Friday, January 30, 2009

Quotable Quotes: As January Goes, So Goes the Year?

The well-worn Wall Street axiom, “As January goes, so goes the year”, is about to move to the top of the financial media’s list in the coming days. For, barring a supernatural rally in the next few hours, stocks will turn in a negative performance for month (actually worse than last January). Down 6.29% (S&P 500 total return) going into the day, the odds favor a bad 2009 for stocks. Here are some facts courtesy Sam Stovall, Chief Investment Strategist with S&P:

“Since 1945, whenever the S&P 500 advanced in January, the market continued to rise during the remaining 11 months of the year 85% of the time, posting an average price advance of 11.6% -- substantially more than the 8.2% return recorded by the S&P 500’s 12-month price appreciation for the past 64 years. Whenever the market declined during the opening month of the year, the S&P 500 fell an average 2.2% for the remaining 11 months. Its frequency of success, however, was no better than a coin toss at 48.”

Sam goes on to note that “…the January Barometer offers correlation with causation for behavioral reasons.” I take this to mean that there is a certain self-fulfilling quality to the January barometer. However, correlation is not always causation and the past is only prologue, not destiny. Therefore, investors would be prudent to take a skeptical eye to the idea that stocks are destined to rise or fall based strictly on historical facts, especially during times of great uncertainty and change.

Have a good weekend.

Thursday, January 29, 2009

Minyanville posting: 50-Day Moving Average Useless on its Own

This week's Minyanville posting looks into the dubious value of the 50-day moving average on its own.

"Every now and then I get a phone call or email from a reporter asking my views about a market metric that receives what I believe to be an undue amount of investor attention: the 50-day moving average (or MA).

The calls and emails usually occur right around the time when..."

To read the full current Minyanville commentary as well as other Minyanville postings, click here

Wednesday, January 28, 2009

TARP Version 1 Revisited: Mark-to-Market Back in the Crosshairs

“Senior Wall Street executives said yesterday that they had been sounded out on plans for an “aggregator bank” that would purchase toxic assets from banks. Under one of the plans discussed, toxic assets would be valued by an independent third party. Where assets are purchased at prices below their book values, the government might then inject common equity into the banks to make up for capital wiped out by the sales.”
Financial Times, January 28, 2009

On the surface, mixed signals are emanating out of the US Treasury department. Last week, Treasury Secretary Geithner stated that he was comfortable with mark-to-market accounting. Today, we learn of the above quoted plan, which is a direct assault on mark-to-market – the real villain in turning a recession into potentially a depression. What gives?

To refresh your memory, mark-to-market accounting is rooted in the failed ideology of the efficient market hypothesis, which (in its “strong” form) says that when it comes to determining the fair value of an asset the market knows best. This dogma is so entrenched in the thinking of mainstream economists and many na├»ve investors that even Nobel Laureates such as Paul Krugman ascribe to this fantasy of the “wisdom of the market” (see "More on the bad bank"). Moreover, there is little doubt on these pages that the primary reason why TARP Version 1 went from “price discovery” (code for attacking mark-to-market) to bank capital infusions was due to the intimidation of then Treasury Paulsen by mainstream, non behavioral finance economists.

Investment Strategy Implications

Conspiracy theorist alert: Clever guy this Mr. Geithner. Publicly advocate for free market principles (mark-to-market) while working behind the scenes to exploit it (through the aggregator bank and price discovery (courtesy the "independent third party")).

The significance of keeping mark-to-market intact is the extraordinarily positive impact it will have on bank earnings as assets held at 20 cents on the dollar are written up ("say what?" you say) thereby producing large earnings gains. Moreover, by stabilizing the valuations of “toxic assets”, write ups will thereby alleviate banks’ capital requirements, which is the primary reason why bankers are reluctant to lend. Under the bizarro logic of mark-to-market, they need the cash to remain solvent – hence no lending.

Once mark-to-market is replaced by something like mark-to-maturity (suggested by Bernanke during early days of TARP Version 1), then, miraculously, liquidity will begin to flow through the banking system to the real economy. Sounds too simple? Allow me to refresh your memory on another non real economy factor that wrecked a large amount of unnecessary havoc on the global economy – commodity speculation and the price of oil.

Tuesday, January 27, 2009

Geithner’s Opening Blunder – China Bashing

As refreshing as the activist tone and tempo of the early days of the Obama administration may be, there is a developing uncertainty as to exactly what is the philosophy of the new administration? Take, for example, the nexus of foreign and economic policy and the comments made by recently confirmed Treasury Secretary Geithner.

What is Mr. Geithner trying to convey when he states that China is “manipulating” its currency? What is the strategy and gamesmanship behind rhetoric that can easily be construed as having a protectionist sound to it?

At a time when the threat of a global beggar-thy-neighbor mindset could develop between and among nations pressured by their citizens (leading to protectionist actions, such as the one the toy industry in India just instituted), it seems quite imprudent for a high US government official in a brand new administration whose philosophy is not quite fully disseminated to be making accusatory statements about one of the world’s most important countries.

The activist tone and tempo of the Obama administration is clearly designed to quickly seek the high ground in the battle to change the game of the political status quo. And who can blame the President. The economic stimulus package is a perfect example of the competing forces at work, with the result almost certainly being the equivalent of an economic camel – a horse designed by a committee. Therefore, getting a jump out of the starting gate does seem to be a rational tactic. However, as shown in business, the first mover advantage may not be sustainable, particularly when so many forces are aligned against change AND the advocates for change may not be completely prepared for all contingencies, including the inevitable unintended consequences.

Investment Strategy Implications

There’s a great moment in the acclaimed HBO series “John Adams” when Ben Franklin advises the volatile Mr. Adams against publicly attacking someone who disagrees with him. “He might think you are serious”, cautions Mr. Franklin. Perhaps the Treasury Secretary should heed such advice. Or, maybe the implied no-drama Obama administration is just a campaign slogan.

Wednesday, January 21, 2009

Beyond the Sound Bite: An Interview Tim Hayes, CMT

In his first Beyond the Sound Bite interview last April, the Chief Investment Strategist for Ned Davis Research accurately portrayed the markets with his maximum underweight in equities and other insightful comments. In this interview, we get an updated perspective from Tim, which is considerably more optimistic than last spring.

Beyond the Sound Bite postings can be found at
To listen to this week's podcast interview, click here

Friday, January 16, 2009

Quotable Quotes: Everett Dirksen

Next Tuesday, a senator from Illinois will bring his Midwestern sensibilities to the White House. So, it seems appropriate to look back at the words of another famous political figure from the Prairie State. No, not that one. Rather, the one who got to be known by some as the “Wizard of Ooze”.

“When a member of the House moves over to the Senate, he raises the IQ of both bodies.”

“I am a man of fixed and unbending principles, the first of which is to be flexible at all times.”

“A billion here, a billion there, and pretty soon you're talking about real money.”

“During a political campaign everyone is concerned with what a candidate will do on this or that question if he is elected except the candidate; he's too busy wondering what he'll do if he isn't elected.”

“I have said, with respect to authorization bills, that I do not want the Congress or the country to commit fiscal suicide on the installment plan.”

Have a good weekend.

Thursday, January 15, 2009

Minyanville posting: Stimulus Enough?

This week's Minyanville posting leverages on the past several days blog postings re the government stimuli.

"This morning, in one of those rare moments when CNBC hosts restrain themselves and let their guests complete a thought, two interviews help frame the economic and investment climate quite clearly and, I believe, accurately.

The first interview was with Dr. Doom himself, Nouriel Roubini. To his credit,..."

To read the full current Minyanville commentary as well as prior postings, click here

Wednesday, January 14, 2009

Helicopter Hank

“It is like if you are in an airplane and the oxygen mask comes down,” said Stefanie Kimball, (Independent Bank’s) chief lending officer. “First thing you do is put your own mask on, stabilize yourself.”

"In Michigan, Bank Lends Little of Its Bailout Funds"
NY Times, January 14, 2009

The above quote and article captures the essence of the TARP money dump by Helicopter Hank in 2008. This is, no doubt, a large part of the dynamic that has investors worried, but not in the way that may seem apparent.

Under Obama and the Democrats, TARP funds will be allocated in a striking different manner. And this fact justifiably has many investors concerned that a significant increase in bank failures will be a part of the economic landscape this year: something that the accompanying chart from the Economist strongly suggests. Moreover, with no political dynamic at work this year, it is hard envision any scenario in which the second wave of TARP money would find its way to undeserving banks and with such poor transparency and regard for the terms under which such money is made available. As a result, investors should expect that banks with shaky balance sheets are headed for the operational dustbin. And with them, the economic consequences of the deleveraging process will continue unabated.

Investment Strategy Implications

Were it not for the fact that the stock market is deeply oversold, this morning’s 10 to 1 down ratio (both the advance/decline and advance/decline volume) might lead some to conclude that a return to the really bad old days of last year (with 5% + down days, rising VIX levels, banking crisis du jour, and more pain to follow) is underway rather than a second selling climax based on fears well known, defined, and, yes, manageable.

On the assumption that the plethora of money already doled out and what’s in the monetary and fiscal pipeline (including the Fed’s acquisition of selected “toxic assets” and the prospects for bank “write ups”) will have the desired effect of injecting into the US economic body enough juice to trigger the badly needed multiplier effect on corporations and households beginning in the second half of the year, a cautiously optimistic view of equities does seem warranted - at least for the next several months.

Helicopter Hank did what he did and in a manner that only he fully appreciates*. In short order, his actions will be perceived as they should be – a prelude to the real work of restoring the US and global economy to a more balanced era of growth and stability.

*A more conspiratorial mind might suspect there was a political dimension to his largess as 2008 was a presidential and congressional year. Providing “walking around money” to banks who did not qualify under the agreement that healthy banks should receive TARP funds does make one wonder just what was Helicopter Hank thinking?

Tuesday, January 13, 2009

What if…

…the Keynesian stimulus efforts of President-elect Franklin Delano Obama don’t work?
…credit spreads remain elevated throughout 2009?
…depression/deflation valuation levels come to pass?*

What you see listed above are the three areas I chose to focus on at last Thursday’s 12th Annual "Market Forecast" luncheon. They were selected by me to help frame the discussion among my six expert panelists (Bernstein, Janjigian, Reynolds, Steindel, Trennert, and Wyss)**. Based on the dialogue that ensued, it achieved its goal. Of the three items listed, it was the first, the most macro of the bunch, that generated the most conversation between the panelists and attendees and one that I wish to share in this blog posting.

It must be assumed that some form of fiscal stimulus package will be passed by the US Congress in the coming weeks. By all accounts, the package will have all the qualities of a camel – a horse designed by committee. This is to say tax cuts (for the Republicans) and liberal causes (for the liberal Democrats) will reside along side stimuli that Keynesian oriented economists prefer.

Whatever the blend, there are two larger issues that must not be ignored by investors. The first is embodied in the opening “what if” question – what if the Keynesian stimulus efforts fail to produce a sustainable recovery? At last Thursday’s NYSSA event, panelist David Wyss (Chief Economist, Standard and Poors) articulated what sounded to me like the best answer – the hope that the stimulus package helps unfreeze the private sector (banking, corporate, and personal) and, thereby, a multiplier effect begins to emerge in which a sustainable recovery gets underway. The scary part in this answer is not just the prospect that the unfreezing process does not occur as prescribed but also that the answers David and all five other panelists provided seem to always include the word “hope” – as in “who knows if any of this will have the desired lasting effect?” The second issue is what will be the economic philosophy going forward?***

Investment Strategy Implications

Relative to where things have been recently, the financial markets appear to have entered a somewhat quiescent period. The multi-faceted stimulus and stabilization programs should have their desired effect in the coming months. This is evident in the steady decline in key market metrics, such as the TED spread and the VIX. While still elevated, the direction for the next several months seems almost certainly to be headed in a constructive direction.

The big “however” in this view is what comes after the fiscal and monetary stimulus punchbowl begins to run dry. Then what? For investors, keeping a keen eye on the above and other market and economic metrics will be key to determining if the audacity of our economic hope comes to pass.

*As a point of reference, the valuation parameters noted have been posted on this blog twice in the past weeks (see Dec. 30 and Jan. 7). They provide a framework within which investors can draw their own conclusions re operating earnings for the year ahead and the appropriate P/E ratio.

**Without doubt, given these incredibly challenging times there are numerous areas to explore, many of which could be argued as being vitally important to the investment decision-making process. However, only the most dedicated bottom-up only investor would deny that the global macro climate is the overriding factor is front and center to the future of the markets and economies.

***This is a larger, related issue to the Keynesian stimulus question, one that contains an evolutionary aspect of the current economic crisis: Now that American-style capitalism, in place since the Reagan revolution, has imploded, what will take its place? For interesting and insightful perspective on this subject, see
“Where Do We Go From Here”

Friday, January 9, 2009

Quotable Quotes: Bailouts Gone Wild!

In a publicity stunt Viagra would envy, adult-entertainment moguls Larry Flynt and Joe Francis said Wednesday that they are asking Washington for a $5 billion federal bailout, claiming that "the porn business is suffering from the soft economy."

Entertainment website reported that adult movie DVD sales have plummeted 22 per cent in one year.

"...the economic downturn 'has made America's appetite for sex go limp'. The statement came from Hustler magazine publisher Larry Flynt and 'Girls Gone Wild' creator Joe Francis on Wednesday.

“People are too depressed to be sexually active,” Flynt said in a news release. “This is very unhealthy as a nation. Americans can do without cars and such, but they cannot do without sex.”

"It's time for Congress to rejuvenate the sexual appetite of America. The only way they can do this is by supporting the adult industry and doing it quickly," said Flynt.

I am not sure this is exactly the kind of stimulus President-elect Barack Obama had in mind when he said, “If we don’t act swiftly and boldly, we could see a much deeper economic downturn.”

Have a good weekend.

Wednesday, January 7, 2009

The Market Forecast Season Has Arrived

Tomorrow kicks off my early 2009 Market Forecast events beginning with the 12th Annual "Market Forecast" luncheon at the New York Society of Security Analysts (NYSSA). The six-person panel* will be tasked with discussing and debating the political dimensions of the macro economic points noted in yesterday’s blog posting as well as the pressing issues of the credit crisis, valuation levels, earnings projections, and more (much more).

In this regard, allow me to recap the essential market-wide valuation issues facing investors. I draw your attention to the accompanying updated valuation parameters table (click image to enlarge). What this table does is help frame the key issues impacting equities via a matrix, which incorporates the essential components of valuation (cash flows in the form of operating earnings, prospective growth rates and risk factors in the form of a P/E).

As the table illustrates, the operating earnings projections for 2009 correspond to a likely P/E given the economic climate. For example, as I noted last Tuesday it is improbable that a "great times” P/E of 20 would apply if operating earnings plunged to $52. Under such a situation, a $52 number would likely come about due to an economic climate that is under serious duress (as in the “bad times” deep recession – P/E of 10 – or worse).

Investment Strategy Implications

What will my expert panelists have to say about these and other vital issues pressing on the markets and economy? Well, for those of you in the New York area** perhaps you can carve out some time from your busy schedule and come hear for yourself". For those not able to make the event, I will provide a recap of some of the key thoughts and views expressed.

*Richard Bernstein, Chief Investment Strategist, Head of Investment Strategy Group, Merrill Lynch
Vahan Janjigian, Ph. D., CFA, Chief Investment Strategist, Forbes, Inc.

Glenn L. Reynolds, CFA, CEO, CreditSights

Charles Steindel, Ph. D., Senior Vice President and Head Research Support Function, Federal Reserve Bank of New York

Jason DeSena Trennert, Managing Partner, Chief Investment Strategist, Strategas Research Partners

David A. Wyss, PhD, Chief Economist, Standard & Poor's

**members of the media attend free of charge

Tuesday, January 6, 2009

A Most Dangerous Inflection Point

“If we don’t act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment.”
President-elect Barack Obama
January 3, 2009

There is a major economic battle underway pitting the resurgent Keynesian forces of President-elect Franklin Delano Obama against the monetarists and the remnants of the laissez faire/supply side crowd. To exemplify this policy struggle, consider the following two recent quotes from Paul Krugman:

“The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.”

“(Milton) Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time.”

To help complete the picture of this economic/political battle royal we have the factions of the newly empowered Democratic Party and its liberal wing seeking to spend the political capital they think they have earned courtesy the recent election results. Then, on top of all this is the stickiness of Washington business as usual and the reality that entrenched power is rarely ceded without a fight.

Needless to say, the task before Mr. Obama is daunting. And we will all learn if his campaigning skills can be translated into effective policy decisions and leadership.

Investment Strategy Implications

The central question is not whether all the money being thrown at the global economy (both fiscal and monetary) will produce positive results. It will. Rather, the key question is whether the policy actions under vigorous (and potentially divisive) debate involving trillions of dollars ends up stabilizing and then turning things around or merely mutes the decline to an era of lessened living standards and a lower quality of life. If the former, a new era of growth ensues. If the latter, get ready for the Great Depression II and a highly dangerous future.