Head Fake

Two things happened this week. First, I finally finished the Black Swan book. I feel inspired by it. What I got from the book is the idea that no one can forecast the future so surfing to the far edge of the risk curve is not such a crazy idea after all, providing you manage the overall risk well. Second, something happened at work. Let's just say it changed my perspective on life forever. 

Outside of my little universe, an important thing happened. The stock market globally rallied strongly. Yet, the world hasn't changed this much. Maybe the only big change is how Europe is contemplating "quantitative easing" as well. Otherwise, the best that we can say is the world is not getting any worse. US car sales dropped 40%, instead of 50% like the previous few months. One suspects we are also seeing inventories being replenished. Also of note is how the US market is feeling somewhat more optimistic about the various measures (say TALF) to save the banking system.

If you are perfectly smart, you may say so what ? The world is still in a lot of trouble. There is no way the global system can be fixed so quickly. Now is the time to call the market bluff and short the market. My humble advice is don't. The market's collective might is bigger than you and I. The market is voting that maybe there is a chance that the world may be on the right track. Remember, the gist of the Black Swan book is you and I don't have a clue on what is going to unfold in the next 12 months. Don't adopt the "holier than thou" attitude and be pigheaded. Be flexible and agile. For all we know, all these countries printing money may actually bring back inflation and growth.....We just don't know.

In my case, I have seen this before. My game plan is don't argue with the market. Enjoy the ride. It may go on far longer than anyone can anticipate. Remember as recent as 3 weeks ago, there were lots of shorts out there. Comes mid-Apr, we will see if the "inflection" trade can persist. Maybe another 2-3 weeks of happiness if the companies report as expected results and that things have "bottomed". But I will definitely cut back my exposure in late Apr - "Sell in May...Go Away". After a lull, if you are very aggressive, maybe you can resume the "2010 will recover" trade towards Q4. If 2010 turns out to be another down year, you are toast. If 2010 turns out to be OK, you will make lots of money. Take your pick and overlay your macro view there.

By the way, I don't offer financial advice. Think of the above as rambling of a worthless stock market participant who has plenty of scars on his back to remind him of all the lessons over the past 10+ years.

Turning to the Sydney property market, again I am quoting the fantastic RWM.com.au. Got the following statistic from the latest blog there:

MOSMAN HOUSES

• 2009 – 24 sales. Averaging 8 sales per month with a median sale price of $1,425,000
• 2008 – 264 sales. Averaging 22 sales per month with a median sale price of $2,200,000
• 2007 – 409 sales. Averaging 34 sales per month with a median sale price of $2,230,000
• 2006 – 396 sales. Averaging 33 sales per month with a median sale price of $1,900,000
• 2005 – 293 sales. Averaging 24 sales per month with a median sale price of $1,850,000
• 2004 – 310 sales. Averaging 26 sales per month with a median sale price of $1,637,500
• 2003 – 376 sales. Averaging 31 sales per month with a median sale price of $1,699,500
• 2002 – 392 sales. Averaging 33 sales per month with a median sale price of $1,690,000
• 2001 – 446 sales. Averaging 37 sales per month with a median sale price of $1,250,000
• 2000 - 349 sales. Averaging 29 sales per month with a median sale price of $1,150,000

Source: RP Data

Looks like property prices in Mosman have doubled since 2000. 2009 is turning out to be a very quiet year. I also notice that quite a few auctions fall through. The $2-3.5M range feel very quiet. An interesting question is what will drive prices down ? Maybe something is happening. Remember I once wrote about how property valuation is such an imprecise science. Here is an example. In Cremorne, a 4/5 bedroom house with proper harbour/city view was sold for $1.66M (vs. $1.8-1.9M initial asking price). When I saw the price, I thought it wasn't a bad deal for the buyer. The house is now available for rent at $1495/week. A house round the corner was up for auction last week. We saw that house as well. The vendor was asking for around $2M at the time. It wasn't sold and the vendor bid was $1.6M. I am waiting to see if the domino effect kicks in elsewhere.

I think I will stick to my 2010 scenario. Further, if I were to look at my own circumstances, I no longer feel secured about anything. My perspective on life has turned 10 shades more grey than 2 weeks before. I can imagine how a lot of folks will feel how their circumstances have changed for the worse as well. Really can't see any reason to hurry.