The elevator is full
DIS and DAT- The elevator is full- July 2013
Our periodic communication that reminds you to ask, “Should I react to those headlines?”
“And she'll have fun fun fun
Til her daddy takes the t-bird away” Beach Boys
Dear Friends:
Boy, oh boy, it is hot down here in South Louisiana! The crawfish shells have hardened and sno-balls are in favor. Many people travel to the beach for a vacation this time of year, which made one think of how that vacation relates to current market conditions.
You have planned it out for months. You booked and paid for the condo, bought the groceries, packed the SUV, drove the distance, and most of all your family is extremely excited about the great time you are going to have. Once to the condo, you have to get the keys, get the codes, unpack everything. Finally you say to your family “Let’s hit the beach!” You lug all the chairs, beach toys, snacks, drinks, music, books etc to the beach from the twelfth floor of a sixteen story condominium. You set it all out on your part of the beach. You apply all the lotion. So you are enjoying your family vacation on the beach!!!
You pat yourself on the back for such a well-planned vacation. You enjoy the waves, the sun, and the cool breeze off the water for an hour and a half...."Uggh. No way, not dark clouds" you think. You watch others, who seem to have been on vacation for a week, pack up and go in..... "awe scaredy cats, let 'em geaux", you boast. You continue thinking I have too much sunk investment in this day to leave just because a few dark clouds. As the scaredy cats, leave more people file onto the beach, passing on their way. The site of fresh faces, confirms your thought "nothing to worry about". Five minutes pass and no rain. Yet darker it becomes....ten minutes later, BOOM ! the crash of thunder and it's too late. Panic sets into the crowd. Authorities are forcing people out of the water. You think to yourself, "How can this be on my first day of vacation? How many times have I seen it pass over before? How can this be ?".
In your panicked voice you say, "pack it up we are headed in.” As you approach the boardwalk, you are greeted by a long line of vacationers. By now, the long line and the frightening sound of thunder are leading some to decide that, bypassing the foot wash is well worth the time saved. This decision is causing sand to be tracked everywhere. When you finally get inside the gate the progress of the line slows to a crawl. “What's the holdup?” you ask. A not so calm mother of three young ones, screams back “the elevator is full !" Portions of the crowd decide to wait for the next empty elevator. Some others seek shelter believing they will ride out the storm. Still others climb the stairs with their beach stuff, while another group decides to leave the beach stuff behind.
This scenario can be similar to the panic which develops as the crowd seeks to get out of an overcrowded, overpriced investment. The panic occurs in stages due to the individuals of the crowd finding their own liquidity along the way.
Maybe we could imagine three moving parts in this transition to higher interest rates rise.
First, Nasdaq index finding a panic bottom on March 9th 2009 of 1268 from a peak of 5048 in March 2000 as the internet mania faded from memory.
Second, a possible bull market peak in commodities, seeing gold prices go from September 1999 of 252 to a peak of 1895 in September 2011. Investor's discovering not as much value as they did more than a decade earlier and possibly fewer other people to pass on the golden price to.
Possibly the largest is a thirty year U.S. bond market which has seen ten year treasury yields fall from 16.46% in September 1981 to 1.39% in July 2012.
Boy if one could only know when those major changes occur! No we aren’t the ones who will pin point those changes. Yet we are simply pointing out those pivot points to demonstrate that reversals in asset classes could occur in stages due to the market participants attempt to reach a value equilibrium in their allocations.
Now one could imagine a few “conservative” and independent minded people allocating portions of their portfolios into U.S. stocks in late 2008 and early 2009. Maybe they were in bonds for a while, similar to the first ones off the beach who had been on vacation for a while.
Other investors could have allocated into equities during late 2011 while they were selling their gold allocations.
And in the last two months maybe others were deciding to bypass the comfort and cleanliness of the foot shower, by selling recently purchased treasuries at a loss. The investment news periodical reports that $60 billion was pulled from bond funds in June.
Now we have no idea if this process continues or what pivot points might occur. The point is to explain that we believe this unwinding of low yields, combined with an unwinding of the disbelief in the earning power of corporations, could occur over a long period of time. The process could have several stages based on the decisions that individuals make in order to protect themselves the best way they know how. We find it odd that given a long period to think market participants would favor ten year U.S. treasuries at 2.48% yield or gold at $1,242 an ounce over the thirty Dow Jones index company stocks averaging 2.4 % in dividend yield and 7.6% in earnings yield.
Therefore we believe we may still have stages yet to survive. Similar to the beach situation as a frustrated mother at the beach screams “the elevator is full", some people still have to decide whether to wait it out, take the stairs, or stand patiently for the next elevator. Investors may continue to flee gold, and U.S. treasuries in search for the value of earnings in U.S. companies even with the Dow Jones around 15,000.
We believe, there are investors riding along the beach in their T-Birds, not wanting to hear that Mr. Bernanke is taking the fun away.
See you next time.
James Pope
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