Steady,…. Hold…. Hold…….

There’s this great scene in the Braveheart movie where the Scots are facing down an English cavalry charge. The Scots are armed with spears and they want to wait for the moment of maximum surprise before springing them on the advancing cavalry. William Wallace (Mel Gibson) keeps trying to get his troops to be patient and wait. “Steady, hold.., hold…, hold…..”

Whenever I’m looking to buy shares as they decline, I like to play that clip at the office. Then we usually go out for some Starbucks and buy some time. The temptation is to do something and take advantage of bargains, but usually you are better off just being patient and waiting until there is an actionable event that will arrest the decline. Just because it is down a lot, that doesn’t mean that you need to buy it right then. I frequently find myself surprised by just how low a stock can drop before it bottoms. What I thought was cheap, turned out to be a month too early. I think we may be in a similar situation today. What can make shares go up from here?

Let’s face it, the global economy isn’t recovering. It isn’t doing badly, but it isn’t exactly robust. With QE2 about to finish, investors are coming to the conclusion that the problems in the West are not fixed, in fact without QE2 to cover up for these problems, they will resurface with a vengeance.

Shares are starting to decline. I think they will continue to decline until something makes them stop declining. What would that thing be? Naturally, it’s QE3, but I would caution that it is not as near-term as many seem to believe.

Most thinking people have come to the logical conclusion that printing a whole lot of money doesn’t do much except lead to higher food and energy costs. You cannot fix a debt problem with more debt, just like you cannot use inflation to solve structural problems. Bernanke knows that another round of money printing is not palatable right now. His hands are tied. He wants to print, but knows he can’t, unless of course there is another crisis. Only a really bad market decline will let him start printing again. Even then, he may not be able to simply buy treasuries. He will have to mix it up a bit. Will QE3 involve printing money to buy foreclosed homes? Will the government use the money to bail out insolvent state pension funds or bankrupt cities? No one really knows. Our government is liable to do just about anything. It doesn’t have to make logical sense, just like QE1 didn’t make sense. You know it’s coming, but it might take some real economic pain before they pull the trigger on more QE.

Until we know their plan, there’s nothing to do. In the lead-up to QE2, the market acted weak for months. Then when they started to hint at QE2, the market never looked back. For most of the past half year, I have had a whole lot more cash than normal. I’m waiting for the cue, then I’m buying as many commodity assets as I can handle, just like last time.  Until then, “Steady…, Hold…Hold…….”

Categories: Comments On Events
Positions Mentioned: none

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