Monday, March 24, 2008

Bull and Bear Markets, According to Oaktree’s Howard Marks

From DealJournal:

Pt. 1:The Memo All the Investment World Should Read
Everyone knows about the anticipation leading up to Warren Buffett’s annual shareholder letters. But for a certain Wall Street set, there are equally high expectations for the writings of Howard Marks. Marks is the chairman of Oaktree, the low-profile but powerful L.A-based firm that manages more than $50 billion in alternative investments, mostly in fixed-income strategies. He’s been writing memos to clients since 1990, but a cult following developed after a missive he penned on Jan. 1, 2000 titled “”>>>MORE

Pt. 2: Bull and Bear markets...

...To aid in your consideration of the future, I’ve formulated the converse of the above, the three stages of a bear market:

  • the first, when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,
  • the second, when most investors recognize things are deteriorating, and
  • the third, when everyone’s convinced things can only get worse.

Certainly we’re well into the second of these three stages. There’s been lots of bad news and writeoffs. More and more people recognize the dangers inherent in things like innovation, leverage, derivatives, counterparty risk and mark-to-market accounting. And increasingly the problems seem insolvable.

One of these days, though, we’ll reach the third stage, and the herd will give up on there being a solution. And unless the financial world really does end, we’re likely to encounter the investment opportunities of a lifetime. Major bottoms occur when everyone forgets that the tide also comes in. Those are the times we live for. [Emphasis his.]

I've been thinking we'd see this happen three times in the current downturn. If the hypothesis is to be close to the mark, the March lows set the stage for the "credit crunch bounce" which would take us back toward the old highs, followed by recession I (2008) new lows, a second run back up and a final bottom around the time recession II is announced (2009).

See: Markets: I Scream, Triple Dip, from last week.
Remember this is just a working hypothesis and almost certainly won't come to pass as presented. Stay tuned.