Market View and trading strategy from Vitaliy Katsenelson

Vitaliy Katsenelson provides a clear and concise view on the market movement and strategies to make money.

Market Performance Outlook

He predicts another year of range-bound behaviour with higher highs and lower lows. I am not sure about the duration but I agree with higher highs and lower lows theory. Further I believe the cycles (high to low) will be much compressed this time around.

 

Investment Strategy

Katesenelson's investment strategy suggestions are must read for all investors. I would just add that one needs to pick winners/survivors in this crises. This is type of crisis that separates really dynamic companies from sitting ducks. So extra due-diligence is the order of the day.

Vitaliy Katsenelson's recommendation for investment strategy:

In range-bound markets, as P/Es compress they turn against investors; thus investment strategy in this very different and difficult environment needs to be adjusted for the new investment reality:

• Become an active value investor.  Traditional buy-and-forget-to-sell (hold) strategy is not dead but is in a coma waiting for the next secular bull market to return; and it’s still far, far away.  Sell is not just another four-letter word; sell discipline needs to be kicked into higher gear.
• Margin of safety needs to be increased.  Typically, value investors seek for margin of safety to protect them from overestimating the “E”.  In this environment it needs to be beefed up to accommodate the impact of constantly declining P/Es.
• Don’t fall into the relative valuation trap.  Many stocks will appear cheap based on past valuations, but past secular bull market valuations will not be in vogue for a long time, thus absolute valuation tools such as discounted cash-flow analysis should carry more weight.
• Though timing the market is alluring, don’t – it is very difficult to do it consistently.  Value individual stocks instead. Buy them when they are undervalued and sell them when they become fairly valued.
• Increased margin of safety and stricter sell discipline will lead one to have a higher cash position at times.  Don’t invest for the sake of being invested, because this will force you to own stocks of marginal quality or ones that don’t meet your heightened required margin of safety.  Secular bull markets taught investors not to hold cash, as the opportunity cost of doing so was very high.  However, the opportunity cost of cash is a lot lower during a range-bound market.

Links

The Big Picture » Blog Archive » Welcome to Another Lost Decade

Rahul Deodhar: Cyclicality of global slowdown

Rahul Deodhar: Picking Survivors

Stimulus - Monetary, Fiscal or both

Ed Harrison initiated a discussion on stimulus. The question was whether the US government stimulus was necessary. Here is my response.

US Dollar views

I am starting a new initiative. I will hereafter add videos rather than posts. Here is the first one on US dollar.

Defining end of recession

Just a quick note:
If it takes three consecutive quarters of GDP decline to call a recession then how can we call it over by just one good quarter?

Dollar will go down - just not yet!

There is a lot of talk about return of the USD, specially after Jim Rogers declared that he is long USD. Jim Roger put out a counter trade argument. Simply put, there were too many people betting against the dollar. So no way it will go down right away. There is one more argument!

Exporter push developing country central banks to the wall!

While USD weakness is well known, the developing country central banks are under increasing pressure to  manage the exchange rates at current or pre-crisis levels. Entire exporter lobby staff is on just this one task. The thing they don't understand is that US demand is not coming back to pre-Sub-Prime Crisis levels.

I expected this lobbying. But I also expected large exporters to start geographical diversification. This would suggest that exporters are buying time while preparing for new world realities. But there is still no sign of it. I believe, exporters are still in denial!

Currency tango - It still takes two for it!

Central bankers, on the other hand, do not want to be the first developing country to let their currency appreciate. So it will be a game of who blinks first. The usual strategy is such a poker game is to suggest that one will defend the peg no matter what! That is what China has done.

But I would venture they will be the first to act, and they will act decisively. But till that time we are in for holding breath under-water! It is unlikely that anything substantial will happen in 2010 on this front, may be during fall of 2010. One can only guess the impact once currency revaluation sets in. Lord have mercy!