the year, I pretty much stopped writing options.

Now with VIX at 25 it was easy hit that criteria. If the corrections continues to S&P 1700, my put options will be exercised in Dec. If not I make a 10% annualized return.

The options premiums I picked up for a couple of individual stocks were crazy high.

 

[eta2020]

I added a bit...spending some cache. I think lucky market timers will do much better then me. Because my portfolio experienced about about average losses, I was not lucky to go up while S&P was crashing down (as some lucky few did). Perhaps this is because of having no bonds

But it is all fine with me because my 100 equity portfolio generates 6k plus a month in dividends (growing faster then inflation) and that is enough for me.

 

[Fermion]

The options premiums I picked up for a couple of individual stocks were crazy high.

I bet if you wrote some near the money puts on Netflix right now you could get 30% annualized returns.

 

[aja8888]

A possibility. The question mark for me is how long the Saudis can withstand lower prices before it starts to undermine their ability to keep their oppressed population sweet with lots of domestic spending. I have a funny feeling that within 6 months we will see oil prices back over $90/bbl. If ISIS gets completely out of hand, the Saudi border is pretty close to where they are now. Oil prices could become sensitized to political events again.

In the meantime, lower oil prices are a stimulant to the US economy and poison to Putin's ambitions. If he thought the sanctions would not matter, taking away the oil earnings that Russia was counting on will put paid to that.

Yes, it's well known that the Kingdom handouts have expanded exponentially and they need the revenues! I doubt that they will be handing out $$$ from their bank accounts and price squeezing Canada and the Ven's for a long time.

Another pressure point for the Saudi's is the age of their large producing fields and the fact that they are in artificial lift now (waterflood). This leads to a situation where they won't be able to continue high production in the long run as the fields are playing out. The Saudi's have never given accurate reserve figures so it's been a guessing game as to what's left. But when a field goes in waterflood, it is definitely an indication the the end is in sight (may be 10 - 20 years?). Plus, running waterflood operations adds a significant cost to each barrel of oil.

They also have not found new reserves to replace these old fields.

Interestingly, many of the Eagleford, Permian and Bakken producers I work with have been holding back (throttling) production from a lot of new wells due to no crude storage or transport capabilities. So real output from the shale formations and conventional play horizontal wells is a fudged figure.

Even with prices set to take a slide, it's a good time to be in the oil & gas business and it's good for the economy.

 

[brewer12345]

It will be interesting if the latest slide is the opening the US producers need to get permits to export crude. Won't matter in the short term, but will be a big deal long term.

 

[clifp]

I bet if you wrote some near the money puts on Netflix right now you could get 30% annualized returns.

An October option on Netflix (1 day) gives you 360% annualized return. A Dec put is 38%. The problem is I have no idea how much Netflix is worth the S&P I've have a better handle on.

 

[Hamlet]

SARS had a market effect, but did it have any long-term investment affect? Not really.

I worry about things that can cause lasting damage to the economy. Ebola isn't in that category. It's simply the flavor of the month to generate fear in old people who still watch the news. SARS, swine flu, etc. There is always some health risk that is making headlines that are disproportunate to its actual risk.

There are roughly 25 deaths a year in the US from whooping cough. When Ebola reaches that threshold, I'll consider worrying about it.

Actually, I don't think Ebola is a sideshow from an investment standpoint if we don't stop it outside of the handful of African countries right away. When people stop traveling out of fear, shutting schools down, etc., it causes an economic slowdown. SARS had a strong enough market effect.

 

[aja8888]

It will be interesting if the latest slide is the opening the US producers need to get permits to export crude. Won't matter in the short term, but will be a big deal long term.

Agreed here. That will be another pressure point on the OPEC crowd, although they are not as powerful as they once were. But what it will do is provide a way to sell excess U. S. crude (God, I never thought I would be saying that) on the world market.

 

[Hamlet]

I think that when the LNG export facilities start coming online it will be a game changer. I'll feel a lot better about Europe's situation when they aren't 100% dependent on the Ukraine for natural gas.

It will be interesting if the latest slide is the opening the US producers need to get permits to export crude. Won't matter in the short term, but will be a big deal long term.

