In The Hope That 2012 Is Not Another Year of Running Around in Circles

I’ve read about 3000 blog posts and news articles this year, scanned three times that many, closely parsed 200-400 research reports and spent the remainder of the hours between 7:30am and 6:00pm in search of other sources of information. The fact that the S&P 500 stands almost exactly at the same level as in January implies that the majority of this effort, intellectually stimulating as it may have been, has been a waste of time.  We have spent almost 12 entire months chasing our tails, jumping at economic shadows only to find ourselves in the exact same place we started.

A cursory review of asset prices in 2011 provides a reasonably simple lesson for next year – assess the scenario the market is priced for and the probability of its accuracy. This year the Q1 sell-side consensus view was, as usual, a second half growth ramp-up which, to be fair, was reasonably accurate in term of US data. Equity values melted up accordingly in Q2 until the recovery was largely priced in despite intensifying credit pressures in Europe.   By mid-year, European credit data put the second half growth thesis on extremely shaky ground and it was not a difficult decision, with the precedent of 2007 in recent memory, to avoid getting aggressive for the remainder of the year.

200-page “Outlook 2012” research reports will begin to ooze out in publication shortly. As Josh Brown recently pointed out, the default position of “second half recovery” will no doubt be in full effect. Personally, I will be watching for extrapolation of current corporate earnings growth trends. Aggregate profits have been remarkably resilient while the market has been focused on macro factors  and this will likely result in some early-year table pounding from analysts and strategists. This could, however, set us up for a vicious whipsaw. Global credit problems and the ongoing slowdown in merging markets growth levels imply a rapid, sudden slowdown in corporate capex during Q4, reflecting a declining number of opportunities for investment in expansion.  Falling capex means falling aggregate profits so, in the end, if the sell side is successful in getting profit growth at current levels priced in to equities, I will be looking for shorts.

All of this is subject to change with little notice. My real hope for 2012 is for an actual trend to arise so that it does not turn out to be the giant waste of time 2011 was.  Years like this make us all look stupid, spilling oceans of virtual ink on commentary, implementing billions of dollars borrowed for higher education in biz school or economics only to, in terms of equity prices, run around in circles. This reminder that the finance and investing industries really don’t do anything tangible, just determine the monetary value of efforts by others in the real world, is unwelcome.

About these ads

13 thoughts on “In The Hope That 2012 Is Not Another Year of Running Around in Circles

  1. D says:

    Respectfully, I think a lot of trend traders were frustrated in 2011, but a lot of mean reversion traders did fine (like me). In fact, volatile years where we go nowhere are really the best to have where we continuously buy the dips and sell the rips. I do admit I was more hesitant to buy those dips as so many blogs tried to convince me every down week was the “big one.”

    I think years like these prove you need more than one tool in your toolbox. Even if you are predominantly a trend trader, you need a tool to tell you when the market is just not trending and you either stay out of the market or buy/sell according to different rules until trends re-emerges. On a sidenote, do you think the lack of trends can be attributed to the popularity of trend trading now?

    • Interloper says:

      Understand totally, was thinking about that all the thru. I was talking in aggregate terms. I know a lot of traders made money, and I’m happy you did, but there was someone on the other side of all your trades.

      • Mario says:

        there’s always someone on the other side of the trade so I fail to see your point. Also since we never know the holding time for the other side, nor do we know if they are exiting or entering, we really don’t know if they are “losing” as a result of our gains. These facts prove that the markets are not necessarily zero-sum, contrary to popular belief.

  2. JMac says:

    Earthquakes, tsunamis, nuclear distaster, Arab Spring, political brinkmanship in the U.S, debt crisis and political bumbling in Europe…….no wonder we never made any headway.

    Short of it raining frogs or Newt Gingrinch seizing power and ruling your country like Attila the Hun, I remain caustiosly optimistic we will see share prices catch up to earnings next year.

    • Jonas says:

      I feel equities have been disfavored for almost a decade now, while earnings have improved a lot. I don’t understand why equities aren’t a stronger part of the investment universe.

