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"Do Nothing!"

Tyler Durden's picture




 

Submitted by Erico Matias Tavares via Sinclair & Co.,

What's an equity investor to do these days?

Weekly S&P500: Jan 2013 – Today

On the one hand, the weekly S&P500 chart is resiliently bullish. The arrow in the graph above shows the only instance where there was a material correction since early 2013, quickly rebounding after that. The trend is your friend and so far it has been positive.

If there's one area where central bank intervention has been unambiguously successful it’s the stock market. The ECB will soon join the party with its own quantitative easing program. In an environment characterized by commodities in a downtrend, zero interest rates and (incredibly) negative yields across several sovereign and even corporate bonds, where else can an investor get some pizazz?

On the other hand, there are some pretty serious risks lurking out there. Here’s a quick overview:

  • Global economic growth forecasts continue to be under pressure (further evidenced by copper prices consistently below $3/pound and weakness in crude oil prices);
  • Global carry trades undermined by a strong US Dollar, which according to some estimates has been used to fund $5-9 trillion of asset purchases outside of the US (that’s quite a lot), and also the Swiss Franc, where its dramatic appreciation a few weeks ago caught many funds off-guard;
  • The realization that the bailout plan for Greece is not working and the polarization of positions between the borrower and its creditors on what to do about it might force a major change in the existing Eurozone construct;
  • According to McKinsey, the global consultancy, total debt levels in China have jumped from 158% of GDP in 2007 to 282% as of 2Q'14 – higher than in many advanced economies, raising concerns about credit sustainability and the feasibility of another stimulus encore;
  • Several emerging markets, particularly in Eastern Europe, Turkey and South Africa, have accumulated substantial debts in foreign currency, and any further depreciation of their own currency might make those debt loads unsustainable;
  • The Middle East is now a breeding ground for terrorism, attracting fighters from core European countries, South and Southeast Asia; containing this threat may require a lot of sacrifice and cost, with potential repercussions back home;
  • The prospect of continued sanctions against Russia, accompanied by an escalation of the conflict in Ukraine, will likely disrupt trade, diplomacy and credit flows between all the parties involved;
  • Many banks are heavily exposed to emerging markets, particularly in Europe;
  • Option volatility (VIX), credit and breadth indicators are not confirming recent US equity highs;
  • US equity valuation multiples are sitting at levels which historically have correlated well with very low returns over the following 7-10 years.

So what to do here?

Well, unless you are a fund manager who is paid to be in the markets no matter what, here’s an interesting course of action to consider right now: do nothing!

If there is one thing credit indicators and the strong US Dollar are telling us right now, is that there is trouble brewing out there. So you don’t have to rush to buy crude oil or copper because you think it’s cheap (although there’s some logic to that); you don’t have to buy equities because everyone else is doing it; you don’t need to be a hero to be a good investor (unless adrenaline is what you truly seek).

Of course we could move higher from here, much higher in fact. But there are times when holding a healthy amount of cash is not a bad option (provided it is kept in a safe place); actually, if the forces of deflation prevail this is the place to be.

It is important to note that after trillions in quantitative easing around the world these deflationary forces remain so prevalent, especially when there is a lull in central bank action. Perhaps policymakers should also consider the “do nothing” approach, let market forces clean out some of the excesses and reengage with the markets at levels where their programs can be much more effective. This may require a more pragmatic approach to central banking.

Indeed, this seems like a sensible strategy overall:

If you are in the major equity markets, you can protect your paper profits by tightening your stops and/or taking some chips off the table. Think about this one. When you buy at a (true) bottom, by definition the odds of gains are much higher than losses at that stage. But as prices move higher, at some point your expected gains will be much less than the accumulated profits you are now risking by remaining invested in the market. What's the risk/return profile of equities right now? That's a really good question.

Otherwise, you can always take a step back, keep your powder dry and wait for a major correction (there will always be one) or for key economic variables to realign in the direction of your investment, so that you can improve the odds in your favor.

