Don’t be fooled by the way the market is trading. It falls rapidly, then some good news is announced, and it jumps right back up. Looking beyond the headlines, we see deeper troubles.
1) Volumes are at historic lows compared to their moving averages. A large drop on high volume followed by a large increase on low volume, is not a good sign.
2) On a macro level, the data from the US clearly shows that the economy dipped into recession in April or May. It has deteriorated since. With this too you must be cautious, because a recession is usually only officially declared many months after it actually starts, and by that time, stocks have already usually dropped considerably.
3)Anecdotally, Ford and GM are once again announcing “employee pricing” deals in an effort to sell more cars, this is always a negative sign. Lots of companies are suddenly stuck with a lot of inventory because purchases have suddenly dropped.
4) If the US economy dips into recession, the Canadian economy will follow. With governments around the world trying to reduce spending, this will directly cause a reduction in overall growth and lead to more economic troubles on a worldwide level. With Canadian consumers holding a record amount of debt, even a small recession will reverberate and cause massive problems. Given the influence of the federally backed CMHC within the Canadian housing market, should a recession cause home prices to dip, even marginally, the CMHC will likely have to be bailed out by the government, which would cause a drop in the Canadian dollar. Whereas this would help increase profits at large Canadian exporters (commodity exports), the average consumer would be negatively affected as Canada is a huge importer of consumer goods (most of which are priced in US dollars (Imports from China).
In the event of a recession, there will be no safe haven; the challenge would be to maintain portfolio stability as much as possible while limiting risk.
At the fund, our largest position is now CASH, and we will be happy to maintain this position until either stock prices decrease considerably (>20), or stability is restored (unlikely). Since we have considerable breathing room, we look forward to a downturn, while still having some money in stocks in case things miraculously increase.
Overall, the market are not well. The prospects of more stimulus from the US Fed is temporarily causing some buying, but it will not last long. Moreover, unless the Fed announces something truly extraordinary in September, the market will react negatively. I think the chance of a large intervention is slim. Any considerable stimulus will cause commodity prices to increase rapidly and dramatically, further damaging the world economy.
In our opinion, the best plan is to walk away and just wait for things to revert to a more normal level. In general, stocks have not fallen very much and almost everything is still expensive. Are you smart enough to spot the rare opportunities? Neither are we. We prefer to wait until things are obviously cheap. It will be easier to spot deals and there will be much lower risk.