Is this rally for real?

[Running_Man]

Thanks for going out on this limb, Running Man. I pretty much agree with your analysis. I know one thing- "He who panics first, panics best." When the market is going up it is easy to be brave, or "skeptical of bearish prognostications". But if the market goes down hard from here, many already-retired people who need their nest egg for living are going to have a hard time staying calm. The first crash is bad enough, but if it then goes back up and you feel like you have been granted a stay of execution, look for some pretty squirrely emotions if it heads down hard once more, especially if it should break the March low. A good exercise is to imagine a 50% loss from here, imagine your self after this loss; imagine our new net worth. Imagine talking to your spouse, especially if s/he is not actively involved in investment decision making. Check how you feel.

Getting back to your situation, Running Man, unless the stock you sold was in an IRA/401k you must have incurred some pretty steep ST capital gains? I would enjoy it if you would run through some of your thought processes. You have high credibility because of your excellent preformance in the early rounds.

Right now, I don't own any crap. My equities are all well financed dividend paying and dividend growing companies. Still, they represent 50% of my portfolio (down from about 98%). I know I will not be stampeded out on a drop, but I would not like it much. The only thing that holds me back from further trimming is fear of taxes, and income concerns. Still, if I save $300K in losses not suffered, I can go along for a long time even on zero interest rates.

All equities already have been sold from my IRA, and I have no capital loss carryovers or stocks carried at a loss currently. So any sales will incur ST Capital gain taxes, and also all the nasty side effects of higher AGI.

My mind is still open as to what would be best for me right now. I reasoned this same way in fall of 2007, and I believe I was dead wrong then. I should have sold out and just paid the tax. At that time much of it would have been long term. Valuations were worse then, but the economy appeared better.

Philosophically I reject the idea that anytime is a good time to own stocks. That is only a slogan, made conventional by repetition and a fairly benign experience over the past 30 years.

Ha

As far as taxes the first 16% I sold was all in index funds in my 401K. That is normally my first course of action if I am unsure about the length of time of my holdings and are not purchasing individual stocks. I had planned to hold the other 16% even through any decline since I had purchased most of the shares at a low price and had good dividends on them. Virtually all of these are in an after-tax account, a small portion is in an IRA but most is after tax. I have a general rule on taxes though - I never worry about the tax implication as to whether to buy or sell. I hope to pay lots of taxes over the next few years, I love tax payments much better than tax loss carryforwards. However as I looked at the earnings of the companies and the prospects for the economy I viewed the odds of a coming significant decline as too high for the value of the dividends received.

Despite my relatively rapid turnover the past couple of years most of the time I hold for very long periods, well in excess of years but when my mind changes on a stock I just sell and whatever the taxes I pay them. I am unafraid of being wrong in taking an action but try and think things through before selling or buying. Selling a portfolio that included rock solid companies KO, PG and JNJ was because I have convinced myself that deflation has taken hold of the economy and with that stocks have no chance. I am on watch though and willing to adjust if inflation does begin to accelerate as at that point stocks will be needed.

Another of the events that really impressed me on deflation being more of an issue than inflation was finding out that in our building there was a firm that was renting 4 floors here in downtown Chicago on an old lease for $30 a square foot. They had 2 years remaining on the lease and wanted another floor, however they threatened to walk and lease at another nearby building while subletting their floors and sign at a new building for the long term and the landlord tore up the lease and took $14 a square foot for the entire 5 floors. The similarity to what is occurring in the BDI index was striking to me.

Our company found out and is now in the final process of negotiating a 30% reduction in our rent on a lease with 10 years remaining. The eagerness/desperation/willingness of a landlord to take a financial hit of that magnitutude on an iron clad contract makes me wonder how many of these are going on right now. These events are a portion of what is showing up as corporate cost reductions right now, however it is not a positive for the economy as a whole, nor is it good for future dividends of stocks, it is portending further contraction.

 

[NW-Bound]

All right! Some people here are gutsy enough to admit to being a CMT. I like that. However, I am more bullish than Haha and RunningMan, owning 67% in equities right now.

