As the ECB considers stepping up to the plate and acting as the lender of last resort, yesterday's blockbuster Bloomberg article on the US Fed's secret funding program (forced out in the open via a Bloomberg lawsuit) could not be more timely.
Here are a few excerpts:
"The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.
The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day..."
"The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year..."
"The secrecy extended even to members of President George W. Bush’s administration who managed TARP. Top aides to Paulson weren’t privy to Fed lending details during the creation of the program that provided crisis funding to more than 700 banks, say two former senior Treasury officials who requested anonymity because they weren’t authorized to speak..."
"TARP and the Fed lending programs went “hand in hand,” says Sherrill Shaffer, a banking professor at the University of Wyoming in Laramie and a former chief economist at the New York Fed. While the TARP money helped insulate the central bank from losses, the Fed’s willingness to supply seemingly unlimited financing to the banks assured they wouldn’t collapse, protecting the Treasury’s TARP investments, he says..."
"On Jan. 14, 2009, six days before the company’s central bank loans peaked, the New York Fed gave CEO Vikram Pandit a report declaring Citigroup’s financial strength to be “superficial,” bolstered largely by its $45 billion of Treasury funds..."
To read the full story, click here
Monday, November 28, 2011
As the ECB considers stepping up to the plate and acting as the lender of last resort, yesterday's blockbuster Bloomberg article on the US Fed's secret funding program (forced out in the open via a Bloomberg lawsuit) could not be more timely.
Friday, November 25, 2011
To those who believe the current economic risks are all about the Eurozone and that the stock market decline is in nothing more than a bull market correction and to all of us who have been convinced otherwise, I offer the following quote from "The Last King of Scotland" with us as Nicolas and those as Idi Amin:
Idi Amin: I want you to tell me what to do.
Nicholas Garrigan: You want ME to tell YOU what to do?
Idi Amin: Yes, you are my advisor. You are the only one I can trust in here. You should have told me not to throw the Asians out, in the first place.
Nicholas Garrigan: I DID!
Idi Amin: But you did not persuade me, Nicholas. You did not persuade me!
Friday, November 11, 2011
Heard enough about China's "growth" miracle, with its Louis XIV-style corporate palaces and its ghost cities? No? Well, then I am sure you will enjoy this neat little story from Bloomberg about the unregulated loan-shark-rates lending that many (most?) non state controlled businesses are forced (choose?) to rely on and what happens when their ability to pay is impacted by difficult economic and credit conditions:
"Hours after a creditor and his gang of tattooed thugs hustled Zhong Maojin into a coffee shop in Wenzhou, he says he wouldn’t yield to their demands.
They wanted to take over one of the pharmacies in a chain he’d built by borrowing from private lenders. Instead, he made an offer of traditional retribution in this eastern Chinese city, known for loan sharks who have sometimes meted out violence to bad debtors.
“If you like, you can cut off one of my fingers instead,” Zhong, 42, says he told them.
Giving up the store would have made it impossible to pay back another 130 creditors, Zhong said.."
To read the finger licking good tale, click here
Thursday, November 10, 2011
A few weeks back, I provided the video of an Australian investigative program on the ghost cities of China. If that wasn't enough to concern investors about China's "growth" miracle, perhaps this will. Here are a few (yes, there's more here and here*) photos of the corporate headquarters recently built for state owned Harbin Pharmaceutical.
And these are the guys whom investors are relying on to provide capital for the Eurozone and save the world economy with middle class demand. Ghost cities and corporate palaces. Good luck with that.
*Note: For some reason, this second link no longer works.
Wednesday, November 9, 2011
Despite sporting an above large cap P/E (19.1 times versus 12.6, estimated for 2011) and despite having an exceptionally optimistic consensus earnings estimate for 2012 (27.3% versus 9.3%) and despite facing the heightened risk of an era of diminished US consumer demand (which is the primary business space small companies operate in), the emboldened bottom up crowd (see yesterday's comment re the bottom up idol, Warren Buffett) joined by the who-cares-what-direction-the-market-moves-just-as-long-as-the-market-moves momos remain fairly sanguine as they have yet to show any meaningful and sustained reduction in their risk appetite. To see this clearly, just look at the accompanying chart illustrating the performance of the small caps (IJR) versus the large (SPX) and mega caps (OEF) over the past 2 years.
While there have been relatively brief periods of reduced risk appetite (when small caps underperform their larger cap brethren (bottom portion of the accompanying chart), the cumulative result still remains fairly rosy.
Investment Strategy Implications
Today's big market move is yet another example of a point I have made on numerous previous occasions: large moves within trading ranges mean nothing. It is only when the current first wave of the bear (my view) or the bull market correction (bulls view) resolves itself with a clear downside or upside break AND is accompanied by confirming action from other indices that the true trend will be exposed.
One early sign would be if there is or is not a change in the risk appetite investors and their momo cohorts. And that would reveal itself in the relative performance of the small caps. Telescoping that performance into today's action: OEF -2.11%, IJR -2.62%. Applying the point made re the range bound market to todays' performance: motion is not movement. Unless and until this changes on a sustained basis, the risk appetite remains unchecked.
Motion is not movement. In fact, motion often resembles commotion.
Note: Accounts managed by Blue Marble Research presently hold a long/short position in the above mentioned issues and their inverse comparables.
