Wednesday, September 10, 2008

Is this capitulation?

Up until the middle of last week, the daily read of newspapers, blogs and other financial commentators produced a wide variety of views on the current state of financial markets. Typical sentiment included the mildly optimistic ("this is a good opportunity" and "we are seeing value based opportunities"), the hugely pessimistic ("housing is still over valued", "deleveraging has only just begun" etc) and the indecisive ("it could go down further before it goes back up"). Recommended actions varied accordingly.

Towards the end of last week there was a noticeable shift in tone towards the hugely pessimistic. There is far more talk about how much further markets have to fall, how bad the recession is going to be and investors starting to cut their losses (especially in commodities). Talk of value and opportunity became increasingly hard to find.

The question I have to ask myself is whether we are getting close to what Sir John Templeton would describe as the point of "maximum pessimism"? Obviously my ability to predict the future is no better than anyone else's (and my track record this year has been generally bad). However, instinct and experience suggest that hopes of a short downturn, a mild recession and a quick recovery appear to be fading. We are also beginning to see meaningful evidence (beyond the anecdotal) that the current economic problems which originated in the United States are spreading to Asia.

As hard as it is to admit to being wrong, I have decided to cut my losses on some of my investments and hold more cash. I have placed orders to sell the last of my remaining holding in the Lyxor commodity ETF (at a small profit) and silver (at a material loss). I am reviewing my other investments but will probably ride out the equity funds and be content to build my cash until I have a much higher degree of confidence that the scope for further downside is limited. One of the points I will have to keep reminding myself of is that markets tend to lead the economy - stock markets have historically rebounded before the underlying economy rebounds. In effect, the best time to buy aggressively is while most "experts" are still negative.

I have also recently revised my income expectations down by 10%. That is starting to look insufficient. I will rework the numbers over the weekend, but will probably need to reduce my income expectations further.

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