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What's the real definition of market capitulation


Guest JackRiver
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Guest JackRiver

Lately I've seen and read reports about market participants looking for signs of capitulation.  Invariably they always seem to suggest that capitulation is related to a major selloff, but I was taught that capitulation is apathy.  That capitulation was the point where most investors just don't give a rats ass anymore.  So which is it?

 

I believe capitulation is apathy and I'm starting to see signs of apathy. 

 

Yours

 

Jack River

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Here are some statements that serve as guide posts of capitulation.  1873, 1907, 1929 you always had the same statements in media and by citizens:

 

1.  People say 'buy and hold is dead' 

2.  Investors pray stocks rise so they can get their money back, rather than make money off fresh capital. 

3.  Constant predictions and fear of a market crash, after a market crash. 

4.  You hear the claim 'capitalism is dead' or its companion 'capitalism is not working'.

5.  Wall Street is viewed as a gang of crooks.

6.  Bankers are cursed.

7.  Rich people are being vilified and blamed.

 

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Well #5 is partly true right now.  Too many executives have gotten away with publically misrepresenting their capital situation when they clearly knew better.  This should be treated as fraud and people need to go to jail.  The sooner this happens, the sooner confidence will return as investors will start believing they aren't being lied to.

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Another way to look at this is to compare the cash on hand during various recessionary periods.  I don't think we will see the same boom after the bust this time around, but we must be getting close to the bottom now.

 

 

http://www.theglobeandmail.com/servlet/story/RTGAM.20090305.wheinzl0306/BNStory/Business/

 

In the United States, there was about $8.85-trillion (U.S.) sitting in cash, bank deposits and money market funds at the end of 2008. That was equal to 74 per cent of the market value of all publicly traded companies – the highest ratio since 1990, according to a Bloomberg report.

 

The report went on to say that when the amount of cash relative to stock prices reaches extremely high levels, the market often rebounds forcefully.

 

In 1974, for example, cash reached a record 120 per cent of U.S. stock market capitalization. Over the next six months, stocks rose 31 per cent. In 1982, with the ratio at 95 per cent, the S&P 500 posted a six-month gain of 36 per cent. And in the recession of 1990, the ratio reached 75 per cent and stocks jumped nearly 30 per cent in the following year.

 

 

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Speaking of giving up all hope, I am reading more and more quotes like these in recent days:

 

http://www.nytimes.com/2009/03/06/business/economy/06shares.html?_r=1&ref=business

 

"with no end in sight to the downward spiral"

 

"With so much uncertainty, investors are parachuting out of companies like banks, retailers and utilities, and abandoning stock markets everywhere"

 

"It’s just a continuing self-destructive market...Everyone is just selling"

 

"We’re collapsing in on ourselves...Nobody wants to be invested, that’s the problem. I don’t believe we’re at the bottom yet."

 

“Ninety-nine percent of the people I talk to are pessimistic...Everyone is sitting back and waiting for one more big implosion.”

 

All of this was from just one article.  And the other day I heard the talking heads on CNBC saying that long-term investing is dead and doesn't work anymore.  I really think we're close to the point where most people have given up all hope.

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The Markets have dropped 25% since Dec 31, 2008.  So even if the available cash has not changed it now represent 100% of existing stock market capitalization, only surpassed by the 120% ratio in 1974.  The ratio could be even higher if more money has been pulled from the market since Jan 1st.

 

 

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Guest JackRiver

I pulled a fast one on you guys.  Sorry.

 

The definition of capitulation is apathy.  I knew this before my post, and I know it now. 

 

I was trying to see if others understood this or if we like the media were buying into the notion that capitulation was when people threw in the towel and sold.  The blood in the streets analogy. 

 

The best example I've seen that suggest some apathy is taking hold is, "I just don't open my statements anymore."  That, you will agree, is subtly different from, "I give up, just sell everything."

 

Yours

 

Jack River

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Guest ericopoly

The ratio could be even higher if more money has been pulled from the market since Jan 1st.

 

 

Every time a stock is sold, exactly the same amount of money goes into the market as leaves it.

 

The only thing that has changed over the past year is that the negotiated price has fallen.

 

There has been zero money pulled from the market.

 

The exception would be new issues where you have a company raising capital for example, or companies buying back shares.  But I think you were referring to people selling existing shares to other market participants (unless I misunderstood, which is entirely possible).

