Friday, May 28, 2010

Beyond the Sound Bite: An Interview with Christopher Chabris, Ph.D. and Daniel Simons, Ph.D.

If someone told you to keep your eye on a bouncing ball, do you think you would notice a gorilla entering into then departing your field of vision?

We kick off our summer reading series with the authors of "The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us". In a most fascinating conversation with the cognitive psychologists, we explore key elements of behavioral science and many of its applications to decision-making including the myth of intuition, the illusion of knowledge (e.g. Amaranth), and the appeal of confidence and certainty ("...we prefer people who are confident even when we have all the information we need to see that they are less accurate in what they are saying."). Bernie Madoff, anyone?

Investors seeking to gain a better understanding of their own investment decision-making process will find the time spent listening to this podcast as time well spent.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here

Wednesday, May 26, 2010

A Stock Market Correction Hanging In The Balance

Stock market corrections, such as the one we are currently experiencing, are healthy processes by which excesses generated in the advance can be wrung out and rotational (sector) change can evolve. In the process, new leadership emerges thereby helping to elevate the renewed rally to higher levels. There is, however, another evolutionary factor that investors should be mindful of: a correction that could easily evolve into a transitional phase resulting in a market reversal.

One way this transitional phase can occur is when a market correction is succeeded by a failing rally which then morphs into a distributional range from which more market weakness is developed culminating in a market reversal. I referenced one such version of this in last week’s post (“37.17”). While this process is underway, those in favor of the preceding market trend (in this case, a bullish one) argue for a continuation of the preceding good times. In the process, further distributional market action occurs. And when the market decline begins in earnest, the market believers continue to dismiss the move.

Will this occur in the current market conditions? It is too early to say for certain, but for the moment the benefit of the doubt must be given to the bull case for the following reasons:

The fundamental argument for a resumption of the bull after the correction is anchored in optimistic earnings growth levels (S&P 500 operating earnings of $80 and $88 for 2010 and 2011, respectively) coming to pass AND for average to above average P/E ratios (15 to 18) being applied to such earnings. For both issues to occur, an economic slowdown in the US and Europe coupled with a only modest decline in China’s growth rate is one key ingredient*. A second ingredient is for little to no serious surprises in the geo political realm. This would include any exogenous shocks, such as a massive terrorism act. It would also include governments that are overly fractured due to the consequences of domestic politics (e.g. the US mid term elections).

A third ingredient would be for longer-term interest rates (5 and 10 years) to remain range bound and neither decline nor increase substantially as either move would imply deflation or inflation. Both will likely be most unacceptable to investors – the former for the implications of a collapsing pricing structure for businesses (not to mention the risks to monetary policy, among other risks), the latter for the implications of a higher cost of capital (among other factors, and not excluding the possibility of a stagflationary environment).

A fourth ingredient has to be the unforeseen and unintended consequences emanating from the final financial regulatory reform bill and/or overly aggressive action by the regulators. Since virtually no one can predict how far the financial tentacles reach from financial innovation products and processes into the real economy, this is a substantial unknown that goes far beyond just the financial services industry and must not produce yet another macro financial services industry surprise (that ends up negatively impacting the real economy).

In sum:

• Sustained economic growth (albeit at very low rates in developed economies)
• No geo political or exogenous shocks
• Stable longer-term interest rates
• No unintended consequences from the new regulatory regime

If any of the above four items fail to live up to expectations, the fundamental arguments for a resumption of the bull market must be reexamined.

Investment Strategy Implications

When it comes to stocks, it must be assumed that the old Yogi Berra adage, “It ain’t over ‘til it’s over”, applies. The above four items could deliver and the current market correction will be all she wrote. Markets get in gear again and higher highs are confirmed. However, if any of the above falls short, the fundamental justification for higher stock prices is in jeopardy.

From a market intelligence perspective, until there are clear signs of a market reversal (a Mega Trend reversal being the most significant), it is advisable to operate on the assumption that the correction will be just that – a correction – followed by a resumption of the trend in force. That said, investors are advised to be ever vigilant for signs of market deterioration and the aforementioned items as the fundamental story hangs in the balance. And that goes a long way toward explaining the contradictory and conflicting market action of late.

*China's growth must also evolve to a more demand driven model and away from fixed investment and exports, both of which are unsustainable for China and, importantly, the global growth story. Corporate profitability needs to remain at their current levels, something that appears to be quite achievable.

Wednesday, May 19, 2010

Beyond the Sound Bite: An Interview with Don Rissmiller

"Kick the can down the road" seems to be the policy response of governments, Europe being the latest to do so. My fourth interview with the Chief Economist at Strategas Research Partners begins with this issue and the virtually inevitable consequence when "the bill comes due". We also discussed the inherent conflict between the positives of the cyclical recovery presently experienced in most regions of the world and the secular risks of a (still) structurally imbalanced world. We end with a quick look at the US consumer.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here

Tuesday, May 18, 2010


China (FXI).

A closing break below 37.17 (Feb. 8 low) indicates a move to 30 - 32, which is a 30% decline from its April 9 closing of 44.59.

Last decline was Nov. 16 to Feb. 8, which was 20% down.

S&P 500 (SPX) declined 8% during its previous drop (Jan. 19 to Feb. 8).

If China goes down 30% this time and the price relationship holds, then SPX drops 15% to 1034.

Key levels for SPX: 1110 (closing low of May 7), then 1056 (Feb. 8 closing low).

