Not so HOT – betting against a consumer recovery

August 20, 2010

Economic statistics seem to be confirming the suspicion many have had that the “economic recovery” was merely a reprieve from a drawn-out process of deleveraging and structural changes – a much needed process after decades of ever increasing consumer spending on the back of easy credit and rising asset prices. This reprieve was created by stimulative measures taken by the government and the Federal Reserve, who now both seem low on ammunition.

Among many consumer cyclical stocks that look vulnerable is Starwood Hotels & Resorts Worldwide Inc. (HOT). This company touts an inexplicably high valuation and I believe another contraction in consumer spending will provide the catalyst to take its stock price down significantly. Read the rest of this entry »

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My trading plan for the coming years

August 3, 2010

Watching stock charts being drawn in real time and digesting data on a daily basis, it is easy to get distracted from your longer term views. I believe it is useful to review once in a while what those views are as it can give you a different, less myopic view on your trading. The following longer term views influence my trading plan:

  1. Markets move in long cycles. I am a believer in long market cycles, typically 16-20 years in duration. Such cycles are empirically supported by market history and there is also a certain logic to them. A bull cycle starts when valuations are very compelling and all the weak and frustrated hands have been shaken out. That cycle continues until everyone has been enticed back into the market (on margin, in many cases) and valuations apparently cease to matter. When there is no one left to be fooled into the market, the process is reversed.
  2. Valuations matter. Perhaps not on a daily basis, but in the long term fundamentals always catch up with stock prices. Long bull markets start from low valuations (e.g. 1982) and long bear markets start from high valuations (e.g. 2000). My favorite gauge of where the market stands valuation wise is the Cyclically Adjusted P/E ratio (CAPE), made popular by Robert Shiller in his book Irrational Exuberance. Check out Doug Short’s recent post for an excellent discussion of this topic. Read the rest of this entry »