This week, I thought I might take a moment to update where we stand in the big picture.
Returning to my baseball analogy, I believe the financial crisis is probably a little later in the game and could even be in the ninth inning. The chance of a collapse in any important financial stock now is rather small.
However, I believe the economy is only in the third inning of a brutal recession. As for the funding crisis and the potential problems in the dollar and in bonds, most people still don't really realize that a game has been scheduled.
As for the stock market, my hunch is the rally that has been under way for a couple of weeks will continue in fits and starts until sometime into early next year as folks become optimistic about what the new Obama administration will propose. A lot of the monetary and fiscal stimulus that's been announced has not yet had time to have an effect. And, since there's a big difference between proposing something and having it work, it's quite likely that folks will get overly excited.
All of these are reasons I haven't wanted to be short recently, though I think that if the stock market behaves in the fashion I just described, there will probably be a pretty decent shorting opportunity sometime in the first quarter. But for now, I think the most likely path is higher.
Even if that's the case, however, I expect some brutal declines, such as we saw Dec. 1. (Although that decline did turn out to be a head fake, buyers still could have gotten shaken out of a lot of money if they'd bought stocks carelessly.)
So, to summarize: It's dangerous to be short right now, though it's probably too early to be long for real. (Folks who are adept traders might be able to make some money.) Other than in precious metals and precious-metal securities, I don't plan on doing much on the long side.
All good things must come to an endI recently announced a change of investment focus on my Web site (subscription required), which consequently received a bit of publicity in the mainstream media. In the interest of keeping readers of the Contrarian in the loop, I would like to share what I wrote:
After considerable thought and deliberation, I have decided to make a major change in my life: I am going to close my hedge fund. I have several reasons for no longer wishing to run a short-only fund, as I have for the past 12 years.
I originally decided to start the fund because of developments in the 1990s that I wanted no part of. I felt that then-Federal Reserve chief Alan Greenspan was fomenting an environment that would lead to disaster, as consultants, financial advisers and the public at large were losing all respect for risk.
Of course, the reckless behavior carried far higher and lasted much, much longer than I'd imagined it could. However, the recent carnage in the stock market, real-estate market and the financial system (as well as the job losses) has washed away those excesses to a large degree, and it has violently demonstrated the risks associated with investing.
A future goal of mine, when I set up the fund in 1996 -- as I attempted to step aside from the madness -- was to return to the long side of the business at some point, after investors became more rational about risk and when stocks offered a better risk-reward proposition. I considered this option briefly in 2002 after the stock bubble imploded, but the cleansing process was postponed due to the burgeoning real-estate bubble.