The Nantucket Sleigh Ride

Executive Summary:
19th century whalers became familiar with the spine-chilling experience of a “Nantucket Sleigh Ride,” a term used to describe a wild ride which harpooned whales would take sailors.  Typically the ‘ride’ would reach speeds of 35 miles per hour and take 4 to 12 hours; The sailors’ survival depended largely on the quick reflexes of the Boatsteerer who continuously poured water over the harpoon’s rope to prevent the wood from burning and stood by with an axe to cut the line if the whale decided to dive into the ocean’s depths.

After a stint in the gyrating investment markets of 2001 and 2002, investors can surely empathize with the ‘spine chilling experience’ of those sailors on their Nantucket Sleigh Rides. A crude parallel exists between the boatsteerers’ skill and the value of lightning reflexes required in a stock market with three times the volatility of any previous market and enough background obstacles to fill an ocean.

A titanic struggle plays out between those who believe the whale will cease its wild excursion (bulls) and those believing the sailors will be pulled into the icy depths (bears). We contend each ‘side’ has enough potential firepower to lead to a ‘ride’ of perhaps extraordinary duration.

Find commentary on our recent views, research and trading in
Winning with a Smörgasbord of Systems.

Commentary on topics in prior issues can be found in:

Update: A Not-So-Demanding Economy
Update: Base Instincts
Update: dot.Mom bubble Under the Microscope
Update: It’s a Long Way to Timere and
Update: Small Wonders: End of a Love Affair?

Other entries include Give Me Liberty or Give Me Breadth!
Keeping the Credit Respirator On Just a Little Longer and
Why IT Failed.

Since last issue, one of the two important ingredient for a market rebound have
turned bullish – buybacks. The other – cash takeovers – has not yet turned. Read:
Buybacks Beginning? and
Return of Takeovers and the LBOs?

We scout the market for clues of a market rebound in:
The Bond Holder Becomes the New Share Holder
To Bottom or Not to Bottom
Dipping Into Treasuries
The Great Search for Cash and
Capitulation are You Out There?

Inflation gets a look in:
Will Inflation Return?
Analysis of falling markets can be found in:
How Long Does a Bear Linger? and
Volatility: Yelling “Fire!” in the Back of a Theater.

The aftermath of corporate criminal prosecution is addressed in:
Hurricane Warning: Corporate Crime Collateral Damage.

The market may feel the effects of Consumer Income, Pension Plan Re-balancing
and/or Real Estate Inflation. They are respectively covered in:
All Eyes on the Right Jolly Old Elf
Will Pension Plans Dive In Again? and
Resting on Real Estate Inflation.

Foreigners’ impact is addressed in:
Will Foreigners Continue to Fund Americans’ Dreams?

Market sector items falls into:
Bill Gates: Bullish on Technology, Bearish on Microsoft
How a Business Takes Out a Loan
Biotech is in Triage and
Yesterday’s Education Leaders Pass the Baton.

It is a natural instinct to shrink from the unknown. So we turn to the great minds of
yesterday with hopes of charting a path for identifying profitable investment
themes in:
Reading the Tea Leaves: A Perspective.

There are a few angles we used to outperform indexes in our clients’ accounts.

Will Airport Security Workers Rescue this Economy?

We look for fresh territory in:
The Rise and Decline of the Buy-and-Hold Investor
Commodities Call
Setting Tripwires for a Market Rebound
Strengthening Our Data Analysis
The Frustrating Business of Domestic Security and
A Glacial Shift: Profit From Opinions Not Just Data.

We find a number of intriguing economic data in:
Greenspan? Watch Out For McDonough
Hey Buddy, Can You Spare a Dime?
Oil Still Matters
Land(s) of the Free and
Questionable Forecasts.

Other market commentary is detailed in:
Profits in the Land of the Rising Sun
Colleges: A Culprit in the dot.Mom bubble Conspiracy?
September to September
To the Victor the Spoils
The Expanding Beltline of State Governments
Flat Chips
Expecting No End of Mideast Violence for the Near Term
We Don’t Care What Coca-Cola is Doing!
Empowering a Commander-in-Chief
Cleaning Up in Japan
Does Conventional Wisdom Matter Anymore?
Indonesia’s Importance
Rating the Movies and
Nursing Home Care 101.

Finally, we update new services and service features in:
Automatic Statement Bundling Launches
White Glove Service
Winning in a Losing Market and
Aiming to Better Serve You Through the Internet.

