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The Perils Of Complacency

By Paul Lamont

August 19th, 2010

 

 

***This is an excerpt from our July 31st Investment Analysis Report.***

 

 

“Investing solely for ‘income,’ investing merely ‘to keep capital employed,’ and investing simply ‘to hedge against inflation’ are all entirely out of the question.” - Gerald M. Loeb, The Battle for Investment Survival. 1935.

 

 

The Perils of Complacency: Two Examples of the Herd Mentality

We thought these two instances of emotional herding instructive:

 

“Stocks in the Standard & Poor's 500-stock index have shown an increasing tendency to move in the same direction at the same time. Last week, those stocks' tendency to move in the same direction as the index hit an extreme not seen since October 1987, according to research by investment group Birinyi Associates in Westport, Conn.”

 

Last February, we presented the Crash of 1987 chart. Specifically, we compared our current market to that of the October peak. Even with the Flash Crash in May, the market is still acting like it wants to crash. While bear markets can be extremely volatile, we continue to expect a Second Flash Crash. 

 

Another example of herding is currently evident in the municipal bond market. As Bloomberg reports: “Citigroup Inc., State Street Corp. and U.S. Bancorp are among U.S. banks whose municipal bond holdings have reached a 25-year high just as state budget deficits swell to $140 billion, the most since the start of the recession.” What caught our attention most especially in this article was that each institution described their comfort level as higher, the larger their exposure. This is the complete opposite of how we would feel. Here are the levels:

 

Citigroup=10% of Tier One bank capital =”comfortable”

State Street=50% of Tier One bank capital=”very comfortable”

Cullen/Frost=100%+ of Tier One bank capital=”extremely comfortable”

 

We guess when you have bet your whole institution on one investment class you better feel ‘extremely comfortable.’ Instead of following the herd, investors should be avoiding municipal bonds as well as any institution that is overloaded with municipal securities. 

 

“Successful investment is a battle for financial survival.”- Gerald M. Loeb, The Battle for Investment Survival. 1935.

 

Quantitative Easing Round 2

There are many investors that have been calling for a second round of money printing as the economic data has come in under expectations. We expect the Fed to print, but it does not change our stock market outlook. Here are a few quotes from Oct. 9th and 10th of 2008, in a week that saw the market lose 18%:

 

"What the Fed has done is eventually going to help turn things around, but people don't believe it yet," said Gary Webb, CEO at Webb Financial Group. "They're acting on fear."

 

"Fear is feeding upon itself and nothing the officials have done to this point seems to stem the tide," said Ryan Atkinson, market analyst at Balestra Capital.

 

"Central banks of the world have been flooding the markets with liquidity, but banks are hoarding cash," Atkinson said. "This is the lynchpin of the entire financial system and as long as this is still going on, the markets will be driven by fear."

 

 

At Lamont Trading Advisors, we provide wealth preservation strategies for our clients. For more information, feel free to contact us. Our monthly Investment Analysis Report requires a subscription fee of $40 a month. Current subscribers are allowed to freely distribute this report with proper attribution.

 

***No graph, chart, formula or other device offered can in and of itself be used to make trading decisions. This newsletter should not be construed as personal investment advice. It is for informational purposes only.

 

Copyright ©2010 Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama. Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm visit www.LTAdvisors.net, or to receive a copy of our disclosure form ADV, please email us at advrequest@ltadvisors.net, or call (256) 850-4161.