What's your take on a looming recession?

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Nov 26, 2007 3:57 pm

Will it happen? I have had clients call me all freaking day crapping bricks over the dips in their accounts and thought I'd post this while I have room to read up on some news for a few.

 
Man clients are something; it's either they pee all over you when they don't make money or lose money. No one likes risk.
Nov 26, 2007 5:43 pm

No crystal ball here.  But most indicators point to it.  Shorts and cash positions galore..

Nov 26, 2007 6:00 pm

No, they like risk.  When it's working in their favor.  They just don't like to lose money.  They tend to think that what's happening NOW is what is always going to happen.  So, when the market goes well, like the last 5 years, they think that's going to continue forever.  When it hiccups, like the last 6 months, they think it's the end of the world.  I'll bet if you ask your average client what their statement value was 12 months ago, they can't tell you.  They see the last few months and figure they've lost all their money.  They don't see the big picture.   

 
The question about the recession isn't will it happen.  It will happen.  Sometime.  The question is does it matter if it happens?  Since the end of WW2 there have been 11 recessions.  They averaged 10 months.  During those 11 recessions the stock market rose 7 times.  Seems to me like a recession might be a good time to put some money into the market. 
Nov 26, 2007 10:45 pm

Broker7 are you saying that you sell equities now (when they are low) into cash? isn't that what we are paid to NOT do? I am telling clients NOT to cash out, as this is an emotional reaction trade--you always buy back in higher (when it FEELS better)

Nov 27, 2007 12:57 am
newnew:

Broker7 are you saying that you sell equities now (when they are low) into cash? isn't that what we are paid to NOT do? I am telling clients NOT to cash out, as this is an emotional reaction trade--you always buy back in higher (when it FEELS better)



No.  You are paid to give clients good advice and hopefully help them make money.  Right now the market is down about 10%, which barely qualifies as a correction.

If it drops farther, your advice will not turn out to be so helpful...

Nov 27, 2007 5:55 am

I think we are there already. Here is what I have been doing right or wrong...

I got out of REIts last year because I reconize a bubble when I see one.
I lightened up on financials, banks and brokerage firms mid summer.
I never owned the housing sector or mortgage though I did buy CFC for some clients at 15 whene money manager Brandes bought the stock.. So far dumb Idea.
Also have been hedging some clients (20% or so) though SDS, SRS, ect(pro share shorts). This was too hard to make a broad call on so I would just run it by clients as a way to protect a portfolio and some thought it was a good idea. i added that i was doing this for myself. Like all bets on the downside, i have sold them possibly to early. time will tell
These were the right ideas, except for CFC.
The rest is to do regular asset allocation. If you avoided financials and anything related to housing, you are probably up a few % vs flat to slightly down. I have no control over which funds or UIT's hold financials and made no moves to change these strategies.
The wrong moves I have made have been sticking with the floating rate funds which have lost 5% in principal.  also i sold emerging markets last year and they had another great year. i still think china is a bubble and i am out except for any diversified international funds that may hold them.
 Everyone wants to buy international which is not a good thing
No one wants to buy financials which makes it an industry to look at. I am still waiting.
No one wants to own the dollar...another bad thing
Remember a falling dollar could cause foriegn buyouts of our companies which could help also.
I would and am starting to do the same things I did in 2000-03 which is bringing clients in and walking them through asset allocation and believe it or not, the American funds ICA brochure. This shows all the ups and downs of the markets and keeps clients focused long term.
By the way, I am up at 5 in the mouring, which i never do, becasue i am nervous fo what is going on with the market. i am open to any ideas anyone has??????
 
 
Nov 27, 2007 9:36 am

It is a bit unsettling how this market is acting, and how much money central banks are spending on pumping liquidity into credit markets.  Subprime issues are like a big game of 'whack a mole' right now....just when you think we're done something else pops up.

