Beware of the Secular Bear
Today's Financial News - Posted September 19, 2008
Mike Burnick of Weiss Capital Management explains how to protect your wealth in a secular bear market and how to capitalize on widespread stock market losses.
by Krista Das
Baltimore — (TFN): In a global economy where it seems there’s nowhere to turn, developed markets are down 20 percent and emerging markets aren’t safe either, then it’s time to capitalize on widespread stock market losses.
Joining us today to share some bear market strategies, is Mike Burnick, director of research for Weiss Capital Management. Mike, welcome to Market Insights.
So do you see a prolonged recession and steeper bear market decline ahead or do you think this turbulent climate is going to turn around soon?
Mike Burnick: Well that’s really the question on everybody’s minds right now. Unfortunately there’s probably no easy answer. You know, according to the official statisticians in Washington we’re not even in recession yet. They still claim the economy’s growing.
Although you can’t really trust a lot of that data that comes out of Washington and particularly the GDP because it’s backward looking.
I mean the second quarter GDP data for instance goes all the way back to a period that started on April 1st, April Fool’s Day and ran through the end of June So that’s looking in the rear view mirror trying to figure out your investment strategy. You’d probably get about the same kind of results as if you drive down I-95 here in Baltimore by looking just in the rear view mirror. It wouldn’t work out too well for you.
The problem is you’ve got to be more forward looking. If you look at some of the real-time data, like jobless claims for instance or some of the other numbers coming out, they look dismal. The leading economic indicators look terrible.
Retail sales are slumping; multi-year lows. Consumer confidence for instance is at 28 year lows, the lowest level its been since Jimmy Carter was in the White House.
So these more real-time data are telling us that we’re probably already in recession or very close. It’s just not official yet. And in terms of the market I really don’t think we’re done here. We haven’t seen the bottom yet. We made a big splash here recently when the Treasury came out and trying to bail out Freddie Mac and Fannie Mae, but again it’s a short term fix kind of like what we saw with Bear Stearns back in March.
The market caught a rally for awhile, then rolled over and ended up hitting new lows. I don’t think we’re through this thing yet. As you mentioned, the S&P 500 has declined about 20 percent total from high to low in October to the lows here in July.
Since then it bounced a little bit, but we may very well be in for lower lows ahead. You know, the average bear market, Krista, since 1950 has declined about 30 percent. So, on that particular measure we may only be about two-thirds of the way there.
The last big bear market we had here in the U.S. in stocks was of course when the tech wreck happened in 2000. The dot com boom went bust. At that time the S&P 500 fell 50 percent from its high in 2000 to its final low in October 2002 and it really wasn’t until 2003 that they got started to the upside again. Over the same period the NASDAQ fell almost 80 percent.
So by that measure we may not be even halfway through this particular downturn in the market.
Krista Das: Right. So what makes a secular bear market, such as what had happened in Japan in 1989 and its gone on for so long. So dangerous when it comes to protecting your wealth.
Mike Burnick: Well, yeah, that’s a great thing to point out right now. A lot of investors I talk to every day, they’re searching for a bottom. Is this a good time to buy, put some money to work and it may be, but we’re not going to know that until hindsight.
I prefer to be cautious, raise some cash, wait for the really good buying opportunities when you’re sure that we’re back into an up trend again when things look a little bit healthier.
You mentioned a secular bear market. I think the biggest fear investors should be worried about now is that we’re in one that maybe began even in 2000. What we’ve since then in the last eight years, we saw a nice market rally, but the S&P 500 only made a marginal new high in 2007. The NASDAQ never got back to about half of its value from 2000.
So by that measure, really the big bull market of the 80s and 90s ended in 2000 and we haven’t been back to anything even close to that since then.
Stock returns over the last ten years have been tiny; about two percent, two and a half percent average per year for the S&P 500. That’s a lot less than the long-term return of about ten or 11 percent for stocks.
So, you mentioned Japan and that’s a great case in point. Japanese stocks measured by the Nikkei index over there, they peaked in 1989 just a few days before New Years as a matter of fact at 38,900. Since then the market’s declined over 70 percent. It’s at 13,000 today, Krista, almost 20 years later. It’s still about 60, 70 percent below its peak.
I’m worried that the U.S. stock market could be in for a similar longer term bear market that lasts for quite a bit longer.Krista Das: Now Mike, your capital management firm has helped clients weather bear markets before. Tell us about the Weiss bear strategy.
Mike Burnick: Yeah; the Weiss bear strategy is a professional managed account program where we basically are looking to safeguard investors’ returns, kind of hedge their long side investments in a turbulent bear market environment and even earn gains when the market declines overall.
The bear strategy we actually started during the last bear market, we started the fund up in December of 2000. From 2000 December until March 2003 when the market pretty much bottomed, the bear strategy was up about 40 percent compared to a 30 percent loss in the S&P 500.
So, it served us well during that bear market. Its done so again this year. Just in the second quarter, which ended June, the Weiss bear strategy was up about nine percent and the S&P 500 was down three. So it’s doing its job right now.
Of course as they say, the past performance is no guarantee of the future returns, but if we do end up staying in the secular bear market for awhile and we see a lot of false starts, choppy market environment continuing for months or if not years into the future, you’ve got to have some sort of a hedge for your portfolio and the Weiss bear strategy can provide that. Its done so in the past.
Krista Das: Mike, exciting information. Thanks for coming on the show today and helping us battle the bear.
If you would like to learn further about protecting your wealth in these treacherous times, simply click on this screen or go to Today’s Financial News.com.
That’s all for today’s show. Thank you for watching. Until next time here’s to great profits from smart investing.
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