Turning Japanese (I really think so)

Brilliant post by Baruch’s bloggy chum Cassandra last week about the current rally in shares, and not just because it gives me the opportunity to play this video, which I’ve been humming on and off for a while now:

No, the other reason to appreciate Cassandra’s experience is that it descibes so well the torture of the trapped bear, a torture all the worse for being administered to oneself by oneself in an open plan office in front of your colleagues (the only thing actual physical torture has to recommend it as an alternative is it tends to humiliate in private and doesn’t directly damage your finances. If you’re fortunate enough to be tortured by American subcontractors there’s the small chance you may be able to sue your torturer afterwards and possibly end up with more money than you started with, but that is definitely not the case if you’re waterboarding yourself ). Oh, there’s nothing worse in an investing context than being trapped on the wrong side; it is awful.

In the week since reading the post, three things have struck me :

  • I don’t know where we are in the rebound, but the maddened mob have clearly started turning on the um cassandras who told them to be short, the Roubinis, the Talebs and in fact gurus in general. One can applaud the sentiment about gurus overall, but being cross at people who are generally more right than wrong seems a bit ungracious to say the least. Nevertheless, I would imagine this sort of thing would happen closer to the end of the rally than at the start.
  • That said, equity rallies in the Japanese bear market of 1990 to well, now, tended to go much much farther than you would think. At least 4 times in the decade after their bubble burst, Japanese stocks, measured by the Nikkei, popped well over 30%. The median rally over that period seems to have measured about 50% from the low to the high. Think about it; we’re up a bit less than 40% last I looked. We could have 20% more to go. 20%! That’s worth getting out of bed for. And definitely something a trapped bear would want to avoid thinking about.
  • To make things more complicated, however, it is just not true that fundamentals and the current rally are moving in opposite directions; there is some, actually a lot, of improvement in specifically the companies that Baruch follows oh so exhaustingly closely, and by extension the global economy. To be sure, the improvement is relative to extremely low expectations for revenues and earnings that were set amid the very extremely terrible conditions at the end of 2008; on an absolute basis, measured from this time last year, things still look crap. But stock investing is an expectations game, based on where we are going not where we’ve been, and there’s reason enough, trust Baruch here, for lots of his stocks to have rallied significantly on the basis of the quarters they just printed. At least prima facie.

So where does that leave us? Well, the last point seems to be the killer. Stay long, I guess? The only problem with that, of course, is that much of the improvement in fundamentals in Baruch’s technology names at least comes from what is being called “restocking”, the refill of inventory of finished goods in the retail channel and of components in manufacturers warehouses. On the other side of the “Restockers” stand those who I call the “Double Dippers”. They think this will all end in another overstocking of inventory, that just as we did at the end of september last year, at some point in Q2 or Q3 we will all have to cut our estimates again and that means stocks should start tanking, well about now. Which they sort of are.

We still don’t know much about end demand here; is it down 10%, or 30%? We’ll probably only find out after the summer. How much, and at what speed, will consumers delever themselves? How much of a difference will government demand make? To make it extra difficult we also have George Soros’ big idea of “Reflexivity” to deal with, the idea that an otherwise frivolous restocking cycle and associated stockmarket rally could start a virtuous feedback loop that ends in fundamental improvement in the real economy. Sure, it could just be an oversold rally, but fundamentals don’t just sit there, unchanging. Company earnings can get “oversold” too, or at least stretched to the downside and bounce back. Or they might not. 

Basically, no-one knows, no matter how hard they pretend to. And if they did they certainly wouldn’t tell us. Posts like Cassandra’s are excellent aide memoires for mistakes others have made in the past, but in general you’re on your own, dear reader, as is Baruch. The only advice he can give you is. . . be the ball.

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3 thoughts on “Turning Japanese (I really think so)”

  1. we will not truly turn japanese until we start speculating in prized real estate in Tokyo…or buying undergarments from vending machines

    does a glass of Orange Juice still cost $26US in Japan?

  2. Baruch… I dropped you an e-mail a few weeks passed, let me know if you saw it, if not please hit me with a decent one. Tnx, Cassie

    1. ay yiyi, am not checking my email!! most sorry. ok will go and see what you have to say!

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