Beware of Sideways Markets

Posted by Vitaliy Katsenelson via John Mauldin

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Screen shot 2013-05-28 at 6.38.02 PMVitaliy Katsenelson is a modern-day American success story, the kind we need more of. He grew up in Murmansk, in the extreme northwest corner of Russia, north of the Arctic Circle and close to the Finnish border. He says he barely escaped a career in the engine rooms of Russian Navy vessels when his family wrangled a visa to emigrate to the US in 1991.

He finished high school here, knocked out a BA in finance at the University of Colorado at Denver, and followed up with an MS in finance and his CFA.  At that point, a local Denver firm, Investment Management Associates, snapped him up; and before long he was one of the two principals in the company, alongside Michael Conn.

Are We There Yet?

His first book, Active Value Investing: Making Money in Range-Bound Markets, appeared in 2007, and it proved Vitaliy had really been doing his homework: he had dug deep into the historical market data and emerged with insights that really broadened our understanding of range-bound or “sideways” markets (like the one we’ve been stuck in for more than a decade now). With the book, he also provided a very detailed strategic investment process for these very treacherous markets.

In today’s Outside the Box, Vitaliy brings those insights to bear on our present, tenuous situation, as we go on wondering what it is going to take to move the global economy off the (rapidly depreciating) dime and into a new, expansive phase. Vitaliy faces that question head-on, with a convincing combination of stock market analytics and global macro perspectives.

(This article is the core of a piece he just published in Institutional Investor. You can read the entire article HERE

Vitaliy and I corresponded on this piece for some time. I often publish something in Outside the Box I don’t agree with, as I like to listen to those who disagree with me. In this case, however, Vitaliy and I do in large part agree, although there are some minor points on which I will have to engage with him the next time we get together. We are still in the secular bear market whose imminent appearance I was writing about way back in 1999. The end of the bearish slant will come when valuations are low. That can happen with a decline in price or a sideways market for a longer period of time. It makes for a challenging equity market. But time is the healer for secular bears, and this one too shall pass. There is yet another secular bull in our future. Until then we get trading opportunities and have to look for value where we can find it.

I write from Brussels where the weather is perfect at the moment, contrary to the weather experts who told me it would be nasty. (The old joke is that God made economists so that weathermen can look smart.) There is a da Vinci exhibit around the corner that I have to find the time to see. My hosts Geert Wellens and Geert Noels (author of Econoshock) of Econopolis are keeping me busy. I have had some fascinating discussions with their clients and staff.

The 777 that American Airlines now uses to cross the pond is hereby officially declared my new favorite airplane. Besides being very comfortable, it has wi-fi on international flights and is set up to let you create your own personal work space, a new standard in flying offices. While I try and sleep when I go to Europe, I tend to stay up returning home to help with jet lag and get back to Texas time easier. That travel time just got more productive, and I can still get in my reading at my leisure.

While standing in line I noticed the lady next to me had a tag which, if you travel a lot, you recognize as a sign of a fellow true road warrior. Those designations are rare (and get some nice perks), and so I asked her to tell me what she did that had got her one of those coveted items. “Oh, I am a million miler,” She replied. My first reaction was to think “Don’t we all have a million miles?” and I assume a puzzled look danced across my face. She smiled and clarified: “I mean I fly a million miles a year.” I was truly astounded. I had heard rumors of people who did that but had never actually met anyone who did. I will have somewhat more than 100,000 miles by the end of June, and I thought I lived on airplanes. The gentleman next to us joined the conversation. He only did 400,000 a year, down slightly from past years when he was busier.

This lady had employees and projects all over the world, so when she traveled in one direction she would just keep on going around the world, which saves money, stopping where it was convenient. Three or four world tours a month and you soon get to a million miles. And she has kids and lives in west Texas. The gentleman who does 400K hops the globe fixing other people’s problems. We discussed the ins and outs of being a road warrior, and I pick up a few new tips from people who truly deserve that appellation. They both sat near me on the plane, and they soon fell asleep. I envied them, as I have trouble sleeping on planes, but I got a little more work done before landing in Brussels. It is a good thing that my “fun” is also my day job. Now, I just need to find a gym before the next meeting.

Have a great week, and take time to enjoy life, wherever you find yourself.

Your starting to learn the rhythm of the road analyst,

John Mauldin, Editor
Outside the Box