This week finds us more than a little chastened by a Market correction that seems to have arrived a bit sooner than I expected. Last week’s Musings ended with: The Market got its badly needed excuse to sell off, ... but long term investors who are attuned to the global economy should not be dismayed. By midday Friday, dismay would be a very apt way to describe my frame of mind. With the Nasdaq having already already melted some 8% over the dozen or so trading days since its January 11 (intraday) peak, it seems more likely than not that a bona fide correction, as opposed to a mere “pullback”, is upon us. This installment of Musings will explore some of the putative reasons why the prevailing bias seems to have inflected in a southerly direction.
The first thing to remember about a Market correction is that it really doesn’t need a reason. Nature’s tendency to impose regression to a mean can and does suffice. Whenever the pullbacks that were experienced along the way since the March 9 seemed like they were about to become the new norm, there were plenty of “reasons” being proffered by the hired guns of Wall Street and their media enablers. We should not be surprised to hear this chorus grow louder in the days ahead. I can remember toward the end of that swoon that ran from mid June until the day Intel’s Q2 results ignited a rally (and set the stage for the sucker’s game of trading ahead of earnings that has failed the not-so-smart-money so spectacularly these past two weeks) hearing a lot about technical breakdown and ahead of the earnings, etc. The same was true during the multi-week pullback that was seemingly precipitated by purportedly disappointing (i.e., they blew away official estimates, but analysts “expected” more, and outlooks fell short of somebody somewhere’s all-but-certainly-unguided expectations) earnings in the latter part of October. My experience has been that the “reasons” for the Market to go up or down are always there and don’t change as much as they seem to. What changes, from day to day and season to season, is what gets focused on, spotlighted if you will, by the seeming keepers of consensus. It’s as if there are a bunch of cue cards that we are all supposed to heed, and the Market shifts direction to the extent that someone somewhere decides which set of cue cards to use. (Ah, the dreaded unseen “they” who are behind the misfortunes of the conspiracy minded. Human nature is such that it is more reasonable to believe that coteries or factions will attempt to rig the system in their favor than to assume that some moral compass or fear of punishment will rule out this possibility. Just because manipulation, or any ad hoc behavior for that matter, cannot be proved or even directly observed does not mean it does not happen, any more than irrefutable assertions, a generation ago, that the Mafia “did not exist” disproved the existence of organized crime families rooted in Sicily.)
This pullback or correction that has overtaken the Market does not need a reason, some fact of life that was not in play the when the trend was the Bull’s friend, but I think a few catalytic factors have entered the mix. Much has been made of financial troubles in Greece. Substantively speaking, this should not be a big deal, as Greece is just not that much of country. Its population is only 11.3MM (up only about 340K in the last decade), which is fewer people than Texas has cows or Mongolia has sheep. Its GDP approximates the market cap of Exxon Mobil. It is less than one third the size of New Mexico and most of that (86%!) water. It is hard to think of what assets it has besides tourist venues, and its leading export seems to be people. Greece has been around longer than just about any people group presently extant, thirty centuries at least, and yet they couldn’t bring themselves to organize into a country until 1830. If the whole country were to take note of Mongolia’s very low people/sheep ratio and move there (a sort of mass "embraceable ewe" hysteria?), would the world economy notice? Hardly. I think what is in play here, besides someone somewhere with influence over what scripts get read or what “research” gets published trying to scare you into doing something stupid, is that players of all stripes are being reminded of a recent traumatic experience. The fear of imminent global collapse, so rampant only a year ago, has died down, but it left painful scars that have not healed. Visions of dominos (metaphor run amok!) jellify the knees of traders and investors. The smart money senses this and piles on, confirming the not-so-smart’s worst fears, and we get a Market correction until the path of least resistance is no longer down.