– The Editors

Since The Last Time We Spoke:

Winning with a Smörgasbord of Systems

We are asked to give reasons why we maintain such conservative investment allocations. The answer is two-fold: (1) it’s working and (2) the pervasive lack of empirical grizzle supporting optimistic projections which we fear more than rattlesnakes and balanced budgets.

If you believe a market sell-off would have adjusted investor’s expectations to a lower level, 14 minutes after the Dow had registered a 390 point fall breaking through its 9/11 floor, the headline hit the wire:

4:14PM, 7/19/02 “Repositioning for a market upswing”–Deborah Adamson
Repositioning for what? Consider actual data from last quarter (SPX=918.84):
Price/ Earnings = Price/Earnings ratio
918.84/24.70 = 37.2

Perry states “You do not make money by being right. You make money by knowing when to run away.” Indeed it was that apologist of the utopian potential of the state, John Maynard Keynes who cautioned “markets can remain irrational longer than you can remain solvent.”

Our recent ability to outpace the market indexes, which incorporated an unprecedented high level of conservative investment allocations, can be attributed to the simultaneous use of a smörgasbord of at least 7 (and up to 12) different screens for securities. Indeed a study from last year concludes that ‘even simple methods of combining [screens] could produce a better overall system than either one alone’ [technology & trading, December 2001].

Schaeffer contends:

“Speaking of a “contrarian’s delight,” I recently reviewed the mid-year forecasts from Barron’s and Business Week. And from the sheer sanguineness of each of these prognostication compendiums, it is safe to report to you that the capitulation phase of the bear market remains well out of reach. Business Week tells us that it “sees stocks ending the year up in the single digits – perhaps around 2%.” Assuming by “stocks” BW means “the S&P,” this would place this index at about 1170 by year-end, or about 18 percent above current levels. And Barron’s reports that “more than a few of our distinguished (Roundtable) crowd now believe the market is setting up for a rally, one that could lift the busted techs and telecoms, maybe the drugs, and certainly the Nasdaq, by more than 30%.”
As for me, I’m sticking with my forecast in last December’s Business Week Market Survey of 925 for the S&P at yearend 2002. But there’s no guarantee at all that this will be the low for the year.”

Update: Small Wonders: End of a Love Affair?

Small caps start to feel the bear market. Bidermann reports:
“[June 17, 2002] Small cap has stopped getting new money. The small cap value funds we track with $12 billion in assets had net redemptions of $83 billion over the past fortnight.”

Update: dot.Mom bubble Under the Microscope


According to Fed Funds Flow:

“During the first quarter of 2002, total credit market debt grew as follows:

Contrary Investor remarks:

“Just a few tidbits before we get to the household and corporate sectors. This is the first time in many a moon that the Federal debt has been in a more than benign expansion mode. Chances are this accelerates possibly significantly ahead. From a purely longer term macro standpoint, periods where government borrowing and spending has been in a significantly expansionary mode have been periods where common equity P/E multiples have not. We’re in the early innings of government deficit spending for this cycle. Our second comment is that domestic financial sector debt has been in a meaningful expansionary mode for more than a decade now. The consistency of financial sector credit expansion has been such that most investors are now numb to the recurring double digit characterization of growth. Much as the mainstream became numb to equity valuation levels just 24 short months ago. The good news for now being that the numbness in terms of equity valuation has worn off. The bad news being that shock has now begun to set in.”

They continue:

“The consumer simply cannot continue to outspend and out borrow GDP growth rates indefinitely. A GDP which owes a good chunk of its prior decade growth not only to consumer spending, but importantly to corporate capital spending. As you may remember, just a few short years ago virtually no one in the mainstream consensus anticipated an implosion in corporate capital spending that was literally right around the corner, despite the fact that anecdotal evidence was in abundance. Does that same experience now hold true for consumer spending?”

Update: It’s A Long Way To Timere

On the morning after the Dow Jones Industrial Average slid 390 points [Saturday July 20, 2002], of the 40 largest news services in North America, only five elected to carry the Dow’s descent to a “4-year low” as a headline.  Based on the reasoning found in these pages over the course of the past year, we tend to be persuaded that more than 12% (5 out of 40) of the news services will need to ‘headline’ an evacuation of the market before a longer term market bottom is in place. [Note: of the 5 headlines ‘headlining’ the Dow’s fall, three headlines reported the fall in a conventional manner, one predicted sunnier days (viz. “Stock sliding but sales aren’t”) and one was a Canadian news service.]

