The Point of Maximum Pessimism

The Point of Maximum Pessimism

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Phew! What an exhausting month.

On the last day of July, the S&P/ASX 200 index closed at 4,424 points.

On 9 August the index reached an intra-day low of 3,765 points.

At the close of trade on Wednesday the index closed at 4,296.

As you can see on the logarithmic chart below, the stock market action this month has been the most volatile this year:

stock market chart
Source: CMC Markets Stockbroking

 

In fact, for a similar sized percentage move you have to go back to April last year. Funnily enough, that too marked the approximate end of a period of U.S. Federal Reserve money-printing.

And now the market is waiting for the next central bank move.

Not surprisingly, the market has gone all topsy-turvy.

What’s good is bad, and bad is good

Economic news that’s normally seen as positive is now seen as negative. Why? Because the market fears it may stop the Fed from printing money.

Not only that, but bad economic news is cheered… because it increases the chances of money-printing… and that’s seen as a good sign for the markets and the economy.

For example, this from Bloomberg News:

The dollar rallied, Treasuries rose and U.S. stocks swung between gains and losses, as the manufacturing report bolstered optimism in the economy while dimming prospects for more monetary stimulus from the Federal Reserve.

It’s crazy. Positive news should be positive for stocks. But these days, that ain’t always the case.

The only explanation we can come up with is this…

A genuinely self-sufficient market will take months and possibly years to recover and grow. But – and here’s the key – it will be sustainable growth.

By contrast, a central-bank-induced “recovery” will hit the markets right now, like a big shot of coffee. But – and here’s another key – it’s not sustainable. Just as the effects of previous stimulus soon wear off, so will this one.

And traders who have gotten into the market on the basis of more stimulus know this. That’s why they’re getting out on any signs of positive economic news.

However, they needn’t be so nervous. Because we’ve got some news for them…

Fed meddling is certain

Action by the U.S. Federal Reserve is almost guaranteed. Meddling is what these guys live for. But we understand traders’ nervousness. When they’re punting with huge leveraged bets the last thing they want is to be in the market while other traders are selling out.

That’s what’s making the market hyper-volatile.

And if you’re in any doubt about the impact of stimulus on the real economy, it’s worth noting the following quote from the Financial Times. Because not everyone is happy about the outlook for the economy:

In many countries, the surveys of purchasing managers produced the lowest readings of manufacturing activity, orders and jobs since mid-2009, when the world economy was crawling out of recession.

To us, the situation is clear: for as long as policymakers continue to meddle and try to boost the economy, the longer the economy will stay depressed.

Yes, it may help the stock market in the short term by artificially inflating prices. But long term, it will do no more than disappoint investors.

And eventually investors will get so used to the post-stimulus disappointment they’ll forget to get excited about the stimulus beforehand. That’s when you’ll know the market is at the depths of the depression.

And that’s when the market will be at a genuine bargain price. Famous investor John Templeton only bought stocks when the market reached “the point of maximum pessimism”.

In 1939 it reached that point. He bought stocks. He made a fortune. But not straight away. It took time. Central bankers aren’t interested in taking time. They’re trying to bag a quick fix.

And that’s what’s creating the volatility and distortions in the market.

So right now, some individual stocks are at “maximum pessimism” prices and are worth buying. But the market as a whole isn’t.

That will only come when investors are no longer fooled by the magic charms of central bankers.

Until then, the action you’re seeing now is nothing more than a trading market. That’s great for traders. And great for punters. But it’s not so good for the conservative investor who’s just trying to save for retirement.

And by our estimates, it seems the market is set to stay this way for a while yet.

Cheers.
Kris

Publisher’s note: Something else that’s “great for traders”: Murray Dawes’ latest market update video, posted on YouTube on Wednesday. If you haven’t watched it yet, go here now. It’s rare that an experienced trader will give his insight away for free. So while he’s happy to do it, you should lap it up! For Murray’s latest overview of the market… and an idea of where he thinks it could be headed next… click here.

 

Kris Sayce

Kris Sayce

Publisher and Investment Director at Port Phillip Publishing

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth, and Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

Kris is also the editor of Tactical Wealth and Microcap Trader where he reveals the best opportunities he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here or Microcap Trader here.

Official websites and financial e-letters Kris writes for:

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21 Comments on "The Point of Maximum Pessimism"

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Bobby
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Bobby
5 years 3 months ago

US is suing the banks for bad mortgages.

http://www.bbc.co.uk/news/world-us-canada-14758677

This shall be “good” for the markets tonight.

Peter Fraser
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Peter Fraser
5 years 3 months ago

Thanks Bobby, I guess they will sue for the $30B lost by Fannie and Freddie, and then they will settle out of court for half that. The banks should be easily able to afford that, and if not the public will have to bail them out again.

If it wasn’t so tragic it would be funny.

Drood
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Drood
5 years 3 months ago

If we,re all here to make money, why should banks be villified for doing it well?

PT
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PT
5 years 3 months ago

They weren’t making money Drood. They were going broke, begging the American government to be bailed out, and then kept on paying out bonuses and acting as if nothing was wrong.

Try “The Big Short In The Doomsday Machine” by Michael Lewis. I also recommend his book, “Liar’s Poker”, which will explain how it all started.

PT
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PT
5 years 3 months ago

The reason the mess ain’t going away is because those who created it are still in power, and haven’t changed their ways. (Or have they? I could be at the point where I’m getting out of date here but I doubt it. Anyone know any better? … )

Peter Fraser
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Peter Fraser
5 years 3 months ago

Drood there is absolutely nothing wrong with a bank making money, in fact it is desirable, but when it was done with dishonesty and sold off to unsuspecting investors, that becomes a diffferent matter.

The Wolf
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The Wolf
5 years 3 months ago

PF… how is that fence ?

“but when it was done with dishonesty and sold off to unsuspecting investors, that becomes a diffferent matter.”

It isn’t a different matter… it is fraudulent…and they should be prosecuted, fined, directors and managers jailed, and certainly not bailed out by the taxpayer to do it all again 😉

Peter Fraser
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Peter Fraser
5 years 3 months ago

Wolf – yes I agree, I’m disappointed that people are not in jail over what has happenend in the past. I believe a couple of people have been charged in the US, but surely there are hundreds who were complicit and knew the full extent of the damage they were causing.

Fence – I’m lost on that question. I painted my front fence/wall recently – looks great, but I don’t remember having an international forum discuss it. Cheers.

Drood
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Drood
5 years 3 months ago

Why is what you lot do more ethical than the banks?
Ok so its done with dishonesty , but so is investing in stocks that cause pollution , made in sweatshops, kill a few iraqi,s for.
Pretty easy to say other business,s ,countries shouldn,t do things then invest in those things.
PF…How many unaffordable mortgages did you help people obtain?

Roger Guillemet
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Roger Guillemet
5 years 3 months ago

It was reported this week that 25 of Americas top 100 companies payed their CEOs more than they paid in income tax. Not fraudulent, but not right either.
Given Telstras increases in pay to its directors of 50% plus whilst it sheds profits shows its not just a US problem and Bluescope lays of mass employees and increases directors income whilst seeking a bail out from the taxpayer.
It seems there are no Ethics in the business world just out and out Greed. All in the name of increasing share holders profits of course.

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