A market correction (15% to 1034) with a breach of the SPX Feb. 8 low (1056) should raise bearish sentiment and produce an oversold condition to sufficient levels to trigger a summer rally. It will likely fail as many global markets would have triggered a Mega Trend reversal (price to moving averages (50 and 200 day), and slope of moving averages): just as the accompanying chart shows China doing right now (as are EAFE (EFA), Europe 350 (IEV), Germany (EWG), and United Kingdom (EWU), among others.*

If all occurs: Bull market over.

*click image to enlarge

Friday, May 14, 2010

Beyond the Sound Bite: An Interview with Dr. Ian Bremmer

As important as China and other emerging economies are to the global economy, precious little time is devoted to understanding their form of capitalism. And when it comes to western oriented economies, even less time is taken to understand which form of capitalism will emerge as the dominant economic philosophy in the aftermath of the ongoing credit and economic crises.

My interview with the founder and president of Eurasia Group, the world's leading global political risk research and consulting firm, and author of The End of the Free Market: Who Wins The War Between States and Corporations addresses these vital and transformational issues that are and will impact the global economy. Investors who take the time to go down the learning curve and seek to understand this emergent battle - its consequences and likely outcomes - will benefit significantly.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here

Thursday, May 13, 2010

Beyond the Sound Bite: An Interview Dr. Robert Litan

We conclude our Innovation Series with a discussion on the financial regulatory reform working its way through Congress, America's global innovation position, the competitive threat from emerging markets' companies, and the public policy considerations.

Dr. Robert Litan, Vice President, Research and Policy, Ewing Marion Kauffman Foundation; Senior Fellow, Economic Studies, Brookings Institution, is our guest.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here

Wednesday, May 12, 2010

Beyond the Sound Bite: An Interview with Lakshman Achuthan

The recent market volatility has brought back into the discussion the risk of a double dip in the US economy. To this and other economic issues we turn to the prescient Managing Director of the Economic Cycle Research Institute (ECRI).

Mr. Achuthan describes how the ECRI analysis points toward a deceleration of economic and profits growth and not a double dip. In this interview, we also explore the unique methodology of ECRI, the Euro rescue package, the impact of a shocks, and the preconditions necessary for shocks to alter the direction of a prevailing economic trend.

Note: In addition to the above noted website, those wishing to learn more about Mr. Achuthan and ECRI might consider his book, Beating the Business Cycle.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here

Friday, May 7, 2010

Technical Analysis Rule of Thumb re Selling Climaxes

In order to qualify as a selling climax, stocks must NOT close below yesterday's closing price over the next 3 trading days. As the first chart shows, given the deterioration in the near term indicators tracked (momentum and MACD) and the fact that the short term indicator tracked (slow stochastics) is not in deep oversold territory (below 20), the odds are high that stocks WILL close below yesterday's close and the air pocket corrective phase we just lurched into will likely continue. The most pressing question is: does that mean something more than the long overdue healthy correction? No, for the following reasons.

The fact that we entered the correction with some degree of technical analysis weakness but not an overwhelming amount of it suggests the decline will be contained and not usher in a bear market. As the second chart shows, divergences between the S&P 500 and other key global indices (e.g. EAFE (EFA), Asia Pacific ex Japan (EPP), and Latin America 40 (ILF)) were evident (my "Sell in May and Pray" mantra) but not so pronounced to warrant ringing the bearish bell. Moreover, as the third chart makes abundantly clear, the Mega Trend HAS NOT reversed itself. Until price crosses both moving averages AND the 50 day crosses the 200 day AND both averages point southward, the bull market is intact. However, all this could change in the coming months as the following paragraph illustrates.

The next most pressing question then becomes: how low will this correction go? The market intelligence/technical analysis tools I use only provide direction not amplitude. That said, given all of the above plus history plus valuation considerations, the odds are that the decline will likely turn out to be a garden variety correction of 10 to 15% - this despite the dramatics exhibited yesterday and the unquestionably horrendous advance/decline data (> 10 to 1). What follows will likely be an attempt to reestablish the bull and it is in that rally that key signs of broad market strength must emerge - most notably global indices must improve their relative performance. If in the subsequent rally phase broad market participation does not emerge and further technical analysis damage does, then the odds for an end to the bull market will increase significantly.

Bottom Line: Correction not apocalypse now.

Thursday, May 6, 2010

Beyond the Sound Bite: An Interview with Dr. Ross Levine

Does recently maligned financial innovation produce an economic good? The third installment in our Innovation Series explores this question with the James and Merryl Tisch Professor of Economics and Director William R. Rhodes Center for International Economics and Finance, Watson Institute for International Studies, Brown University.

Fresh off his Economist magazine on-line debate with Nobel laureate Joseph Stiglitz, Dr. Levine - the advocate for financial innovation - describes why financial innovation is not just important but "necessary for growth". We also discussed the role of regulation viz-a-viz financial innovation and the future of the economics profession (including the George Soros funded Institute for New Economic Thinking initiative.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here

Wednesday, May 5, 2010

Beyond the Sound Bite: An Interview with Dr. Paul Kedrosky

We continue our Innovation Series with the well-known editor of the popular blog, Infectious Greed, exploring his views on financial regulatory reform - its potential negative impact on angel investing and the implications for innovation, as well as the risk that banks would be constrained from assisting early stage growth companies. We also discussed the appropriate role of government in spurring innovation and the under appreciated aspect re how immigrants play a key role in America's standing in innovation.

Beyond the Sound Bite podcast interviews can be found at
To listen to this interview, click here