You will probably sleep better at night in either case.

 

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Thu, 02/12/2015 - 11:34 | 5775819 SethDealer
SethDealer's picture

equity investors need to listen to Jim Cramer!

Thu, 02/12/2015 - 11:42 | 5775854 SHEEPFUKKER
SHEEPFUKKER's picture

"equity investor" a.k.a. long only no matter what.

Thu, 02/12/2015 - 11:52 | 5775880 froze25
froze25's picture

Cash is king in a deflationary correction.

Thu, 02/12/2015 - 11:57 | 5775899 Uchtdorf
Uchtdorf's picture

Does "doing nothing" include purchasing physical assets?

Thu, 02/12/2015 - 12:04 | 5775923 Stuck on Zero
Stuck on Zero's picture

Good point.  You are invested in something if you have any worth.  If it's in cash in the mattress then you are bullish on the dollar. You have to be bullish on something.  You cannot be uninvested.

Thu, 02/12/2015 - 12:14 | 5775945 StandardDeviant
StandardDeviant's picture

"If you choose not to decide, you still have made a choice."

Showing my age...

Thu, 02/12/2015 - 12:18 | 5775959 therover
therover's picture

Nah....Rush is always good. 2112 is my all time fav.

Thu, 02/12/2015 - 22:33 | 5778884 barroter
barroter's picture

Age? That's when music was good.  2112? Excellent..."The Temples of Syrinx"

Do nothing? Sure, I ain't buying at these valuations.

Thu, 02/12/2015 - 12:12 | 5775943 thinkmoretalkless
thinkmoretalkless's picture

Cyprus made an impression on me. Cash as an investment strategy has become more complicated in a world without rules.

Thu, 02/12/2015 - 11:52 | 5775884 sodbuster
sodbuster's picture

This article is blasphemy. Not the way to get invited on CNBS.

Thu, 02/12/2015 - 12:16 | 5775952 StandardDeviant
StandardDeviant's picture

That's it.  The question itself, "What's an equity investor to do?", is nonsense.  It's not as though you're born an equity investor, and must remain one for life.

Thu, 02/12/2015 - 11:52 | 5775874 tgatliff
tgatliff's picture

Wait... You mean there are still "equity investors" left?   I thought the only investors left were the computers (aka algo).   

 

Meaning, the market is going up because there is no volume and the FED (aka Citadel) decided it needed a confidence booster.   As long as this continues, the "market" will stay either flat or in a range that the FED considers acceptable.

Why do people openly admit that the markets are manipulated, yet still pretend that fundamentals still apply.   On fundamentals, deflation would have crushed all markets by now..

Thu, 02/12/2015 - 11:34 | 5775821 Money Boo Boo
Money Boo Boo's picture

major correction = bloodbath

Thu, 02/12/2015 - 11:34 | 5775822 Stoploss
Stoploss's picture

When in doubt, sell gold.

Thu, 02/12/2015 - 12:19 | 5775964 neuronius
neuronius's picture

Yeah, sell it to me, I'll take it off your hands.  If you have silver, I'll take that too.

https://www.youtube.com/watch?v=iFDe5kUUyT0

 

Thu, 02/12/2015 - 11:35 | 5775823 power steering
power steering's picture

I can't earn 2 and 20 on cash Jack

Thu, 02/12/2015 - 11:39 | 5775846 Rainman
Rainman's picture

earn ? ... that's funny.

Thu, 02/12/2015 - 11:35 | 5775828 XAU XAG
XAU XAG's picture

PM's................is all you need

 

Sleep well

Thu, 02/12/2015 - 11:36 | 5775831 indygo55
indygo55's picture

Why didn't you mention Gold and Silver?

 

Thu, 02/12/2015 - 11:45 | 5775860 Dr. Engali
Dr. Engali's picture

No need. It's a known fact that you must own stawks and sell barbaric relics.

