Quite Possibly the Biggest Dump of Your Life

While the first half of this month found us thinking a lot about a particularly dreadful October we endured some 21 years ago and being bombarded with comparisons to the one 79 years ago, the Market was actually a source of encouragement during the week just ended. It was not simply because the indices actually managed a weekly gain for the first time since I can remember. It is because what I think I saw was that vast pile of “assets for sale, name your price, I just want some cash I can hold in my hand” appears to be diminishing down to a size that is manageable relative to piles of buying power that have been waiting nervously on the sidelines. In “technical analysis- speak”, the Market had a great test of a really major low this week.

What I have in mind started on the previous Friday morning, when for what seemed like the umpteenth time trading opened with a wave of “get me out!” sales hitting bids well below the previous day’s close. It was something on the order of a 1000 point gap down opening, the likes of which even multiple decades of being there for the opening does not prepare one for. It closed down for the day and way down for the week, but far less than down 1000 on the day for the Dow. Based on the intraday lows for three indices (DJIA, S&P500 and NDQ) the Market that day traded 46% below its peak of almost exactly a year before. I noticed quite a few stocks indicated higher after the close, in stark contrast to the prior Friday, when a late in the day slump gave off the distinct aroma of no one wanting to be long anything over the weekend.

Monday roared famously and there was some follow through on Tuesday morning, at least for the Dow and S&P. Indeed, from the intraday lows Friday to the Monday close, about 15 trading hours, the indices all shot up better than 19%. Does anyone remember anything catalytic happening over the weekend, like the surprise change in the short selling rules that caused a ripple of excitement a few weeks back? I certainly don’t. No, the selling simply reached an unsustainable emotional climax early Friday and burned itself out. Fifteen trading hours later, the recovery had gotten ahead of itself. This lead to another miserable seeming day on Wednesday, as buyers slinked back to the sidelines and the Liquidation Imperative resumed, no doubt with at least a few of those savvy traders who had bought the opening on Friday joining in.

The rationale for the rally petering out was “recession fears” emanating from earnings releases, as if anyone with access to the internet or a TV in the house might suddenly realize that the global economy might be in danger of slowing down and so he had better sell his stocks. I was particularly struck by how Intel’s release of a record quarter and an outlook that suggests a perhaps unprecedented control of its destiny culminated in a headline about a “murky outlook”. (Is that a “Dog Bites Man” headline or what?) This weakness carried over into Thursday, with the NDQ seemingly leading the way down, setting up what was perhaps a defining moment. Several hours into it, the NDQ got to within 1.2% of the low it made on Friday, 10/10, and then bounced up to close almost 10% above that intraday low. The other two indices got within about 3% of their Friday lows and then made similar moves. This is what the technicians call a successful test of a low. It is an indication that buying interest is no longer being overwhelmed by selling interest. This sharp reversal was followed by a Friday that gapped sharply lower but spent most of the day seesawing with an upward bias, up on the order of 3% at one point before closing down fractionally for the day and up for the week.

What’s going on here is that we are in the late phases of a wholesale liquidation. Call it the Great Asset Dump of 2008. Every day for the past several weeks plan sponsors, committees, spouses, etc. reached a pain threshold and said “Enough!”, and more assets hit the market. It matters, especially in the hedge fund world, that the end of the third quarter was two weeks ago (could they be almost done re the Sept 30 notification deadline?). It wasn’t just stocks and bonds, either. Over the past couple of years, commodities got hoarded, and not just by speculators. All this talk of oil coming down because of weak demand is the same sort of smoke that took it to $147. For instance, uranium has exhibited signs of trade liquidation, dropping a couple of bucks a pound every week over the past month or so. Does anyone think that we are headed into a situation that will involve a reduction in base load electric power generation? I don’t think so. No, what we are going through is simply liquidation. Assets that got squirreled away, some of which (like mortgage backed securities and blue chip stocks) were meant to be held more or less indefinitely, have been hitting a market were even the most seasoned investors have found themselves wondering if maybe this isn’t The Big One and pondering that wisdom about running away so as to live to fight another day.

The Big One, indeed. A recent poll suggests a substantial number of Americans have responded to the barrage of 1930s imagery in the media and have started mouthing the D-word. Other commentators have offered up plenty of comparative statistics that just how far fetched the idea of Depression is at this juncture. Having been a “downsize-ee” at a very inopportune time of life many years ago myself, I can understand depression finding its way into the thinking of many thousands who thought that the fat hog that is the financial services industry would be taking care of all those tuitions, payments on multiple residences and other accoutrements in the great game of keeping up appearances. Cumulative weeks of dealing with people who have had the realizable value of much of their life’s savings being priced by frantic liquidators is depressing, as is not being barely able to look at the prices of stocks you thought you bought so cheaply on a very bad day like March 17. However, we forget that for an awful lot of people, this Market is just a spectator sport, one more place where “other people” do what they do. Last weekend, we took a drive out to a State Park about two hours west of Austin. With all the talk about looming recession, one would have thought that a park several gallons of gasoline away from even outer suburbia would have been close to empty but for a few rangers twiddling their thumbs, but we had to park way off in the overflow parking area instead of in the very large main lot. On the way back, we went through Fredricksburg, a popular destination for shopping and overeating, that one would have also expected to be forsaken by hard pressed householders intent on shepherding their few remaining shekels so as to postpone their inevitable rendezvous with a bread line. There was hardly a parking space to be had along the main street. These little anecdotes suggest that while there are likely many individualized instances of dire financial straits out there, Main Street America, speaking generally, is a long, long ways from depressed.

What matters most in here is that governments are working together to pre-empt those worst case scenarios that prey on our imaginations. The interventions present the potential for all kinds of unpleasant consequences down the road, but they are just that, potential and out there in the future. In the here and now, the specter of the metaphor shifting from meltdown to black hole needs to be put to rest. There are all kinds of bad things that might come out of the government getting more deeply involved in the credit markets, and as time goes by we need to pay attention to how it plays out. There is also potential, although I would not go betting this way anytime soon, that the end games on a lot of these actions can be managed ways that exceed our expectations. For example, the Treasury could earn a nice return for a few years, then sell its shares at a profit five years from now and be out of banking, providing the taxpayers with at least a whiff of relief.

What matters is that the restoration of confidence that things aren’t going to just get worse and worse, which seemed to take root this week, makes those with the urge to liquidate just a little less frantic each week, and those with the deep pockets (like that smart guy from Omaha, who wrote that very encouraging op-ed in the NYT) a little more confident. The Great Asset Dump of 2008 will go on, irrespective of what we read about the economy or earnings, until it becomes apparent that “what’s for sale” has shrunk to a point that it can be easily absorbed by the large piles of buying power that have been sitting nervously on the sidelines. Then there will be more days like Monday and fewer days like all the others that have collectively seared our memories. But for the degree to which most us used up so much of our buying power snapping up bargains before the real ugliness started, these brutal weeks will likely prove to be a blessing. What will likely follow is a multiyear era when all but the most snake-bit equities actually produce double digit returns, a repeat of what many astute value investors reaped during that otherwise dreadful time that was the back half of the Seventies. (You can look it up.) There is something out of kilter about a world where an enterprise like Intel, with its cash hoard overflowing, its innovation engine back in high gear and its competitor in disarray, for less than thirteen times current year earnings and ten times likely year ahead earnings. (I’m thinking something like twenty times earnings a little more than $2 within four or so years.) I’m with Warren, cash is about to become trash.