Welcome back my friends to the show that never ends We’re so glad you could attend Come inside! Come inside!
Come inside, the show’s about to start guaranteed to blow your head apart Rest assured you’ll get your money’s worth The greatest show in Heaven, Hell or Earth
-Karn Evil 9 Emerson, Lake and Palmer Brain Salad Surgery
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For the past few decades, the greatest show on earth has been the global stock markets. The gyrations of markets make for a compelling narrative: From boom to bust and back again to boom and bust.
Welcome back my friends to the show that never ends
If you manage to survive in the market for a long enough period of time — I guess that’s somewhere in the neighborhood of a decade — you begin to notice the repetitiveness of cycles. You begin to notice the show never ends. There is a daily rhythm of the market open, the initial lift or fade, the counter rally, success or failure, the reasserting of the initial move. The midday slow down (traders gots to eat too!). The mid-afternoon move, (and at times, the terrible remorseless march of the margin clerks). Then the close. I suspect most (human) traders and quants live in the context of a daily grind.
We’re so glad you could attend
There are the weekly cycles — Monday’s excitement, the turnaround Tuesdays, the squaring of positions on Friday before the weekend. Weekly retail, unemployment, and economic reports.
Many sales people live in a weekly context — they may get paid a monthly commission run, but its the weekly rhythms that define their schedule, their meetings and sales. Brokers, Institutional Sales, Mutual fund hawkers, even Bloomberg terminals sales people are weekly.
Come inside, the show’s about to start
The monthly cycles are an entire different animal. The big economic data points are out monthly: Non Farm Payroll, GDP and revisions, Inflation numbers like CPI/PPI. Absolute return strategies get measured monthly. Hedge funds and others report their gains/losses monthly. Indeed, hedge fund mangers and Economists live in an environment of a monthly data cycles.
guaranteed to blow your head apart
The quarterly cycle begins with earnings. Pre-announcment season, the early warnings of misses. Then the earnings parade begins. The 60% average beat rate, the surprise misses, the understated expectations game, the folly of forecasts. The post mortem: How many companies beat? By how much?
CEOs, CFOs, accoutants and Analysts live in a world of quarters.
Rest assured you’ll get your money’s worth
As the earth makes its annual sojourn around the sun, we see a steady cycle of key factors: Year end contributions to tax deferred accounts, Christmas shopping, bonus season. April 15th. The school year, Sell in May, the dangers of September and October.
Strategists, mutual fund managers, retailers, compensation consultants live on this annual cycle.
The greatest show in Heaven, Hell or Earth
The secular bull bear market cycle, with its cyclical counter points, has become the greatest of all these shows. Its too long of a period to comprehend as a first hand witness — the many intervening cycles prevent you from feeling it.Its not the sort of thing you sense or intuit, given the extended frame of reference. But you can comprehend it intellectually. You can learn about the longer cycles from history. Its in the charts, its within the data.
If you ignore the secular and cyclical, you will miss the greatest show on earth.
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And today? Its a Monday . . . and the show must go on . . .
The key cycles are easy to remember.
We have two market drops of 5 to 15% each year, called seasonal corrections. We have two major market drops of 15 to 25% each decade, called cyclical recessions every 4-6 years. We have two severe market drops of 25 to 75% each century, called secular depressions every 45-65 years
The cyclical recessions are characterized by strong demand stimulating production and end-product inflation which, in turn, dampens demand and results in excessive inventories that are corrected by curtailing production and jobs (income). The cycle is fueled initially by lower interest rates and is dampened by high interest rates, until excessive inventories are worked down over a 1 to 1.5 year period
The secular depressions are characterized by extremely strong demand stimulating expanded production capacity (and production) and commodity and end-product inflation which, in turn, dampens demand and results in excessive inventories that are corrected by shutting down entire factories, curtailing production and substantial unemployment. The cycle is fueled initially by low interest rates and is characterized by interest rates running below inflation rates (negative real rates), until excessive capacities are eliminated over a 1 to 1.5 decade period.