With regard to sentiment among investment advisors:

Per Jeff Cooper of (July 17, 2002),
“In 1994, there were 45 weeks in which bears outnumbered bulls among investment advisors. This year [2002], we have yet to see a single week in which bears outnumber bulls.” In fact, based on the readings of late, a case could be made that advisors are closer to “euphoric” than anything else. In addition to all the talk of a bottom being at hand, this continued optimism pervades nearly all public comments by market pundits.”

Sparks reminds us (July 19, 2002):

“Optimism is most destructive in a market that is already technically weak. A good example of this phenomenon occurs at an auction. If you see something you like at an auction, you can help bid up the price until you don’t have any more cash. When everyone exhausts all their available cash, the price stops rising. The same type of thing happened in 1993 when market strategists allocated an excessively large amount of their portfolios to stocks. According to Merrill Lynch Quantitative Analysis, the average percentage of available funds that strategists were allocating to stocks in September 1993 was 62%. Even though this may seem like a long way from 100%, it is still a high number. With such a large amount of assets allocated to stocks, the potential buying strength was minimal.”

Give Me Liberty or Give Me Breadth!

Lane observes:

“The recent drop in stocks, he said, differs from the panic sell-off last September. In trading immediately after the attacks on the United States, stocks tumbled to three-year lows, but after a week of heavy selling, the breadth improved.

“Institutions on the buy side (like mutual funds) are not showing any confidence or conviction,” Lane said. “Last September, we saw big surges in gainers versus decliners, we saw institutions step back into the market. Now, you are not seeing anyone step up with confidence or conviction.”

Keeping the Credit Respirator On Just a Little Longer

Marketwatch recently reported:

“A federal judge stopped the implementation of a law that would have required the nation’s largest bankers to include credit card “warnings” in monthly customer statements. The ruling, by U.S. District Judge Frank C. Damrell in Sacramento, comes three days before the law was set to go into effect. Damrell said both sides needed time to research whether the law would be too financially burdensome on banks.

The new law would have required the companies to send the warnings only to customers who make just the minimum payment for six months in a row.  Credit card companies that have monthly payments of 10 percent or more of the entire balance are exempt. Howard N. Cayne, an attorney for the Washington D.C.-based firm representing the banks, said that because adding the warnings would be costly, banks would have no other choice than to increase their minimum monthly payments. States are not allowed to pass laws that interfere with monthly payment schedules or interest.

“National bank powers trump the state law,” Douglas Jordan, senior counsel for the U.S. Comptroller of the Currency, told the judge.  He ordered both sides to research the issue and told the bankers to perform a cost-benefit analysis to prove the warnings would be burdensome. Both parties will turn in their reports in October and the case will be reheard on Nov. 8.”

Resting On Real Estate Inflation

Contrary Investor finds (July 15, 2002): “It is our humble observation that consumer behavior over the last half decade at least has been very dependent on having at least one meaningful household asset inflate. Common equity did the trick in the late 1990’s, but it now seems that household confidence rests largely on real estate inflation.”

They prepared a table as follows:

The Rise and Decline of the Buy and Hold Investor
Increasingly, we find our research chock full of data which support a trading strategy vis-à-vis a ‘buy-and-hold’ strategy. It is an understatement to say the investment markets have seen good times and bad as of late and thereby now contain datum expected in both raging bull markets and bear markets.

We contend the buy-and-hold investment strategy has an ‘American appeal.’ That is to say, it possesses those attributes which are, to be sure, American.

Easy to understand
(even) Patriotic

Indeed, the impact of the plentiful fruits bestowed upon ‘buy-and-holders’ in the second half of the 1990’s is so profound that there are investors who, we contend, will not be persuaded to adopted another investment strategy in this life, regardless of the data presented.

Nevertheless, it is incumbent on us, in an advisory role, to demonstrate that data.

The work we cite is that reported by Ruggiero (April 2002):

“During the period, the S&P 500 made 450.25 points in 14.82 years. Our rules [based on COT reports published at the CBOE] were in the market only 35.44% of the time and our results were as follows: number of trades- 18 and win percentage- 88.89%.”

“Being in the market about 35% of the time with this simple system produced 178% of a buy-and-hold return.”

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