Happy Europe Day

I remain constructive on markets and believe they are poised for gains barring a collapse in the EU. Investors are broadly in risk off mode, leaving them a lot of room to buy if the situation stabilizes.I believe stabilization is the most likely eventual outcome, although it might take some more turmoil to compel EU officials to act.

In George Soros' book The Alchemy of Finance, Soros describes a model for financial crises. There is usually an imbalance that is ignored for years until a crisis point is reached. Markets go to the brink, which forces authorities to act, thereby solving the crisis. The first half of the model for a crisis certainly fits the current situation in Europe. We are at a crisis point in Europe and markets are going to the brink.  It seems as if EU officials are thoroughly worried, which is a good thing. The lower markets go the more likely they are to act forcefully.

My portfolio is positioned for a bullish outcome but I am also leaving room for myself to be wrong. My entire portfolio is comprised of defensive, value stocks that should perform relatively well in a slow economy. Many defensive businesses are trading at similar or cheaper levels to cyclical businesses, which makes it a no brainer for me. I am also partially hedged.  While I will certainly not prosper if the market collapses I will likely survive.

3 comments:

frank r said...

I'm anxious to move from bonds to stocks, give the high prices on bonds these days, but I was hoping for better prices on the stocks. Sentiment feels horrible (good for buyers), but is 1149 really as low as we're going to go? This is no better than in August.

Tsachy Mishal said...

I dont know about the indices but there are individual stocks that seem very reasonable. The DAX is trading at 10 PE and a 4% dividend yield.

frank r said...

I subscribe to the efficient market hypothesis on relative value trades, because  smarter and harder-working people than me can and do take advantage of relative mispricings, so there probably aren't a lot of opportunities left for people like me. If VOD is cheap and AAPL expensive, why doesn't the smart money take advantage of this? This isn't to say relative value trades are impossible, just that a person has to make investing a full-time job to make money that way, and I am not willing to commit to that much work. (Buying the cheap stocks and not buying the expensive stocks, as you are suggesting, is, effectively, a relative value trade, no need to short anything.)

But no one can push the entire market down, nor can any hedge fund hang around in bonds for 10 years like I can (and did from 1999 to 2008, and again from April 2010 to now). So that's where the easy money is, long-term market timing, or so I believe. And yes, I do own the DAX and other european stocks (via  broad-market indexes) and I'll be buying more if and when I move my remaining bonds into stocks. European stocks were cheaper than US stocks even before Monday's carnage, but they still aren't screamingly cheap, especially given the downside risks. The chart of the Nikkei from 1990 to now shows what happens to stocks if we fall into deflation.