Friday, April 11, 2014

What the heck? (and a white board lesson)

I know, despite your long-term view on investing, you're wondering what the heck just happened. Well, I'll tell ya: For whatever reasons, a lot of folks who owned stocks a week and a half ago decided it was time to get out, and, for no doubt some of the very same reasons, the market couldn't locate any buyers that were willing to pay a-week-and-a-half-ago prices.

I know, that's not good enough. You want to know what those reasons are. Well, okay, here's what I'm hearing from the media's chosen "experts"---followed by my comments in italics:

Earnings season is going to be ugly. Yep, that's what "they" have predicted. But that---reduced earnings expectations---has pretty much been the story quarter after quarter for a very long time. And you'd think, with high hopes for a later-year economic rebound, traders would be more focused on the forward guidance than past earnings. So I'd say fear over earnings disappointments probably wasn't the main catalyst.

Prospects for Fed tightening. Nah, I don't think so. The Fed is killing itself to signal easy money (taper notwithstanding) for a long time going forward.

A correction is way overdue. No doubt, but what's the catalyst? Wasn't it way overdue when Russian troops lined up along the Ukrainian border? I mean they're still there. You'd think that would have pricked the bloated gut of an extended bull market by at least 10%.

Maybe it's the rolling over of the high flyers, like Tesla. Maybe, but Tesla, for example, has been ridiculously valued for a very long time, and they've got some exciting stuff going on.

How about the biotechs? Now there you go! When a pretty big swath of companies in a way overvalued industry begin to rollover, they could surely take the rest of the market---decent overall valuation or not---down a peg with them. While they've been too expensive for awhile, and I can't give you a catalyst for their fall, I think there's something to this one.

And what about China? Its economy is showing definite signs of weakness. Absolutely! The world's second largest economy slowing down could indeed spark fear that global growth may not support the earnings needed to support a continued bull market in 2014. That said, China's slowdown has been somewhat by design. China is in the process of attempting to reinvent its economy as one more focused on internal, as opposed to export, growth. I'm wondering however if they haven't gotten a little more bang for their efforts than they bargained for at this juncture. If that's the case, look for a new government stimulus program (maybe an aggressive devaluation of the Yuan) aimed at boosting the economic drivers they're supposed to be compromising. Also, if the world's worried about China, how is it that emerging markets stocks have actually rallied throughout most of this developed market selloff? That pours cold water all over the notion that everyone's freaking out and rushing into U.S. treasuries.

And what about tax time? Could it be that lots of folks are having to sell stocks to pay their taxes? Uh, yeah, but, no... I'm not buying that one. At least not to any great extent.

How about the stuff I wrote about yesterday? Change of sector leadership, etc.? Sure, the market is indeed exhibiting a few signs of topiness. But without your classic (to market tops) economic backdrop, I'm doubtful. Plus, bear markets tend not to begin amid huge liquidity, record low interest rates, and waning investor sentiment. Although it could happen...

So then, what the heck? There has to be a reason, right? People don't sell for no reason. That's right, they---the thousands upon thousands of them---sell for their own reasons. To know for sure, we'd have to ask each and every one of them. And when we're done, I'm guessing we'd want to turn around and ask the thousands upon thousands of buyers what inspired them jump in and accommodate all those sellers at those lower prices. I mean, what makes them feel good about the future when so many others are unloading their shares?

Bottom line folks, what we're experiencing is called the stock market. I think the fact that 2013 was so unusual in terms of volatility makes the norm seem abnormal. When in reality, it was 2013 that was abnormal. The last time we had a 2013---only one 5% pullback in the course of a calendar year---was 1961.

Oh, and by the way, the last week and a half, doesn't even qualify as a correction when we're talking the Dow or the S&P. We need a 10-20% decline to call it anything but a pullback. And, as much as you won't enjoy it---in the interest of a healthy market---let's hope we get the real thing soon!

Here's a white board presentation where I explain the very basics of how the market works:

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