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Guest JackRiver

Eric

 

Zero money, but wealth has still been evaporated.  That is, the seller and buyer dictate the price for everybody else and of late they have been dictating lower prices.

 

In a similar vain, I always believed our stock market pricing mechanism was flawed in the short term.  I have no suggestion for a better mechanism (other than some kind of weighting of the transaction size to the whole), and by no means is this flaw specific to stock markets, it shows up in numerous markets - real estate comes to mind, but I do appreciate why Buffett always refers back to chapters 8 and 20 from the "Intelligent Investor."

 

Yours

 

Jack River

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Guest JackRiver

Let me correct that last post.  I should not have used the term "wealth."  The correct term is value, value in the sense of unit price times number of units.

 

Yours

 

Jack River

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Guest ericopoly

Eric

 

Zero money, but wealth has still been evaporated.  That is, the seller and buyer dictate the price for everybody else and of late they have been dictating lower prices.

 

 

Yes I agree.  That was really what I was trying to say -- nothing but the negotiated price has changed.

 

I've been thinking today of where the incoming dividends/interest will go from bonds and equities.  Likely, if these people are already into risky assets and haven't sold, then they won't want to reinvest that income into Treasuries but rather will want to reinvest into stocks/bonds at today's higher yields.

 

Over the past year, corporate bonds have been crushed and... if these investors were happy to puchase those bonds at 6% yields two years ago, they ought to be happy to buy more of the same at much higher yields today.  Their purchasing power can go further in terms of the number of units they can buy with the same annual dividend/interest payment that they started.  So as prices have come down it should at a point become self-stabilizing, but it takes time of course because you have to actually wait for those interest payments to come rolling in.

 

The same dividend buys twice as much you might say, and that will help the people who are already "all in" and love these prices to keep on buying.  It will also help fund managers meet redemptions as fund income gets stronger relative to the size of the redemptions.

 

 

 

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The definition of capitulation is apathy.

 

I'd have to disagree with that.  Apathy mean the absence of interest.  I don't think absence of interest accurately describes what is going on right now.  People are plenty interested - heck, it's all people are talking about; they are just afraid that things won't get better anytime soon.

 

Capitulation means giving up.  In war, capitulation means surrendering or giving up the battle.  In the stock market, capitulation means giving up 'hope.'

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Guest JackRiver

tooskinneejs

 

Just for the record, I was not making the case that apathy was wide spread at this moment.  As I said, "... some apathy is taking hold..."

 

It's better to watch CNN for capitulation (apathy) than to watch CNBC.  Specifically we are talking about the stock market and not the economy.  When the stock market (not to be confused with the economy) is way down the list of stories on CNN that will be the best media tell of capitulation (apathy).  Again, I believe we are starting to see *some* signs of apathy.  My wife has a good one, "Don't tell me about it."  My neighbor, "I don't want to talk about it." 

 

Yours

 

Jack River

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I like that one stone.  I told someone at work to buy FFH @ 260.  He was happy when it went to 330.  Now he no longer gives his wife portfolio updates :) ! 

 

Did you tell him to buy more now that it was on sale? And that over time he'll make even more money? Bet he didn't take you up on it.

 

Over the long haul my co-workers are amazed at how I've made out with FFH over the last 6 years. I've never been able to time the ups and downs by selling all and re-buying at lower prices (like this past 2 weeks...) but I've always been able to gradually increase my holdings over time and have done just fine. This dip will be no different.

 

At the same time they just can't get their head around the idea that Mr. Market is wrong and is offering an opportunity.

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The little bit I have caught from CNBC wasn't giving up hope either.

 

It seems they have a lot of people telling people to buy stocks for the long term.  Money Mag... had a piece on saving more and putting it into your low cost mutual funds.

 

People have been to well conditions to think markets always bounce back.  All hope isn't lost at 6500.    Just like all hope wasn't lost in 2003's bottom which wasn't the bottom after all.  All hope is lost when people don't think it can ever come back. 

 

This could be the bottom, but it doesn't feel like a bottom.  The SP500 still has a double digit PE ratio.  If this is the bottom, then it wasn't as bad as the 70s or the 30s for sure.  The dividend yield isn't all that great either.

 

-SFWUSC

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