Real estate issues in the residential market are going to be with us for a while.  We also probably have not seen the worst in REITS and commercial real estate.  When you see such a huge crisis in a related sector(residential) and as well a big shrinkage in liquidity, it should affect valuations.

There was an article today on page c1 of the Journal about how some of the big public pension funds are reducing US stock holdings in favor of international holdings.  I think when the slowest of the thundering herd are convinced it is a universal truth that the risk/reward tradeoff of international stocks is more favorable, it is probably near the end of this downward dollar trend.

I think the floating rate and high yield funds are getting to a point where they are getting pretty attractive.

I wouldn't be so eager to chase the big banks yet.  C might start to look good under 25 IMO only.  Not a recco-do your own work.

Nov 27, 2007 10:00 am

I like what Ferris told me on the phone the other day... One of his clients called to complain about his account balance going down-  Ferris's response was..." So let me get this straight.. You NEVER want to lose money"  The implication is.. You think your account will ALWAYS being going up.. He said shortly after he said that.. he's client said 'no, your right.. I was just concerned'.

 
I thought that was priceless. Just like Ferris! Gotta love him. I sure do miss his posts on this forum.
 
Miss J
Nov 27, 2007 10:04 am
newnew:

Broker7 are you saying that you sell equities now (when they are low) into cash? isn't that what we are paid to NOT do? I am telling clients NOT to cash out, as this is an emotional reaction trade--you always buy back in higher (when it FEELS better)

 
Domestic equities to global, gold, dollar to euro. Yes, I have been shifting portfolios in that direction for a while now.   The Dow has always been based on the dollar amount of the stock holdings. Price factoring dollar devaluation and the real global price of gold (not in dollars), the dow is currently in the 7500 range.
The 1999 dollar is now 68 cents.  There is a much bigger global picture than the dollar.     It's our job to be informed, and to keep our clients informed
Nov 27, 2007 10:25 am
Broker7:
newnew:

Broker7 are you saying that you sell equities now (when they are low) into cash? isn't that what we are paid to NOT do? I am telling clients NOT to cash out, as this is an emotional reaction trade--you always buy back in higher (when it FEELS better)

 
Domestic equities to global, gold, dollar to euro. Yes, I have been shifting portfolios in that direction for a while now.   The Dow has always been based on the dollar amount of the stock holdings. Price factoring dollar devaluation and the real global price of gold (not in dollars), the dow is currently in the 7500 range.
The 1999 dollar is now 68 cents.  There is a much bigger global picture than the dollar.     It's our job to be informed, and to keep our clients informed



That mindset has become so prevalent...it is exactly what is causing me to believe the dollar is close to a bottom...

Nov 27, 2007 10:32 am

Its a fact..not a mindset. we are an overextended society as individuals and as a people.

I LIKE YOUR OPTOMISM THOUGH!
Nov 27, 2007 12:45 pm

The chorus of negatives has not gotten loud enough for me to be convinced that the bottom is here.  I hope it is, but I don't think there is yet enough capitulation to feel confident of that.  At the same time, I'm buying and staying in.  That's how I've made money for clients over the years and I'm convinced given the long-term history that the formula has not changed.  I've gotten Z-E-R-O calls over the last two weeks expressing concern about the market.  Many of my clients were with me in 2000-2002 so this is hardly a blip on the radar for them.  Also, I've been preparing them for such a downturn for some time through oral and newsletter commentary, so recent moves come as no real surprise to the majority of them.  This is one of those times when time in the business is very helpful. 

 
It's reassuring for clients and prospects that you've been down this road before and your clients survived.  An advisor's first bear market is a make or break proposition - how you handle such adversity will in large part determine your success or failure in this business. It's OK to tell clients that you don't know where the market is headed next, but I've always followed that up with "but I know which direction the market has gone from 1925 to 2007 and I have a lot of confidence that the overall trend will continue."  If your clients see that you're scared and uncertain, they'll mirror that back at you.  If they sense a little near term uncertainty, but overall confidence in the markets in general, they are much more likely to feel reassured and stay put.  I've had several clients thank me for talking them off the ledge in 2000-2002 and a couple tell me that they wish they'd listened.
 
