Market Meltdowns

Investment Wisdom: There's Always Been A Cliff

Or, every rally has its correction…

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]

Last December I wrote the article ‘Investing: There’s Always Been A Cliff, to alert investors of a market reality that pretty much always exists in prolonged rising financial markets: There has never, no not ever, been a stock market rally that has not succumbed to the next stock market correction. And, although we have bumped up several times against what the “masters of the universe” want us to think is a correction (a 10% fall from the most recent market high), we are nowhere near the type of equity carnage that was produced by the 1987, 1999, or 2007 “meltdowns”.

In fact, before the open on December 7th, the stock market was still in positive territory (barely) for the year, and just 8% below the September 20th all time high… but the ten year upward trend seems to be crumbling. Corrections are inevitable, if not precisely predictable. As we sit here, grinding our teeth in day-to-day fear of continued market weakness, what lessons are we relearning in this “déjà vu all over again” atmosphere?

I think this is all useful in explaining some of the forces at play in today’s market. Seriously.

I coulda…

Now, take a moment and pretend that we are in the beginning stages of what will be a composite of the significant corrections of the past… a “recession” even. (Raise your hand if you can define “recession” without our friends at Google.) Think about the things you “coulda” done to protect yourself from the inevitable:

  • I coulda taken profits…
  • I coulda designed my portfolio to produce more income than the amount I withdraw for living expenses.
  • I coulda taken smaller positions in new purchases, and avoided stocks that don’t pay dividends..
  • I coulda designed my portfolio to produce more income than the amount I withdraw for living expenses.
  • I coulda avoided illiquid and low financial quality securities.
  • I coulda designed my portfolio to produce more income than the amount I withdraw for living expenses.
  • I coulda avoided having too much money in any one position.
  • I coulda designed my portfolio to produce more income than the amount I withdraw for living expenses.
  • …I coulda taken profits.

Excerpts from ‘Investing: There’s Always Been A Cliff

There’s always been a cliff: 1987, 1999, 2007; there’s always been year end “window dressing”
With interest rates stranded at historical lows for nine years now, the stock market side of Wall Street has benefited from a self-created image as the only game in town where reasonable “returns” can be had. Literally millions of retirees, and “savings” account/CD owners have been lured into the upward only (and much more speculative) world of index ETFs, Sector ETFs, and Mutual Funds.

  • Note that “returns” are not the same as spending money or income. Portfolios can have returns in double digits while producing no income at all. Wall Street rarely speaks about income. Spending money, in the normal Wall Street model, is obtained by selling securities.
  • Clearly, this model breaks down when even the monthly market value gains do not exceed the needed spending money… so when the stock market corrects (and it always corrects), ETF and Mutual Fund investors get clobbered.
In two of the three major market meltdowns referred to above, prices of income producers actually stabilized or moved higher... in all three, the income kept on flowing...

Fortunately, while the public propaganda from the “Wizards” preaches “buy stocks at any price”, the more conservative (financially) side of the industry quietly and conveniently provides outstanding income production machines. Income and Equity Closed End Funds (CEFs) satisfy the income and safety-of-principal needs of millions of (eventually much safer) investors.

With income purpose securities, the income almost never changes as market values fluctuate. In two of the three major market meltdowns referred to above, prices of income producers actually stabilized or moved higher… in all three, the income kept on flowing.

So an income portfolio generating 7% potential spending money at a $300,000 market valuation will generate the same dollars of income if values fall to $250,000 (negative “returns”) or if the value rises to $400,000 (positive “returns”).

There’s always been year end “window dressing”
2017 has been one of the best years in stock market history. What do you think the continuing employment prospects would be for an institutional money manger who is not fully invested in the best stock market performers at year end? What about for the guy who owns a large number of retailers or (believe it or not) energy companies?

Year end window dressing is a process used by institutional money managers to make themselves look really smart to their big corporate clients. They buy up all the hottest performers and shed anything that has fallen in price significantly… thus producing a “brilliant” year end portfolio picture.

The window dressing has been going on since early November… and even more money is leaving individual income purpose securities in anticipation of future interest rate hikes.

  • Note: this back-asswards emphasis from an industry focused on the market value of fixed income securities as opposed to the higher income that the lower prices produce.

 

Read the entire article here.