Thu, 02/12/2015 - 11:36 | 5775832 NoDebt
NoDebt's picture

Been holding dry powder since Q4 2013.  Dumb strategy.

Thu, 02/12/2015 - 12:18 | 5775961 Arnold
Arnold's picture

You know what you are worth overnight and early morning anyway.

Thu, 02/12/2015 - 11:38 | 5775837 Doubleguns
Doubleguns's picture

At least sleep with one eye open.

Thu, 02/12/2015 - 11:39 | 5775840 ebworthen
ebworthen's picture

Wall Street says "buy high, sell low please".

Just think of all those millions going to work everyday and toiling for the kleptoligarchy.  Each pay period having money thrown into the markets to be gambled with and to feed the parasitic money grubbers of a corrupt nation.

Thu, 02/12/2015 - 11:39 | 5775844 Dr. Engali
Dr. Engali's picture

There won't be a major correction. When this thing vaporizes they will close the casino. Game over man...... game over

 

http://youtu.be/DhS-i-c1XxI

Thu, 02/12/2015 - 11:52 | 5775883 NoDebt
NoDebt's picture

I hope they nuke it from orbit.

Thu, 02/12/2015 - 11:55 | 5775891 Dr. Engali
Dr. Engali's picture

It's the only way to be sure.

 

http://youtu.be/DhS-i-c1XxI

Thu, 02/12/2015 - 11:43 | 5775852 q99x2
q99x2's picture

My investment strategy doesn't include too much of doing nothing. I BTFD. BTFD bitchez.

Thu, 02/12/2015 - 11:46 | 5775861 Raoul_Luke
Raoul_Luke's picture

I'm largely in cash (except for some exposure to pms & miners).  At these levels, with the macro economy stalling, I don't see much upside from here.  And if (I mean when) we get the Gexit, fear of contagion to the next weakest Euro-zone economies will bring the fear to equities.  I think we are weeks if not days away from that happening.

Thu, 02/12/2015 - 11:52 | 5775879 Rubbish
Rubbish's picture

The Greeks are the smartest of us all here. They will get more free money you just watch, one way or another. Damn it's just print a few billion more, big fucking deal, that's the plan, more cash for the leet.

 

It's fucking print till you can't print no more, then fuck it, print more anyway and toss the serfs a bone.

 

Gold Bitchez....I pick up pennies

Thu, 02/12/2015 - 12:12 | 5775942 ejmoosa
ejmoosa's picture

Do you really think they are smart?

Signing away their future potential to a bunch of asshats that do not truly care what happens to their nation, all for the steady flow of loan money?

 

They could do a helluva lot more with a prosperous self governning economy than they can with free money.  How's it working for them so far?

 

I think any nation that cedes control of their destiny to other entities is just plain stupid.

Thu, 02/12/2015 - 13:01 | 5776189 Rubbish
Rubbish's picture

A Greek with a 1,500 euro pension.....hmmm

 

Nothing going forward or a slight haircut, when in reality his pension is unfunded anyway.

 

Smart to take the dough and tell his children, we have to plan for whats coming if they haven't.

 

No one is going to fix this global mess, no one. It's in kick the can mode and will stay that way for a VERY long time yet. Greece will not collapse the system. The system is bigger than any ripple Greece might make.

 

Gold Bitchez....I pick up pennies

Thu, 02/12/2015 - 11:56 | 5775897 ejmoosa
ejmoosa's picture

In Complete Agreement.  I almost feel as if I am paralyzed, doing nothing.  But there is no upside here.

When one dives in and looks at just how weak earnings growth is, and then see the anticipated ramping up of profits going forward in so many forecasts five years out, yet we have had real profit growth the last years between -0.4% to 3.14% for the Dow Jones Industrial average, and a forecast of 3.47%(and declining every week) forecast for 2015, why even bother?

Until we hit the Reset, this is as good as it gets.