 

[brewer12345]

I think that when the LNG export facilities start coming online it will be a game changer. I'll feel a lot better about Europe's situation when they aren't 100% dependent on the Ukraine for natural gas.

It will certainly help stymie Putin's ambitions. But I want to be long natural gas and I will be installing an upgraded wood burning stove because I think gas will be a lot more expensive in a few years.

 

[project2501]

Finalized yesterday before close. Today is woot. . . woot. Could be crying next week, but only time will tell. I'll look to re-balance in first quarter 2015. Everyone has strategies. Agree long as it makes results that's all that matters.

 

[Lsbcal]

Finalized yesterday before close. Today is woot. . . woot. Could be crying next week, but only time will tell. I'll look to re-balance in first quarter 2015. Everyone has strategies. Agree long as it makes results that's all that matters.

Everyone has strategies but mine is the best.

 

[NW-Bound]

I have always carried in mind many strategies, but the optimal ones do not reveal themselves until the dust has settled.

 

[project2501]

Everyone has strategies but mine is the best.

Was just rephrasing what NW Bound posted. Long as it makes money who cares the angle. Just wanted to post a quick update since I posted about making moves yesterday. Let's call it luck and not planning for it (sarcasm)

But if your just poking fun; I drink your milkshake.

I have always carried in mind many strategies, but the optimal ones do not reveal themselves until the dust has settled.

Like you said; long as your making money what does it matter. Oscillations seem to have calmed, but will have to review next week where another tumble could happen. Personally in my situation I'll go even more aggressive. That's just how I think.

 

[audreyh1]

Oct 27 - that will be the all clear!

So say the gnomes under the bridge......

 

[foxfirev5]

SARS had a market effect, but did it have any long-term investment affect? Not really.

There are roughly 25 deaths a year in the US from whooping cough. When Ebola reaches that threshold, I'll consider worrying about it.

Yeah but there's a vaccine for whooping cough. Check the numbers from the early 20th century

 

[Lsbcal]

Was just rephrasing what NW Bound posted. Long as it makes money who cares the angle. Just wanted to post a quick update since I posted about making moves yesterday. Let's call it luck and not planning for it (sarcasm)

But if your just poking fun; I drink your milkshake.
...

Just a little humor. No criticism at all intended.

I do agree that investing is all about getting a good return and not about how you got there. Successful market timing is rare but I think it is possible at key times which are few and far between.

I really do have my own version of MT ... which would make some people roll their eyes. Have not yet had to pull the trigger and exit the market though. So in that sense it is buy-hold until conditions warrant an exit.

I did sell to keep my equities at my max upper limit. Last sale was Sept 2nd for 1% of portfolio. This is purely mechanical. I strive to keep emotions in check by setting rules ahead of time.

 

[Bdroc]

Market will bounce back because sellers have no other place to park their money. They won't be happy with nothing in a money market fund or 1.5% in a 2 year A rated bond.

The market is fairly valued so I don't expect big gains going forward. But I don't expect corrections to be severe or long lasting either.


Sent from my iPad using Early Retirement Forum

 

[Birchwood]

It may be a 10% down, and next day 3% up, and on and on , up and down for months, who knows what's going to happen. Until one day there is a definite up trend or down trend to the "bear" market. Being retired and too late in time to sell, I will just hang in tight and watch what happen and buy a few shares of stocks on the lows, while maintaining my asset allocation.
The top and bottom are unknown, and making rushed big moves may be more dangerous than just staying put and ignoring the chaos.

 

[haha]

Might be a good time to mention Kahneman and Tversky's Prospect theory and how it relates to investor behavior in situations of losses or gains.

Briefly, if one perceives himself to be in a loss situation he will behave as a loss seeker- ie. not take a possibly smaller but definite loss but rather wait for a bounce back. The loss need not be an accounting loss, just perceived as a loss which usually depends on the anchor-ie. what former or attained price has become accepted as normal by the investor.

OTOH, in perceived gain situations there is a tendency to sell and nail down the gain.

I think this is a very powerful behavioral tendency that successful investors must find some way to control or adapt to.

Ha

 

[Lsbcal]

One version of this is the old saying "getting even and getting out". This is a common bear market disease.