Permanent Value

Weekly Update: January 17 -21, 2011

Bruce Doole
January 25th, 2011

THE MARKETS

It may not feel like it, but 2009 and 2010 completed the best two-year advance in the S&P 500 index since 1998 and 1999, according to Bloomberg. The bad news is the booming late 1990s was followed by the bust of the 2000s and as of last week, the S&P 500 was down about 13% from its December 31, 1999 closing price. That excludes reinvested dividends and is based on data from Yahoo! Finance. This 13% decline over the past 11 years was driven by two nasty bear markets — the second from which we are still recovering.

Stepping back to the end of 1998, here’s a high level view of the major market moves in the S&P 500 over the past 12 years, according to Ritholtz.com and Bloomberg:

• A 68% rally from the end of 1998 to the 2000 top
• A 50% sell off to the March 2003 low
• A 104% rally to the October 2007 top
• A 58% drop to the March 2009 low
• An 86% pop to the December 2010 high
 
Clearly, the financial markets are not for the faint of heart!

This brief 12-year history of the stock market shows that the market can “giveth” and it can “taketh” with equal ease. Our role is to try and help you meet your goals regardless of whether the market is in a “giving” or “taking” mood.  

Data as of 1/21/11 1-Week Y-T-D 1-Year 3-Year 5-Year
Standard & Poor’s 500 (Domestic Stocks)    -0.8%   2.0%   17.6% -0.7% 0.3%

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable or not available.

EVERYBODY LOVES LISTS…

…so why not a list of the 10 greatest trades of all time?

Rather than focus on people who bought a stock and watched it zoom up 100 fold, the compiler of this list — International Business Times — focused on a “style of trading that’s best described as making huge, concentrated bets by analyzing fundamental economic/business conditions.  Most (but not all) of these trades can be labeled as ‘global macro.’”

Whether they were lucky or brilliant (or a combination of both), these folks made a bundle of money from their best trades. Here they are:

1. John Paulson’s bet against subprime mortgages (his fund made $15 billion just in 2007 from this trade).
2. Jesse Livermore’s call on the Crash of 1929 (a legendary trader and the subject of the highly popular book, Reminiscences of a Stock Operator).
3. John Templeton’s foray into Japan in the 1960s (a true investment industry pioneer, Templeton foresaw the rise of Japan after World War II and profited enormously from it).
4. George Soros’ breaking of the Bank of England in 1992 (the Bank of England blinked and Soros made $1 billion).
5. Paul Tudor Jones’ shorting of Black Monday in October 1987 (he correctly predicted the crash, bet a bundle, and tripled his money as the market crashed 22% in one day).
6. Andrew Hall’s $100 oil prediction (with oil trading at $30 per barrel in 2003, Hall made a big bet that prices would rise to $100 within five years; they did and he took home a personal paycheck of $100 million in 2008).
7. David Tepper’s 2009 bet on financials (as the market hit its low in early 2009, Tepper boldly bought financial services stocks and his fund earned $7 billion that year — and a cool $4 billion of that went to Tepper).
8. Jim Chanos’ prescient shorts (his sharp analysis led him to predict the demise of Enron, WorldCom, and other firms, and he is known as the best short-seller in the world).
9. Jim Rogers’ early call on commodities (he was bullish on commodities back in the 1990s and has been riding them to great profits ever since).
10. Louis Bacon’s geopolitical play (he correctly predicted that Saddam Hussein would invade Kuwait in 1990 and profited handsomely by going long on oil and shorting stocks, which helped his fund return 86% that year).

While these are the types of trades that make the headlines, you never hear about the other investors who made a big call and missed, and ended up out of business. Rather than trying to throw a touchdown pass on every play and make a “big score” like these traders, we focus on trying to get consistent first downs. Do that and the score may take care of itself.