At my company’s investment committee meeting in April 2009, it was clear that we had a problem.
A good problem to have. But still a problem.
Since I started at the firm the year before, we were decidedly bearish. This served our clients well in 2008. We gained about 10% for the year while the S&P 500 lost nearly 40%.
This performance has earned us many new customers. We started 2008 with approximately $80 million under management. By the end of the year, we had over $150 million.
We wanted to keep customers. Our management fee was 2% per annum. Keeping customers was good for the business. But that’s where we ran into the problem.
Our new clients, who joined after seeing us make money in 2008, liked our bearish outlook. This confirmed their opinions. Changing course could upset them.
But in April 2009, the data indicated a market recovery. This meant we had to change course after proving to all these new clients that being bearish made money.
But while everyone was looking for a continued slump, I thought the bear market was over and the biggest risk we faced was a market ‘collapse’.
I knew it would be difficult to explain to customers. But I also knew that performance mattered more than feelings.
We decided to communicate our shift with detailed data. We have gone bullish.
And it made me think of swans…
Not the “black swan” you may be familiar with. And not the “white swan”, which would signal the opposite.
I started thinking about another type of swan and how my company could use it to our advantage.
threatening from afar
A black swan is one of the most popular terms in finance. It refers to an unexpected event that causes the markets to crash.
The pandemic was a black swan. So did the collapse of Bear Stearns and Lehman Brothers in 2008. No one could have seen these Wall Street giants crumble in a matter of days.
These events are rare. But they seem quite common, because everyone is always looking for them. This is especially true right now with potential black swans everywhere.
Inflation took the Federal Reserve by surprise. Fed officials might say it was a black swan because their models told them not to worry.
Others might say that current officials missed something as obvious as a black swan. They might miss something even worse in the future.
Some see Russia’s invasion of Ukraine as a black swan. This caused untold human suffering. It also affected the energy and grain markets. This made the suffering worse. It also created volatility in the markets.
All of this was largely unexpected, despite Russia having been amassing troops on the Ukrainian border for months before.
There are many more potential black swans to discover. Analysts love to research them.
But just like in April 2009, I think we have to look black collar swans.
Like the black swan, these swans are also rare. They have a black head and neck…but a white body.
(Source: Alexandria Zoo.)
To me, black-necked swans represent market events that sound ominous… but aren’t. There might be more potential black-necked swans than black swans right now.
3 cards to suggest a black-necked swan
Inflation could slow, for example. The slower gains in housing and energy costs bear witness to this.
Consumers will still feel the pain. And they will feel that pain for years to come, because the Fed’s 2% inflation target is both way off and will hurt even more with generally higher prices.
But lower inflation gives the Fed room to cut rates. So if inflation is the black neck of the swan, falling interest rates are the white body.
Let’s say inflation continues to slow. Lower inflation gives businesses room to raise prices. If they can increase the prices by 1% or 2%, it generates higher profits. Many companies have already downsized and lower costs are also contributing to profits. Earnings may be better than expected this year.
Even if the Fed does not cut rates, it has other ways to stimulate the economy. One way is through quantitative easing, i.e. buying bonds with printed money.
This process actually started two weeks ago during the banking crisis. The Fed buys bonds from banks. It’s a throwback to the quantitative easing policies that fueled the stock market booms of 2009 and 2020. We can see it in the Federal Reserve’s balance sheet:
There is also a potential shift in consumer sentiment.
Consumer opinion on the economy shows a strong relationship with the stock market. Lower inflation should boost sentiment. This in turn should boost stocks.
We are already seeing signs of improving sentiment in the University of Michigan Consumer Sentiment Survey.
The survey reached near historic lows last June. It has risen about 15 points since then.
But it goes beyond the investigation. Home sales are also picking up. This is the ultimate sign of consumer optimism.
Buying a home is the biggest purchase most of us make in our lives. We have to believe the house offers value or we won’t buy. The recent surge in sales is bullish for the economy and the stock market.
Each of these events could result in stock market gains.
I’m not saying I see merger potential, like I did in 2009. But I see room for higher prices.
I’m also not saying you can go out and buy anything right now and make some money. These moments are rare. We enjoyed this kind of market in April 2009 and again in April 2020.
Today we look at a market where the news might not be as bad as feared. This makes it the ideal market environment for traders.
When most investors are expecting the worst, and you can identify areas that should surprise those investors, you can position yourself for quick rallies as investors adjust their expectations.
I do this everyday with my subscribers in my live trading room. In just the first 15 minutes after opening, we have enough data to set up a trade with the potential to make 50% gains in less than two hours.
We have been able to do this several times over the past two weeks. As investors continually adjust their expectations in the coming weeks, I foresee even greater profit opportunities.
I should mention that this strategy is one of seven that my followers and I use in my live Trade Room. Trading multiple strategies both provides opportunities and limits our risks.
Another such strategy is to generate income. To do this, we trade short-term credit spreads to generate income.
We have closed six such trades so far – all winners. Overall, we generated $185 in revenue and never risked more than $500. That’s a 37% return. and we find more and more of these trades all the time.
If you want to know how you can share these ideas with me, Click here and get all the details.
I invite you to do so quickly. Access to my Trade Room is closing today and we may not reopen it for some time.
Cheers,Michael CarrEditor, A job
Continuing Mike Carr’s theme of things that don’t seem so bad, let’s take a closer look at the housing market.
Yesterday I spoke about the challenges of be an investor In the real estate. But what about as a buyer?
As Mike pointed out, new home sales surged last week, reversing a bad downward trend in sales that had been in place for a year.
Of course, the most important factor here is affordability.
Americans were shocked when mortgage rates jumped from 2.7% at the start of 2021 to more than 7% at the end of last year. But now the rates are trending down slightly.
Last week, the average 30-year mortgage rate was 6.4%. It’s still high, but potential buyers have had an extra year to get used to this exaggerated reality.
Now that they’ve seen a slight drop in prices and mortgage rates, the home they wanted is starting to look a little more affordable.
Homes are still far from affordable for the average family, especially after we’ve grown accustomed to phenomenally low rates during the COVID pandemic. There is little doubt about it. But household debt service payments are about the same as in 2019.
I’m not saying life was perfect before COVID, or that every American was carrying perfectly comfortable debt. But this graph below shows that the current situation is not completely out of step with the historical norm.
I don’t expect we will see an explosion in house prices anytime soon. While house prices have come down a bit, if prices move too quickly, we’ll be back to where we started – with a lack of affordability dampening demand again.
Inventory data suggests the market is still quite tight. It’s really good.
The median number of days a home is on the market has increased over the past year, but it’s still in the middle of the common range heading into 2020.
And, for what it’s worth, I still get nearly a dozen phone calls a week from people trying to buy my rental home. I briefly put it on the market two years ago, and it hasn’t been listed since.
But when I get calls from strangers hoping to buy my house, it tells me the market is still pretty strong.
I’m not suggesting that you go mortgage yourself all the way to buy new properties. I still play it conservatively at the moment. Even so, we will take this as good news for the real estate market.
Charles SizemoreChief Editor, The edge of the banyan