Now is when you earn those commissions you've collected over the past five years.
Nov 27, 2007 1:41 pm

If you look at the data, in 6 of the last 10 recessions the stock market went up! IMHO, this is because the market was oversold prior to the recession being called. Of course, no one knows how low it can go, but I'm preparing clients to go from the conservative(10 - 15% under their personal benchmark - if they're a 80/20 client, they're at 65/35 or 70/30 right now) to go to normal & then to aggressive(10 - 15% more - any 80/20 client would 90% stocks & 10% mmkt) if the market goes down to 12,000.



On a new client acquisition front, I'm taking this opportunity to sell prospects on how model driven portfolios that allow their new advisor(me) better manage their goals & acct's & the risks they take work. Also continuing to use sub-advised funds like Pac Life & wrap in general. Many advisors say that they're worried that clients will feel like a number, but in my opinion it's a reality that the mass affluent client understands.

Nov 27, 2007 2:20 pm
Indyone:

The chorus of negatives has not gotten loud enough for me to be convinced that the bottom is here.  I hope it is, but I don't think there is yet enough capitulation to feel confident of that.  At the same time, I'm buying and staying in.  That's how I've made money for clients over the years and I'm convinced given the long-term history that the formula has not changed.  I've gotten Z-E-R-O calls over the last two weeks expressing concern about the market.  Many of my clients were with me in 2000-2002 so this is hardly a blip on the radar for them.  Also, I've been preparing them for such a downturn for some time through oral and newsletter commentary, so recent moves come as no real surprise to the majority of them.  This is one of those times when time in the business is very helpful. 

 
It's reassuring for clients and prospects that you've been down this road before and your clients survived.  An advisor's first bear market is a make or break proposition - how you handle such adversity will in large part determine your success or failure in this business. It's OK to tell clients that you don't know where the market is headed next, but I've always followed that up with "but I know which direction the market has gone from 1925 to 2007 and I have a lot of confidence that the overall trend will continue."  If your clients see that you're scared and uncertain, they'll mirror that back at you.  If they sense a little near term uncertainty, but overall confidence in the markets in general, they are much more likely to feel reassured and stay put.  I've had several clients thank me for talking them off the ledge in 2000-2002 and a couple tell me that they wish they'd listened.
 
Now is when you earn those commissions you've collected over the past five years.



I just got off the phone with a client who I tried to talk off the ledge in '02 and failed.  We just finished reviewing his accounts and the IRR that I calculated of 4.5% since he pulled the plug on his allocation plan in 2002.  Now he's ready to get with the program.

Nov 27, 2007 2:25 pm
Ashland:

If you look at the data, in 6 of the last 10 recessions the stock market went up! IMHO, this is because the market was oversold prior to the recession being called. Of course, no one knows how low it can go, but I'm preparing clients to go from the conservative(10 - 15% under their personal benchmark - if they're a 80/20 client, they're at 65/35 or 70/30 right now) to go to normal & then to aggressive(10 - 15% more - any 80/20 client would 90% stocks & 10% mmkt) if the market goes down to 12,000.



On a new client acquisition front, I'm taking this opportunity to sell prospects on how model driven portfolios that allow their new advisor(me) better manage their goals & acct's & the risks they take work. Also continuing to use sub-advised funds like Pac Life & wrap in general. Many advisors say that they're worried that clients will feel like a number, but in my opinion it's a reality that the mass affluent client understands.



Ash-

During the other 4 of 10 events, how much did the market drop from top to bottom?  What can you do to protect your clients(and your business) from such an event?

These are things that are also worth considering.

Nov 28, 2007 9:49 am

This is one of the more positive and worthwhile posts I've seen so I had to respond.