Schumpeter detailed the cyclical phenomena and Kondratiev documented the secular cycle. Interestingly, the pharaohs of ancient Eygypt educated their “borrowed” finance minister, Moses, about the secular cycle and Moses describes his “workout” method in the book of Leviticus (the Year of Jubillee, every 50 years, when indentured peasants are freed of all land-owner debts to start with a clean slate)
The last secular cycle was triggered by the financial excesses of the Roaring Twenties and ran through the 1930s and early 40s. The current cycle was triggered by the financial excesses of the Dot.com 1990s and still have 5 years to run. I pray that we do not need a World War to end the current K-Cycle.
Now I’ve got that goddamned song stuck in my head. On Monday morning, yet. Thanks, BR.
“The 60% average beat rate, the surprise misses, the understated expectations game, the folly of forecasts. ”
BR- you know that “expectations” and reporting of earnings are heavily managed-
The insider’s issuing corporate guidance and analysts are all holding hands – setting the bar low so a beat is the norm- all in the hopes that stock prices spike-
there’s the real game for you- talk about a show!
Great post.
I’ve tried to make some sense out of the daily, weekly and monthly cycles but haven’t had much luck with it personally. Fortunately, there is a new asset class cycle waiting out there to peak every five years it seems…so as long as you don’t mind doing something else while the cycles run their course, you can actually make some real money.
If you believe in the concept of secular cycles and reversion to the mean, then I have a hard time seeing anything but higher inflation and/or a lower Dow in the near future. My guess is a major spike in inflation and a smaller drop in the dow. To wit, this chart tracks the inflation-adjusted secular cycles of the Dow for the past 97 years (note how far we are above the 0% line right now):
http://www.thumbcharts.com/1296/dow-jones-secular-market-cycles
A related chart is this one that shows the effect of inflation on the DJIA in the 70s. A look at a nominal chart might make you think the market went sideways during that period but in fact, an investor would have lost over 65% of his initial investment when inflation is factored in:
http://www.thumbcharts.com/1283/effect-of-inflation-on-the-1970s-stock-market
A link to the entire market cycle chart series:
http://www.thumbcharts.com/series/stock-market-cycles-1913-2010
That could go down as a cornerstone investment classic for new traders. You may even want to expand on the points one day. There might even be a book in there somewhere
call me ahab: You don’t think BR knows that reporting of earnings is heavily managed?
In the east…The Shanghai Composite Index dropped 136.69, or 5.1 percent, to close at 2,559.93, the lowest since May 4, 2009. Today's decline is the biggest since Aug. 31 The Shanghai index has lost 22 percent this year, the world's fourth-worst performer among the 93 gauges tracked by Bloomberg, on concern the government will keep tightening monetary policy to contain inflation and avert asset bubbles. The measure on May 11 entered a bear market after falling 21 percent from its Nov. 23 high.
Premier Wen said the government will "decisively" contain excessive increases in housing prices in some cities and curb growth of industries with overcapacity
Record Gains -Property prices jumped a record 12.8 percent in April from a year earlier and consumer prices rose 2.8 percent, the fastest pace in 18 months, even after the government raised bank reserve requirements three times this year and increased downpayments on homes to curb asset bubbles. The National Development and Reform Commission is currently drafting "more stringent" rules for the property market, the 163.com website reported, citing unidentified people.
Possibly worse than WWII?
Trichet linked the recent exacerbation of the eurozone’s debt crisis to the 2008 collapse of the U.S. investment bank Lehman Brothers, saying “the markets didn’t work anymore.” (I’d say the 4 major banks making trading profits every single day in the 1st quarter that “markets don’t work anymore”)
Trichet was further quoted as saying that there was no doubt the economy “is in its most difficult situation since World War II or perhaps even since World War I.”
“That could go down as a cornerstone investment classic for new traders. You may even want to expand on the points one day. There might even be a book in there somewhere”– HTCMSI, above
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