If there is a true catalyst for this apparent correction, my guess is that is that it revolves around political developments, or perhaps nondevelopment. It is a continuation of what fell into place last March. As Musings noted on March 25: “For weeks on end up until the Market’s first upward surge, we were being treated to volumes of scary-making talk of transforming our experiment in ordered liberty into an amalgamation of Chicago and Berkeley, with a sprinkling of Havana thrown in. Control of both Houses suggested that “get it all in a hurry” was going to be unstoppable. The thing is, it only seemed that way. What occurred to me as that buying stampede wore on was echoed a few days later in the WSJ by Mr. Karl Rove. He noted that every Administration starts with political capital, which they inevitably spend. It’s just a matter of time, and some spend it much more quickly than others. I can remember when Reagan had basically spent his c. 1986. It occurred to me that this time, the collective efforts of this crew had thus far been so amateurish, so evocative of Commencement Day at Clown College and so presumptuous of success as to perhaps set a land speed record for blowing one’s political wad.” It was the realization of this that launched the rally which came to denote 2009. Along the way, in thinking about what might sustain a recovery, it became plausible to suppose that we might be headed for a redux of that Clintonesque triangulation that the Market seemed to applaud fifteen years ago. The notion developed that much the way the Clintons overreached, were rebuked and then changed course in ways that facilitated relatively benign governance (from capital’s point of view, you know, things like welfare reform and NAFTA), the HopeNChange Express was on a collision course with humility and would alter their ways accordingly. This salubrious outcome was expected to be delivered in November. It came early, most recently and vividly in Massachusetts, but the drama has thus far not followed the aforementioned script. We see heightened intransigence where a shade more comity was expected. We get shrill reminders, replayed ad nauseam by the financial media, of the sort of rabid populism that degrades and ultimately destroys any economy it infects. Instead of a Clinton redux, we are left with the unsettling sense that some would move us in the direction of Chavez. (Speaking of that redux, remember that by no means is everyone who is cheering the political incapacitation of this Administration a Republican. We should not be surprised that in the back rooms and soirees were campaign fund raising takes place, it is becoming common knowledge that our Secretary of State and her husband are stepping up their heretofore low-key campaign to return to 1600 Pennsylvania. The slow drip poison accompanying that game is going to make for unsettling developments in the next couple of years.)
What is especially vexing about this downturn, and what likely caused my overly optimistic sense that the rally would stay intact for a while longer, is encapsulated in those words lifted from last week: “attuned to the global economy”. The fundamentals are not great a la what they seemed in 1999 or 2006, but who among us expected anything but a slow recovery? If anything, much of the news is far better than we were expecting even a few months ago, and certainly better than we had any right to expect at the Bottom. No one saw how strongly so much of the global Tech sector would recover. Yet here we are in the wake of the earnings season where monster blowouts by INTC, MSFT, STX and down the line culminated in Tech leading the rout. It could be argued that to the extent “Tech” is synonymous with “risk” and risk aversion just came back into style, this makes sense. This betrays an outdated notion of much of the Tech world. How many countries are better risks, better credits, than Microsoft or Intel? Which would you rather trust with your capital for the next twenty years? No, something else is afoot. What I think has happened is that the Street (those big firms who publish research and invest on their own accounts) recognizes just how great the prospects are for much of the Tech Sector over the next several years, but they didn’t figure it out fast enough to back up the truck and accumulate enough (the trouble with the greed-addled is they have no sense of “enough”.) So we get all this hokey “research” fraught with constructs like “normal peak multiple” and when the mood turns as skittish as it has been these past two weeks the owners at the margin give it the benefit of the doubt. This research is redolent with what seems to be willful ignorance. (Ponder just how much relative weight to accord to each of these terms.) I have a very large bet on certain parts of the Tech Sector (see my List), and either the companies have succeeding in bamboozling me with the steadily strengthening outlook that I have pieced together OR the Street is trying to bamboozle us with its research. The next Musings will address why I am gritting my teeth and riding through this rough patch with an outsized bet (i.e., the four largest positions constitute about a third of my investable net worth) on these Tech stocks.
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