Tuesday, July 11, 2017

"Now is the time to sell your stock" - According to WSJ Columnist

Is the great 2017 stock rush propelled by the "Trump effect" about to come to perdition? Is it time to sell your stocks, assuming you've elected to be part of the current mania? (Ok, it still hasn't been decided by the market gurus whether the current 'ride' is mania or bubble driven by irrational exuberance).  But WSJ columnist James Mackintosh ('Everything Is Awesome! Now Is The Time To Sell Your Stock', July 3, p. B1) seems to have some insight.

Mackintosh begins by citing the usual upside indices (e.g. low inflation, low interest rates,  low bond yields, low volatility  etc.) as to why markets are flush with new money and "celebrating" but why some nevertheless believe "everything is just too perfect".    Mackintosh refers to this as the "Goldilocks economy". Like the "Goldilocks zone" around certain class G and F stars with planets, the conditions are "not too hot and not too cold".

Mackintosh goes on to point out (ibid.):

"Explanation is not the same as justification. The fact that everything has been awesome recently is little guide to the future of the economy or inflation - and the rise of stocks makes it less likely the general awesomeness will continue."

So, in a sense, investors' belief that things will continue "awesome"  because they have been awesome the past year or so,  is a twist on the classical logical fallacy known as Post hoc ergo propter hoc   which - as I noted in a previous post -  basically means a person has connected some event in a causal fashion with an event that has gone before – though there is no proof whatever of causal nexus.  Thus, a guy goes to a fortune teller, demands his money back for not getting the reading he wants, after which she curses him. Three days later he gets the Swine flu and nearly dies. He blames the curse of the fortune teller.

In the current instance, stocks (most) are going great guns and everyone in the market feels like  a world beater. So, if this has already gone on so long, why not longer ....into the near future?

But as Mackintosh points out there are as  many reasons to dismiss this belief as much as the earlier example, i.e. with the fortune teller.  He puts it in terms of an old market adage:

"The markets climb a wall of worry and slide down a slope of hope."


"Worry has all but disappeared this year."

Then quoting Simon Smiles, chief investment officer for UBS Wealth Management, that "if  the only thing to worry about is North Korea then there really isn't anything serious to worry about."

Well, ah, not quite.  If the U.S. were to mount a pre-emptive strike  on North Korea the response would be absolute carnage via retaliation on South Korea and Japan, with perhaps 1 million dead in the first nuclear strikes since the end of World War II. The S & P 500 as well as DOW would plausibly collapse by as much as 80-90 percent. Thinking 21,000 DOW now? Think 1, 500 after a North Korean nuclear retaliation strike on Seoul and Tokyo.

But let's assume that in the constellation of possibles, Smiles believes (or at least hopes) the North Korean scenario is the least likely to occur. Maybe he thinks Trump is another JFK in the midst of the Cuban Missile Crisis. Who knows?

But Mackintosh is thinking beyond current geopolitics or threats arising therefrom, e.g.

"The trouble is it is almost by definition the unexpected events that hit markets, and the calm has left investors less prepared for bad news than usual. As investors step further outside their comfort zone in the pursuit of gains, their resilience to bad news is reduced. The frothier the market the less bad an unexpected event has to be to shake confidence."

In other words, as the market rise goes on, it will take a much less devastating event to shake it. Again, note that the "pursuit of gains' doesn't mean just buying more stocks in this "froth" environment, but remaining in the stocks you have longer to reap continued gains. If I were in stocks, and I am not - preferring the route to immediate annuities - I'd be bailing out about now. (Mainly because of the North Korean specter.)

The following parting words of Mackintosh ought to be a warning to current stock holders:

"Investors believe that bear markets only come with recessions, and so reassure themselves that there is no sign a recession is imminent, repeating the mantra that 'economic cycles don't die of old age'. Unfortunately, this is both wrong and useless.

First, 20 percent drops happen outside recessions, as in 1987 and 1966. Second, economic cycles can be killed by a financial crash, and as the late Hyman Minsky pointed out, the longer a financial cycle goes on, the more likely it is to turn to excess and end badly. Worse, there is no reliable method of forecasting a recession, so even if it were true that only a recession can end a bull market, that isn't a lot of use to investors."

Mackintosh correctly notes no one really "knows when the next dip will come" which is small consolation to those invested 60 percent or more in stocks. However, George P. Brockway ('The End Of Economic Man'), has pointedly noted that all bull markets end in veritable crashes, the purpose of which is a massive transfer of wealth to the upper crust (with most disposable income) from those who can least afford it.

Maybe something to think about. Or perhaps seriously consider the final advice of Mackintosh:

"When everything is awesome it is best to prepare for things being a little less awesome in the future, even at the cost of missing out on some of the gains."

So, a rational response now may be to consolidate gains and sell- redeem what you have - as opposed to waiting until the inevitable panic strikes (at the last  minute) and the wealthy hotshots beat you to the exits with their flash trading systems.

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