RunningMan is right about one should not let tax issues force one to hold a position against his conviction. I had used up my losses suffered in the 2000-2003 bear market in taking some gains in 2004-2007, and hesitated to sell more in 2007-2008. Looking back, it is far better to pay taxes on gains than suffer losses. And as it turned out, my part-time work was cut back because of the downturn and my wage income in 2008 dropped significantly from 2007, and the tax bill would not be as bad as I feared.

 

[Snidely Whiplash]

Thanks for the link. I've always enjoyed listening to Laszlo. He sure is bullish for the next couple of years. I hope he is right. But I have my doubts.

I should have clarified better, I'm not particularly a fan of his, but I do agree with his thought process here ; it's always "different this time" and I think his bullishness for the next couple of years is right on the money.

I admit that the market and economy has some pretty big problems to overcome, but that was the case with prior recessions as well, and if we could never overcome problems we would be forever trapped in downward spiraling recessions.

 

[PROACTIVATING]

I like Snidely Whiplash's last sentence!! What a pearl of wisdom which cannot be disputed.


The devil's in the details.... when where and how much to risk which is really what makes life so exciting isn't it? Thats what separates the sheep from the goats

 

[Snidely Whiplash]

3) Virtually every company I owned reported better than "expected" results due to primarily cost cutting. This is not a recipe for growth.

With all due respect, I think this is completely 100% the incorrect assumption for you to make ; This is EXACTLY what companies do coming out of a recession and the beginning driver of future profits. Maybe this article will help explain it better than I can...

Productivity Augurs Recession's End. Usually - WSJ.com

August 11, 2009

Tuesday will bring one possible explanation of how so many companies managed to trounce earnings expectations last quarter despite the recession.
The Bureau of Labor Statistics will release second-quarter data on nonfarm productivity, the measure of what the economy produces per worker hour. Economists estimate productivity rose at a 5.5% annualized pace, the biggest jump since the third quarter of 2003.

Productivity didn't increase because more stuff was produced -- on the contrary, gross domestic product continued to shrink in the second quarter. But businesses squeezed worker input even harder by cutting payrolls and hours, effectively slashing their labor costs. Economists expect the BLS to report that unit labor costs fell at a 2.9% annualized rate in the quarter, reversing a 3% rise in the first quarter.

The net result: rising unemployment, stagnant wages, sagging consumer confidence -- and better-than-expected corporate profits.

About 73% of the 427 companies in the S&P 500 that have reported second-quarter results have beaten expectations, even as 52% of those same companies have reported worse-than-expected revenue growth, according to Thomson Reuters. They accomplished this neat trick in many cases by squeezing costs mercilessly. And the biggest cost for most businesses is labor.

This hardly seems a recipe for sustainable economic growth, but it is historically how recessions have ended. Driven by late-recession cost-cutting, business productivity has grown at a 5.8% rate, on average, in the first quarter of each of the past five recoveries since 1975 -- nearly triple the long-term average growth rate of about 2%.

The timing of the recession-ending productivity surge varies from recession to recession, but each has fed a profit recovery that in turn fosters a stock-market rebound.

Consumers tend to not cheer having profits and stock gains built on their jobless backs. Sure enough, the Conference Board's consumer-confidence index fell for the second month in a row in July despite the party in stock markets.

In a classic economic recovery, however, rising profits and stock prices help make the recovery self-sustaining by encouraging companies to hire more workers.

What is still in doubt, though, is whether this is a classic recovery.

 

[ziggy29]

Productivity didn't increase because more stuff was produced -- on the contrary, gross domestic product continued to shrink in the second quarter. But businesses squeezed worker input even harder by cutting payrolls and hours, effectively slashing their labor costs. Economists expect the BLS to report that unit labor costs fell at a 2.9% annualized rate in the quarter, reversing a 3% rise in the first quarter.

Employees scared witless about the possibility of getting laid off can help too as they work longer and harder to avoid the axe. At least for a while until they burn out or have a stress-related breakdown.