      I used to think the resistance of valuations rising were due to concerns about equality of earnings, but earnings have managed to stay strong even in the face of a big recession in 2008. And socially, no-one is of the opinion that corporations have lost or are losing leverage vs other parts of society like labor, consumers, government or taxpayers, so why would they face disproportionate downside from bad events vs. the rest of society.

      I haven’t heard a good explanation for equity are so disfavored. The only reasons I can think of are: 1. demographic (baby boomers getting old, risk-averse), 2. no one uses stock as acquisition currency anymore (making stock have less transactional uses), 3. stocks getting a bad name due to treading water in 10 years + 2 bear markets (making stocks a poorer store of value), and 4. PE and other smart money over-emphasize getting alpha thru tax rather than business strategies (debt being more tax favored). Love to hear if interloper has an opinion.

      But its hard to fight the trend. I think it’ll continue in 2012 rather than reverse, so it makes me hesitant to be too gung ho about stocks. I see that in other retail investors as well, although they may not be overthinking it like I do.

  3. “I will be watching for extrapolation of current corporate earnings growth trends. Aggregate profits have been remarkably resilient while the market has been focused on macro factors and this will likely result in some early-year table pounding from analysts and strategists.”

    I don’t think its an oversimplification to state that reduced aggregate payrolls have contributed proportionally to indiv. organizations bottom lines. To what extent is greater productivity (aided by higher unemployment) a leading indicator of corporate profits in this environment?

    • Interloper says:

      It’s big, clearly, but there remains a top line in the productivity equation. There is a ceiling to the process of shrinking to increase efficiency – cant continue until zero employees. Watch hours worked for reversal.

  4. [...] Here’s hoping 2012 at least demonstrates a trend.  (Interloper) [...]

  5. [...] Here’s hoping 2012 at least demonstrates a trend.  (Interloper) [...]

  6. David W says:

    Y’all seem to miss the point competely (so what else is new??). JQPublic is wising up to the fact that his/her risk premium is zero. Put your 401K into the market, return =0%. ‘Invest’ your savings into the market, return=0%. AND … the return=0% is the best case?!? … because, hey, you could’ve lost 40% in the recent ‘downdraft’.

    JQPublic will sit on their cash … who wouldn’t … at least it doesn’t go negative. That leaves all you girls out there scrapping over whatever it is you scrap over … and the capital markets fall to sh*t.

    Once it gets to that point, the party is over. Have a nice life.

  7. [...] "We have spent almost 12 entire months chasing our tails, jumping at economic shadows only to find ourselves in the exact same place we started."  (Interloper) [...]

  8. Mario says:

    it sounds like your underlying premise and assumption is that all success and progress is based upon stock market valuations at regular (random?) start/end dates. Although assessing the numbers at such regular intervals is constructive, I do think that type of analysis is more helpful regarding individual companies and for accounting purposes. If we want to assess whether our society accomplished anything this year (even just financially let alone any other element–and admittedly I’d say it hasn’t been so hot this year…although it could have been worse relatively speaking) we’d need to look at various other types of financial data to make a real assessment like that. I don’t worship the stock market or even give it that much credit in my macro analysis in fact.

  9. Octavio Richetta says:

    You say: “All of this is subject to change with little notice. My real hope for 2012 is for an actual trend to arise so that it does not turn out to be the giant waste of time 2011 was.  Years like this make us all look stupid, spilling oceans of virtual ink on commentary, implementing billions of dollars borrowed for higher education in biz school or economics only to, in terms of equity prices, run around in circles. This reminder that the finance and investing industries really don’t do anything tangible, just determine the monetary value of efforts by others in the real world, is unwelcome.”

    You should not “hope” things turn out the way that pleases your style. The key is that you adjust to the environment. “the market eventually always goes up” mentality that prevailed during the greatest bull market of all times is difficult to change. Sale-side talking heads have a vested interest in the market turning higher every year. I don’t think 2011 was a waste of time, if you kept your eyes open, held down stupid biases, you could have done very well.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 204 other followers

%d bloggers like this: