Predators

According to the African Wildlife Foundation, the lion population has declined 43% in the last two decades, and approximately 23,000 remain on the continent.[1] Other animals that face extinction are the Bengal Tiger, Northern White Rhino, Clouded Leopard, Scalloped Hammerhead Shark, and the Red Wolf.[2] Sadly there are over 41,000 species on the extinction list, and another 16,000 that are considered endangered.[3] From bees to zebras, animals are disappearing at an alarming rate.

Six of the eight species of bears are on the endangered list. Polar and panda bears are considered vulnerable.[4]

Predators are needed to maintain order in the ecosystem. A world without predators sounds nice, but it causes other problems. New Zealand wants to eradicate their predators by 2050. Stoats and ferrets aren’t native to the island, and they’ve been eating the Kiwi – the bird, not the fruit – at an alarming rate.[5] The Stoat and ferret don’t have any predators.

Bulls and bears dominate the stock market. Bulls represent a rising market, bears a declining one. Bullish traders expect the market to rise while bearish traders expect it to fall. Bulls are usually more optimistic than bears.

Can the stock market survive without bears? Wouldn’t the market be better off if everybody was bullish or optimistic? I don’t think so. Bears are needed to maintain order and balance in the marketplace. I believe their job is to identify problems, poke holes in rosy forecasts and look for accounting issues in financial statements.

Citigroup publishes the Panic/Euphoria index weekly. The chart ranges from positive .6 – euphoria to negative .9 – panic, but most of the time, the readings fall between .3 and -.3. When the indicator approaches .3, the market has risen substantially, bulls are winning, and investors are feeling euphoric, so it’s due for a sell-off. Conversely, when it drops to negative .3, investors are panicking, bears are winning, and the market is due for a rebound. Last December the indicator traded below -.3 as stocks were falling and then the market went on a terror, rising more than 27% during the next seven months. When Citigroup’s index trades to extremes, the market’s ecosystem is out of balance.

Jim Chanos is a famous short seller and one of the early bears to attack Enron. The accounting didn’t add up, so he shorted the stock in late 2000.  Enron declared bankruptcy in December 2001 – a good call by Mr. Chanos.

John Hussman, Ph.D., manager of the Hussman Funds, is expecting a market loss “on the order of 60-65%” based on his analysis of current market conditions.[6] The Hussman Strategic Growth Fund (HSGFX) has a 10-year average annual return of -7.46%. A $10,000 investment in 2009 is now worth $4,599. The S&P 500 Index returned 14.3% per year over the same time frame. A $10,000 investment in the index is now worth $30,870.

Harry S. Dent, Jr. is calling for the “biggest crash ever” coming by 2020. Mr. Dent is the author of The Roaring 2000s published in 1998 and The Great Depression Ahead published in 2009. The exact opposite happened for both books. If he had reversed the order of his books, he’d be an investing legend.

I’m habitually bullish on stocks because, on average, they’ve risen three out of every four years, and they’ve generated an average annual return of 10% for the past 93 years. However, I do read bearish reports to give me a perspective on what others are thinking. Negative outlooks and forecasts keep me in check. The bearish reports force me to ask, “What am I missing?”

If there are no predators, the ecosystem will get out of balance – in nature and the markets.

Life, uh, finds a way. ~ Ian Malcolm, Jurassic Park

July 29, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have any asset or fee minimums, and we work with anybody who needs financial help regardless of age, income, or asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

 

 

 

[1] https://www.awf.org/blog/recovering-africas-lost-lion-populations, March 2, 2018 by Jimmiel Mandima

[2] https://awionline.org/content/list-endangered-species#mammals, website accessed July 29, 2019

[3] http://www.endangeredearth.com/, website accessed July 29, 2019

[4] https://seethewild.org/bear-threats/ website accessed July 30, 2019

[5] https://www.kiwisforkiwi.org/about-kiwi/threats/predators-pests/mustelids/ website accessed July 30, 2019

[6] https://www.hussmanfunds.com/comment/observations/obs190714/, John P. Hussman, Ph.D., July 14, 2019

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