 

[Texas Proud]

Another of the events that really impressed me on deflation being more of an issue than inflation was finding out that in our building there was a firm that was renting 4 floors here in downtown Chicago on an old lease for $30 a square foot. They had 2 years remaining on the lease and wanted another floor, however they threatened to walk and lease at another nearby building while subletting their floors and sign at a new building for the long term and the landlord tore up the lease and took $14 a square foot for the entire 5 floors. The similarity to what is occurring in the BDI index was striking to me.

Our company found out and is now in the final process of negotiating a 30% reduction in our rent on a lease with 10 years remaining. The eagerness/desperation/willingness of a landlord to take a financial hit of that magnitutude on an iron clad contract makes me wonder how many of these are going on right now. These events are a portion of what is showing up as corporate cost reductions right now, however it is not a positive for the economy as a whole, nor is it good for future dividends of stocks, it is portending further contraction.

Interesting info but not much help IMO... for a large enough company that takes 4 or 5 floors, two years is like a week... they do not wait until the last minute to negotiate... and I would assume that the going market rate is what they agreed for a new lease (along with expense sharing etc. for all the inflationary items)...

I would doubt that your company would get any break... 10 years on a lease is a lock... heck, a lot of leases are ONLY 10 years... when I worked in the RE group we would laugh at someone who wanted to renegotiate a lease with 10 years left....

 

[Running_Man]

With all due respect, I think this is completely 100% the incorrect assumption for you to make ; This is EXACTLY what companies do coming out of a recession and the beginning driver of future profits. Maybe this article will help explain it better than I can...

Productivity Augurs Recession's End. Usually - WSJ.com

I don't have a online pass so I couldn't read the article however, I agree that my position is risky, and frought with the potential to be wildly off-base, I view the current situation totally different than prior recessions and the "increased productivity" equally risky. Also, the fact that I am in the accumulation phase for the next 5 years allows more leeway than someone already retired which I realize makes investment decisions much more difficult. The risk I would face also is if I am correct and the economy sours much worse than expected my portfolio and job prospects both could take a dive. The recession ending and economy booming will allow me to overcome a mistake here on the market. So for this reason a risky action is mitigated for me.

yet in the prior recessions you mostly could not make a bad investment decision. In 1981 long term bonds paid 14%, short term money 12-20 percent and stocks soared from there. You could not have made a bad investment decisions unless you really worked at it. In 1990 long term rates were at 8.85% short term at 7.75 and again stocks soared from there. In 2001 tougher decisions came along and long term rates were at 5.5 short term at 3.5 percent and now you could really start making decision that might not work out. At this point more and more individuals began investing in the S&P500 and other index funds as interest rates seemed uncompetitive. Stocks worked for a short time but faltered to the present year as consumer and household debt have soared too far to allow for needed growth. This housing problem in the past in Japan and US in 1870's and the 1930's in US has never been a quick end. The lack of money feeds on itself. Past recessions had dropping interest rates fueling consumer spending as both the payments on their houses dropped as they refinanced lower and the prices rose faster than inflation as lower interest rates made more payments affordable. This flood of money will not appear in the near term.

Today you have long term rates of 4 percent and short term at virtually zero, overall after the gloom of a year ago the worst appears to have been missed to the casual observer and stocks must be the best investment? I liked stocks in March when all appeared lost because too many thought the end was at hand, however unless fundamentally the lack of money available to pay the total debt outstanding is adjusted I don't see how we grow. This is not a normal recession in my risky view. Now it is my belief that there is not a good investment in this group to be had other than hold cash to buy after the investment readjust. This recession, unlike others is caused by the end of money available to consumers from their houses. Employees are taking salary and benefit cuts to induce this productivity. There will not be a lowering of interest rates to ignite housing, the "productivity" to me is really falling costs faster than sales prices.

 

[Snidely Whiplash]

I don't have a online pass so I couldn't read the article

I quoted it in its entirety (minus a picture and caption).

 

[almost there]

To answer the orig post from "05-08-2009, 03:06 PM"

I would say, yes.

 

[James5v]

What do you guys think of the other posts regarding insider selling?

I also heard someone say that during the next year about 50% of homes will be worth less than their mortages. In the small town where I live in La. there seems to be a housing boom, houses are being built everywhere. However, the only major industry is a papermill but there is a military base, Fort Polk, near by so all I can assume is soldiers are choosing to live off post instead of in the many many on base apartments. These homes are in the $225,000 so I guess that is cheap compared to many other locations.

And to make things more interesting we are trying to get into a trade war with China.

I can still sleep well since the majority of my funds are in safe investments if there is such a thing.

 

[FUEGO]

I also heard someone say that during the next year about 50% of homes will be worth less than their mortages. In the small town where I live in La. there seems to be a housing boom, houses are being built everywhere. However, the only major industry is a papermill but there is a military base, Fort Polk, near by so all I can assume is soldiers are choosing to live off post instead of in the many many on base apartments. These homes are in the $225,000 so I guess that is cheap compared to many other locations.

Fort Polk and the surrounding area might be the beneficiary of a planned increase in troops soon under BRAC (base relocation and closing). Many of the local bases where I live are increasing their number of troops in the thousands or tens of thousands over the next decade, and they all have to live somewhere. So you have new neighborhoods springing up and lots of on-base construction.

 

[W2R]

Some houses here are certainly worth less than their mortgages due to hurricane damage. But undamaged houses are less likely to be in that category. There is no housing boom here though rebuilding is a continuing effort. New Orleans in 2009 is much smaller in population than New Orleans in 2005.

 

[FIREd]

Fort Polk and the surrounding area might be the beneficiary of a planned increase in troops soon under BRAC (base relocation and closing). Many of the local bases where I live are increasing their number of troops in the thousands or tens of thousands over the next decade, and they all have to live somewhere. So you have new neighborhoods springing up and lots of on-base construction.

BRAC is the reason why real estate prices have held up pretty well around here as well.

 

[FUEGO]

BRAC is the reason why real estate prices have held up pretty well around here as well.

BRAC is one of the main reasons my current employer remains solvent and I remain employed. Military engineering contracts are lucrative.

 

[FIREd]

Military engineering contracts are lucrative.

Yep, our entire local economy is sustained by military engineering contracts...

 

[harley]

Some houses here are certainly worth less than their mortgages due to hurricane damage. But undamaged houses are less likely to be in that category. There is no housing boom here though rebuilding is a continuing effort. New Orleans in 2009 is much smaller in population than New Orleans in 2005.

I just read in a Money magazine that around a third of all homes with mortgages are worth less than the mortgage, according to First American CoreLogic (whoever they are). That seems nearly impossible to me. Did 1/3 of the nation move in the last five or six years?

 

[W2R]

I just read in a Money magazine that around a third of all homes with mortgages are worth less than the mortgage, according to First American CoreLogic (whoever they are). That seems nearly impossible to me. Did 1/3 of the nation move in the last five or six years?

That's possible. Isn't the median length of home ownership around seven years or so?

 

[Notmuchlonger]

That's possible. Isn't the median length of home ownership around seven years or so?

Wow really? I would have never guessed it was that short.

 

[W2R]

Wow really? I would have never guessed it was that short.

Well, then maybe I'm wrong! I don't have a link saying how long most Americans own their homes - - was just looking for one but haven't found it yet.

Edited to add: This rather unauthoritative link cites the National Association of Realtors as saying that the average length of home ownership is 6 years.

 

[Notmuchlonger]

Well, then maybe I'm wrong! I don't have a link saying how long most Americans own their homes - - was just looking for one but haven't found it yet.

Actually you are close. According to a yahoo answer Nar study says its 6 years. Surprising to me.

 

[IndependentlyPoor]

I just read in a Money magazine that around a third of all homes with mortgages are worth less than the mortgage, according to First American CoreLogic (whoever they are). That seems nearly impossible to me. Did 1/3 of the nation move in the last five or six years?

I believe it is also true that about 1/3 of all homes are owned outright.
Bubble Meter: Ask Yahoo: How many "homeowners" own their homes outright?

 

[Zathras]

Although I think the 33% rate is high, however, that probably includes both home buyers and people who refinanced.

 

[audreyh1]

Where is W2R? I felt sure she would have to something to say about the last two days in the market.

Audrey

 

[W2R]

Where is W2R? I felt sure she would have to something to say about the last two days in the market.

Audrey

Too busy counting my money! $$$$