This month’s experience was a painful reminder of how difficult it is to make gains on your invested capital. There are other reminders all over the place. Real estate was a way to make steady gains for many years, and then it wasn’t. Treasury bills are being sold for zero percent interest – and that is surely a loss because inflation will eat away at the value of the investment that yields nothing.
Every December, Smart Money magazine publishes a lead article entitled “Where to Invest in (Next Year)”. Every year, they consult the top analysts they can find to help them come up with a list of the best investments for the coming year. For each company, they give a summary of the often-compelling reasons why that stock is sure to soar in the coming year. I have often been tempted to buy the stock in every one of the 12 or so companies they recommend to spread my risk (but as you know, I resist the temptation and still do not own one share of stock of any company).
I decided to look back to see how the Smart Money selections for 2008 worked out in the real world. Of course, 2008 was a bad year for stocks. For the Smart Money “year” (December 1, 2007 through November 30, 2008), the S&P 500 fell by 40.8%. The Smart Money portfolio did even worse, falling 53.6%. One of the selections fell by 94%. Imagine! These were the 12 best companies that the top analysts selected as their best bets for 2008. A monkey throwing darts at the Wall Street Journal would have randomly selected 12 stocks that did better than those chosen by the experts.
If the smartest financial people out there, those with billions of dollars of other people’s money to invest, with all their research capabilities and inside information, can’t outperform the monkeys, how can ordinary investors like you and me expect to do better?
At least the people who did mirror the Smart Money portfolio only lost a little over half their money last year. They could have put it with Bernard Madoff’s company and lost it all.
Once again, I am convinced that the Mighty Mesa Strategy as it is currently configured, is the best alternative for long-term investment gains for most of us. True, we had a bad month last month. It was especially bad because we were so far ahead at one point. Bad months happen. The prior month saw almost as great gains as we had losses this month. For the two-month period, we have suffered about a 1% composite loss. The same cannot be said for most stock market pickers, for Smart Money followers, or for investors in Mr. Madoff’s ponzi scheme.
More history was made this past week. What’s new, right?
On Tuesday the Federal Open Market Committee (FOMC) lowered its target for overnight interest rates by 75 basis points to a record low 0.25%. At the same time the Fed released a statement that
emphasized their commitment to "employ all available tools to promote the resumption of sustainable
economic growth and to preserve price stability." They signaled the intention to keep the funds rate
"exceptionally low for some time" and for the Fed to "continue to consider ways of using its balance
sheet to further support credit markets and economic activity."
“They’re trying to rekindle the confidence of consumers and businesses, and that ultimately drives profits in the stock market,” Bruce McCain, who helps manage $30 billion as chief investment strategist at Key Private Bank in Cleveland, told Bloomberg News.
“A big, widespread, explosive, incendiary shell has come out of the Fed’s cannon,” Frederic Dickson,
who helps oversee about $19 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Ore., told Bloomberg this afternoon. “It’s a bloody big deal. This is the kick-it-up-a-notch moment.”
The market rallied as a result, but most important was the rally in treasuries. The rally in treasuries drove yields to record lows which also led to lower mortgage rates. This is what the Fed has attempted to do since it started lowering rates back when they were 5.25%.
As good as the lower rates may seem on the surface, it is obvious sign of just how miserable the
economic outlook has become, at least over the near-term. One thing is certain, a quick and easy fix out of the question.
Economic and corporate news was once again horrible, although this did not seem to stop the market
from pushing upward. The recent positive reaction to bad economic and corporate news is a very good sign of seller exhaustion.
Best Buy and Goldman Sachs both reported substantial losses. It was Goldman’s first reported loss as a publicly traded company, but this did not stop buyers from stepping in. Goldman surged after the report and Best Buy finished the week 15% higher.
On the economic front, November proved to be another month of despair for the market. Industrial
production declined 0.6% in November. Housing starts dropped 18.9% which marked the largest decline in 24 years. The weekly jobs report showed more losses and building permits hit a record low.
The one positive for consumers has been the continued decline of oil. OPEC announced that they would cut 4.2 million barrels a day which in the past would have led to higher prices. Well, not this time. Prices moved substantially lower to close out the week at $33.87 a barrel. Can you believe that only a few months ago the price of a barrel of oil topped $147?
On a seasonal basis, next week should see exceptionally low volume with it trickling lower as the weeks comes to an end. This is typical for this time of year. The last 7 trading days of December have finished in positive territory 64 out of the last 80 years (80%) in the S&P with an average return of 1.2%. Not too shabby. The max gain was 2.0% and the max loss was -1.0.