And it really is not that good.

 

Thu, 02/12/2015 - 12:15 | 5775949 scubapro
scubapro's picture

one could still take 5,10% and buy long options to get any upside exposure, with a known downside limit.  this crap can go on a long time, just look back to 1998 when it was abundantly obivous, and correct, but took 2 more years!!  were barely 15 months into la-la land (massive p/e expansion from 2013)

Thu, 02/12/2015 - 14:53 | 5776903 mtl4
mtl4's picture

This^......use long options to capture the market upside (markets never "crash" up) and keep the rest of your poweder dry for when the ship actually goes over the waterfall.

 

When deflation comes you need cash or you're no better off than the fool who stayed in the market too long.

Thu, 02/12/2015 - 11:46 | 5775862 yogibear
yogibear's picture

Then there's the negative rates and infinite Federal Reserve QE.

The Fed is attempting to force all money into stocks. 

Monetizing to the max.

 

Thu, 02/12/2015 - 11:46 | 5775863 Herdee
Herdee's picture

BTDYFI,eom

Thu, 02/12/2015 - 11:50 | 5775873 noben
noben's picture

Ignore the ever moaning and groaning bear, let him eat grubs and berries, and shit in the woods.

Fatten the bull for BBQ Fest and Freezer.

Thu, 02/12/2015 - 12:11 | 5775939 Consuelo
Consuelo's picture

Knee-cappings of arrogant entities are generally not slow-motion events.  In the meantime, party on.

 

 

Thu, 02/12/2015 - 12:11 | 5775941 ben_bernanke
ben_bernanke's picture

Yeah, the best thing to do when there is incredibly low volatility (meaning low risk) and indices are hitting new all time highs practically every month is...

 

Sit on the sidelines.

 

Unbelievable.

Thu, 02/12/2015 - 12:28 | 5776012 EmmittFitzhume
EmmittFitzhume's picture

And you will be buying all the way to the bottom.  Just like doubling your bet on a bad 1000 deck shoe of blackjack

Thu, 02/12/2015 - 12:24 | 5775990 buyingsterling
buyingsterling's picture

Martin Armstrong has been right on the money. All of the institutional money needs a place to park, and only the dollar provides a deep enough well. It's lamentably absurd but true - the much abused dollar isn't going anywhere until all the other dirty shirts go to the laundry.  Aside from China, the others are wedded to socialism (60% of France's GDP is consumed by leviathan) so they aren't going to out-perform us any time soon. As lousy and repressive as the American system is becoming, it is (pathetically) still the best of the bigger countries in terms of economic prospects. Institutional money is going to be somewhere, and the US looks like the safest bet, so we get to go to the laundry last. By then we'll be mostly dirt with a little bit of fabric left.

Thu, 02/12/2015 - 12:28 | 5776006 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

Mngt 101.

1)     First do nothing.

2)      Continue initial efforts.

 

Stratagemology; a method of developing a framework of objectives in order to employ multiple stratagems within a larger overall strategy.

 

Thu, 02/12/2015 - 12:29 | 5776016 nakki
nakki's picture

The Central Bank is pushed everyone to one side of the boat. Problem is for most its already tipped over and 90% are in the water. Better hope Cap'n Yellen knows how to fly a mighty big helicopter.

Thu, 02/12/2015 - 12:45 | 5776107 The Mav
The Mav's picture

Rates down, stocks up - one of these days we'll all be stuck.

Thu, 02/12/2015 - 13:00 | 5776184 Freewheelin Franklin
Freewheelin Franklin's picture

I should have just put all my money into an indexed S&P 500 ETF

Thu, 02/12/2015 - 13:13 | 5776256 ratpack1968
ratpack1968's picture

Best investments - learn a few valuable skils, learn self-defense, learn how to use a firearm.

 

Thu, 02/12/2015 - 18:36 | 5778072 authorized user
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You've lurched into the best 2015 financial advice.

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