Sunday, December 7, 2008
In Bear Markets, Everyone Loses Money
Bear markets are very dangerous. No matter what side of a trade you take, you can lose money. Even if you yourself are a bear, chances are you will lose your shirt as well.
On Friday, the market decided to make sure I understood this point. The worst job numbers in recent memory came out on Friday. The numbers, while they look horrible, are actually worse then they look on the surface. I have always had a problem with the employment rate and how it is calculated. It counts as employed people who are underemployed. That is, people who work part time but want to work full time or people who have a job that pays them much lower then they are qualified to make. It also does not count people who have just given up. In this type of economy, there are many people who fall into these categories. People must also remember, that the financial and credit crisis are just starting to make its way into the economy. That means, we are only in the first half of this problem with plenty more to come.
Anyway, the market was down after the numbers came out, as it should be. I decided to get short the market. But then a funny thing happened. The market decided to shrug it off and rally, ending the day up by about 3%. Now, there was no news that should have made the market rally. In fact, there was more bad news after the job numbers came out. But bear markets just do not care. They move, very rapidly, in directions that do not really make any sense. Since I was double short the market, I instantly lost about 7% of my investment
Now you could argue that the market has bottomed. And you might be right. I personally don't think so as I think people still have not quite digested just how big of a bubble we really had for a year. How do I know this? I just look around me for the data. I have been scanning the house listings seeing how much houses are going for in my area. Housing that are selling are at about 2004 prices. Houses that are listed are around 2006 numbers. Now I live in Southern California, the epicenter for the housing collapse. Yet people are still insisting on premium values for their houses. 2004 housing prices are still about double what they were in 2000 when the bubble started. Does anyone actually think housing prices should have doubled in four years? Further, the average house in the area is still selling for about 8x income. This is more than double what it should be.
If this market bottoms, I am certain it will not be a violent ride up like this. It will hover at the bottom for a while because the United States has a long way to go to work through all the issues that we have. I still have an appetite for risk, and will continue to try and trade this market. I jut hope that hungry bear does not get me before I get it.