 
I'm shorting oil (6-12 months), long alternative energy-there's a lot of great solar and hybrid companies out there, short gold for 6 months, I like the big banks-waiting another 6 months though, I still like the foreign investments other than China like India, Brazil, Mexico. Pending how things evolve in the next year I like the housing market recovering and investing in copper, home builders and getting back into REIT's and TIC's.
 
I've been putting a number of my clients in structured products. The company I work for comes out with 8-12 of these each month that offer 100% principle protection with unlimited upside, usually a 18 month to 3 year investment. I invested in one a little over a year ago which shorted the housing market and it's doing great. Also using our conservative hedge fund that can get me 10-15% a year.
 
I hope the Fed stays their course and worries about the only thing they should-inflation. Not making the White House happy in an election year, be careful of 2009, the year after a new candidate is usually a tough one. Good Luck!
Nov 28, 2007 10:02 pm
joedabrkr:
Ashland:

If you look at the data, in 6 of the last 10 recessions the stock market went up! IMHO, this is because the market was oversold prior to the recession being called. Of course, no one knows how low it can go, but I'm preparing clients to go from the conservative(10 - 15% under their personal benchmark - if they're a 80/20 client, they're at 65/35 or 70/30 right now) to go to normal & then to aggressive(10 - 15% more - any 80/20 client would 90% stocks & 10% mmkt) if the market goes down to 12,000.



On a new client acquisition front, I'm taking this opportunity to sell prospects on how model driven portfolios that allow their new advisor(me) better manage their goals & acct's & the risks they take work. Also continuing to use sub-advised funds like Pac Life & wrap in general. Many advisors say that they're worried that clients will feel like a number, but in my opinion it's a reality that the mass affluent client understands.




Ash-During the other 4 of 10 events, how much did the market drop from top to bottom? What can you do to protect your clients(and your business) from such an event?These are things that are also worth considering.





Joe - The average correction(as reported in today's USA Today) was about 16%. Only 25% of the time did a bear market occur after stocks fell that far. If I recall the little & big dippers were horrible in the 30's. People lost more than 50% in 1973/74 & 2000-2002 was almost 50%. Given the lower interest rates & good corporate profits it's hard to imagine that stocks can trade for any extended period of time below 15 - 17 x forward earnings, and that's pretty much where we're at.



I think the answer to protecting client's assets during such times are model driven portfolios that incorporate all the core asset classes. It looks like high energy, materials, and commodity prices are here to stay for a while & that may be a good way to hedge against other risks like future inflation & a falling dollar. Finally, because one is watching 10 - 15 portfolios(considering various fund families) it should be easy to be nimble with client's allocations when you feel there's a time for a change.

Nov 29, 2007 9:15 am

This is fascinating stuff. 

Personally, I like Son of Seattle Slew in the fifth race at Arlington at 8 to 5 odds, with War Horse to show.  For the Trifecta, I really like Holy Toledo, coming in at a whopping 65 to 1!  In fact, given the temperature and wind speed today, I really like the idea of doubling up on Holy Toledo, who sounds like a real monster to me.  Plus, today is also the anniversary of the founding of Toldeo - coincidence?  I think not!

And maybe 5% of the portfolio on the Patriots to go undefeated for the whole year.  Long shot, I admit, but look at the IRR if you win!  Awesome!

Yep, I've had my fill of that boring asset allocation and sticking to a disciplined plan crap ... give me something to get excited about, and some bets to take! 

Now THAT'S what I call investing!! I may not always be right, but at least I'll have fun ... for a while. 

P.S.  If we can't poke fun at ourselves every now and then, what good are we?!

Nov 29, 2007 3:37 pm

   Put $500 on Holy Toledo for me, too! Let me know if I win, and then I'll send you the cash.

Jan 4, 2008 4:35 pm

Betting on Holy Toledo or betting long on the market?? You tell me