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Author: Wotdabny Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 457511  
Subject: Re: Waiting For S&P Below 700 Date: 1/5/2009 10:21 PM
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The question you are asking is:
What do you all think of the upcoming bad news and how will it affect the market in general?


Yes, exactly. I’m in general agreement with the ensuing discussion. Thank you for your thoughts.

If I had to add anything, it would be that in the recent NYT piece posted here -- http://boards.fool.com/Message.asp?mid=27320086 -- the authors note that everyone from the SEC to the Fed to Hank Himself, and more besides (such as the POTUS) has acted as though to help put a floor under stock prices. I agree with the authors’ conclusion that this is absurd -- no one trusts what the government is doing because it’s all for the wrong reasons, reasons that do little to address reality. In fact, there plenty of open suspicion, and not just on METAR, that they’re actually making matters worse. The stated conclusion of that article is to do the right things without respect to what the stock market will make of it, and let stock prices adjust to an emerging reality that we can have more confidence will stick around for the long haul.

I don’t know what the incoming POTUS will do, but I’m reasonably confident that his actions and those of his administration will be meaningfully different. Who knows? He might even take steps to move the system toward something resembling integrity. But that almost seems to be stretching Hope too far.

I’m reminded of FDR appointing the tougher-than-tough, beyond-hard-boiled operator Joseph Kennedy (the senior Kennedy of that family) as the head of the newly created SEC in 1933 (“he's know all the tricks of the trade” FDR said, and he was exactly right), of how that appointment forever changed Wall Street and global capital markets, and how those changes have been co-opted over recent years. I don’t expect the incoming POTUS to give us that kind of revolution, but I do wonder: What if the new SEC actually does its job the way it’s supposed to? That would indeed represent Change.

And if it were to come to pass, I would expect the stock market to react poorly, at best. Any and all actions taken to restore integrity, transparency, and honesty would be decried, as the creation of the SEC itself was, as un-American, antibusiness, anti-capitalist, and unconstitutional (no, I’m not kidding -- and neither was the NYSE’s President) etc. In fact, anything other than more free money given to Wall Street would be a change for the worse in they eyes of the market. But change away from the direction of the current administration is inevitable no matter who were to become POTUS -- there simply isn’t any more money or credit to give away. So whatever you think of Obama, things will change. No one promised it had to be change for the better, of course.

For this reason too, among all the others, I think we shall be headed to lower lows. There are plenty of fundamental reasons, but the psychological reasons seem even more compelling to me just now. That’s just my opinion, and I’d love to hear others’.

Assume the plausible scenario that the S&P 500 simply rises by around 7% (+dividends) a year for the next 10 years. Are you going to sit out the next ten years if that happens?

You’re right, I didn’t fill in much in the way of details. No, I won’t stay out forever. I’ll put money back in from time to time, depending on the opportunities presented to me and the credibility of earnings, something like two deciles semi-annually with three more deciles kept in reserve for trading opportunities. Even if I can’t detect a shift in sentiment, I’ll be relying on mungofitch’s sensible 100-day rule: When the market hits a new 100-day high, it’s time to Get Back In (whatever that specifically means for one’s strategy). Although I won’t be buying the S&P 500, the proxy mungofitch persuasively uses to show safer, better investment returns, I am convinced that the 100-day rule is something to keep an eye on and to a certain extent abide by. I’ll certainly be taking a much more conservative posture in the future when the rule says to sell, for example. He explains the rule here:
http://boards.fool.com/Message.asp?mid=27035352

And what shall I do should it come to pass that I see the S&P sinking toward 800 again? Just wait around for 700? No. I’ll resume the strategy that paid off so handsomely in 2008: I’ll be watching my short list of very high-quality stocks, stocks I wouldn’t mind owning forever, and that I believe will be in business long after I’m gone, such as JNJ, for example. When one of those stocks gets near a low it has only touched a few times since late 2008, particularly when it is near a nice strike, I’ll sell puts 2-5 weeks out. If they execute, great, I own a great stock for a great price. If not, I’ll collect the premium. I won’t take any large positions in any event. I might reserve three, um (oh, why not?) tranches for JNJ, say one at 55, and two more for lower, whatever that might mean (50 and 45? who knows?). If 55 goes in the money and stays there, I still have powder left for lower strikes. I keep in reserve capital for several other excellent stocks that may fall into my range. I’ve usually sold at an annualized equivalent premium of around 100%, then rolled it over when it was 75-90% cooked -- something that, with the VIX at less than half of what it was, is simply not feasible at this time, at least not on the stocks I'd be comfortable owning. As Wendy has pointed out before, the Mr. Goodbuy list on The BMW Method board is a great place to go shopping, and I pulled on it on more than a few occasions for fruitful ideas.

Dave
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