Saturday, November 6, 2010

Do people actually believe The Toronto Star?

Now they've done great work investigating how Ontario cops can kill, beat and rape innocent people and get away with it, but their business section is locked into a mystical Keynesian everything-is-eh-okay-and-the-recovery-is-taking-hold illogical nonsense.

Take Bill Carrigan's article in the Saturday edition of the Star entitled: ‘Sell in May' and some other losing myths.

Let's break this down bit by bit:

I assume that by now most investors who bought into the “sell in May and go away” investing rule have once again been forced to return to the equity markets at higher prices.

In other words, sell high and buy back even higher.

The Sell-in-May rule (a.k.a. the Halloween axiom) is basically a market-timing model that would have you sell equities in May and return to equities at the end of October. According to my records, this has only worked once on the TSX Composite Index over the past nine years.

No argument from here. I believe in the buy and hold mentality, depending on what you're buying and holding. If you're adventurous to play the market and buy and sell as you see fit, go ahead. Just careful with your (or your client's) money.

Most of the market-timing models that are based on calendar or seasonal trends are investment myths that had their origins based on the U.S. business cycle, which is no longer relevant in today's global environment. That's because auto and cheeseburger sales in Beijing are more relevant than steel production in Pittsburgh.

In this short paragraph Carrigan spouts so many economic fallacies that I don't know where to begin. So I'll just focus on the one aspect: the U.S. business cycle, which is no longer relevant in today's global environment.

Clearly this man is an idiot.

Unfortunately, investor interest in market timing usually occurs during the late stages of a bear market as frustrated investors fret over not selling “at the top.” The reality is that a market-timing strategy is not suitable for investors who have at least a three- to five-year time horizon because bear markets are overrated in terms of their potential to inflict fatal damage to a well-structured portfolio. Bear markets can inflict serious damage only if we are forced to sell at the bottom due to pressure from over-leveraging or a personal crisis.

If you're buying and selling on a daily basis you should probably get a firm grasp of the Austrian business cycle theory. It'll help.

Another investment myth is that “buy-and-hold” is a failed strategy. Actually, it all depends what you buy and hold. During the technology bear market of 2000-2002, the financial and energy sectors actually generated positive returns. Stock sectors that are in long-term up-trends, such as the Canadian financials, materials and global gold sectors, regard most bear markets to be speed bumps on the way to ever higher prices.

The technology bear market of 2000-2002??? It was a burst bubble! After that Greenspan pushed us into the housing bubble and now Bernanke is sending us into Treasury bubble. Of course global gold sectors are looking bullish, the Central Planners at the Fed & BoC have perverted market fundamentals to the point that people are now rushing into what the planners can't touch. Gold. Silver. Commodities. Buy and hold these things, drop everything else.

The jury is still out on Canadian financials, but I wouldn't hold my breath.

How about the “doom and gloom” myth? The perma-bears continually warn of a pending crash. They revisit the crash of 1929, the Great Depression, the U.S. housing crisis and the recent global financial crisis. The disciples of the “Long Wave” predict the Dow Industrials will drop to 1,000 and tell us to sell everything because the next bear market will crush asset prices.

I think Carrigan is referring to the Kondratiev Wave Theory. Developed by Soviet economist Nikolai Kondratiev, the theory says that everyone once in a while there's a major down-turn in the business cycle. So instead of capitalism collapsing, it will just bounce up and down for centuries. Obviously Stalin didn't like his conclusion and sent Nikolai to the Gulag never to be heard from again.

I am not a disciple of socialist economists. Logic tells me that the amount of money printing going on is dangerous and that the US economy is in the shitter. The doom and gloom "myth" (a reference to Marc Faber no doubt) is not a myth. A wide range of economists were predicting the current recession and are warning us of more to come.

Meanwhile Carrigan was telling us back in '06 that inflation is a result of economic growth.

And no one is saying the Dow will drop to 1,000 (no one credible at least). I believe Peter Schiff has mentioned the future Dow being worth one once of gold. That's probably more true that Carrigan's prediction that there will be no double-dip recession. Of course, we never got out of the first recession, so I guess technically Carrigan is right here. But expect to see a fall in asset prices.

There's more to Carrigan's article, but I think I've got the gist of it:

Carrigan -- misguided
Austrian economists -- absolutely right

Look no further than this graph from Carrigan's article

I'm willing to bet all my 'buy and hold' investments that this generation will see at least one more of these Granddaddy Bears... I'm almost willing to bet it will happen before the end of Obama's first term.

But no one can predict the future.

We can however use deductive reasoning. Which is far better than Carrigan's mystical prediction that we're not looking doom and gloom in the face.

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