Tuesday, November 8, 2011
First, the Greek tragedy. Now, the Italian opera.
As the global deleveraging crisis continues to wreck havoc on the Eurozone and interest rates for one of its largest economies hits record levels (see chart), it is advisable to understand the multiple dimensions of this financial and economic opera.
In his blog posting yesterday, Nobel Laureate Paul Krugman notes, “…Italy is not a shadow bank; its debt has on average a roughly 7-year maturity, so high interest rates take time to filter into higher debt service. As a matter of arithmetic, this could go on for a while, maybe even a couple of years, without necessarily pushing the country into default.”
However, as Mr. K also notes, “...rates can go even higher; banks can come under pressure; and bank depositors can vote with their feet.” And therein lies the real trouble – a run on the bank, in this case, a sovereign. As the FT noted recently, “The biggest US money market funds cut their exposure to European banks to another record low last month, amid continuing uncertainty over the fate of the region’s debt crisis.”
As money flows away from risky areas and into safe havens like the US dollar denominated assets, stress fractures in the global financial and economic fabric continue to break apart thereby producing a cascading effect upon all and an obsessive focus on who’s next.
Bottom line: This opera won't end until the fat lady sings. Unfortunately, I don't hear her even warming up.
And don’t think the Chinese are so dumb nor so economically secure (you can’t built ghost cities forever) that they will send boatloads of bailout cash to sinking ships around the world. Turandot falls in love only once.
But, hey, none of this really matters to the bottom up boys and girls who are no doubt emboldened by the actions of their leader, Warren Buffet, who went on a spending spree in the third quarter.
Wednesday, November 2, 2011
Here is The Economist cover image that I referenced in yesterday's foxbusiness.com interview: the Eurozone leaders being lowered into a sea of trouble (mostly of their own doing) with a pasta colander serving as their boat.
One of the points made in yesterday's interview was the near certainty that a recession is on its way (if it's not already there) for the Eurozone. Today's Eurozone manufacturing data only reinforces that view. What is more ominous, however, is the prospect that the best case scenario for the Eurozone appears to be recession. The worst case? Don't ask.
Tuesday, November 1, 2011
Okay, so I look prescient (at least for 3 days) after last Thursday's appearance on Bloomberg radio's "Talking Stock with Pimm Fox and Courtney Donohoe" some 60 S&P 500 points ago. Now what?
Today's talking head appearance affords me another opportunity to describe my emerging bear call and can be viewed at foxbusiness.com (not on cable) at 1 PM (eastern) today.
In addition to my submitted suggested talking points (below, sent yesterday), I hope to explain why
1 - Big market moves within defined trading ranges mean nothing.
2 - On its own, moves above and below the 200 day average also mean nothing.
Plus the emerging bull market in Komboloi (see accompanying image).
Suggested talking points:
Commentary: Blind Faith
* Bottom up type of investors - those that make investment decisions based primarily (many exclusively) on earnings - have helped drive stocks to current levels.
* Following their lead is a very dangerous practice for investors, as bottom up investors have an investment method that is fraught with danger.
* Last Thursday's stock market rally illustrated just how dangerous their approach to investing is: driving stocks higher on the news of the Eurozone deal without full knowledge of the deal's consequences.
* Their method - earnings matter above all else - is anchored in the belief that what's good for business is good for the economy. To believe this is to believe in laissez-faire economics, that unfettered markets work best, that government that governs least governs best.
* One would think that the recent experience (2007 - 2009) would have put this thinking to bed. But old ideas based on an ideology (dogma) die hard.
* There is neither a fundamental nor a technical analysis reason to change my early bear call.
* My proprietary Mega Trend is still strongly in the bear category.
* Earnings are on the verge of a serious decline into 2012 (and beyond) as the Eurozone slips into recession.
* At best, stocks should sell at a low double digit P/E, not the current average (15 times) P/E.
* Resist the siren call of the bottom up bulls. Keep a low equity exposure (50 to 60%).
* Put on mega cap, small cap hedges (long mega cap OEF, long the inverse small cap RWM).
* Be prepared to drop the equity exposure below 50% when the second wave of the bear emerges.
To view the segment live, click here.
Thursday, October 27, 2011
In addition to answering (explaining!?! defending!?!) why I believe this is a counter rally within an emerging bear market, I am hopeful that today's Bloomberg radio segment (4:30 PM easter, "Talking Stock with Pimm Fox and Courtney Donohoe") will touch on the risks inherent in the methodology that most traditionally trained bottom-up portfolio managers and strategists employ in their investment decision-making. And why it is risky to follow those who employ this approach with its faulty premises and embedded blind spots.
To listen to the segment live, click here.
Tuesday, October 25, 2011
Giving the devil his due, the bottom-up crowd has won this round, as earnings results are not disappointing as economists did for the third quarter. Therefore, in light of the recent market action, it seems more than productive to understand the nature of this important (but not dominant) segment of the market.
Most investors are bottom-up oriented. They buy and sell stocks with a passing reference to the sector and style tilt their portfolios produce. Like many sports teams, portfolios are populated with the best ideas. Sectors and styles are a by-product. Individual company earnings results, performance metrics (such as profit margins, growth rates, etc.), and valuation levels determine the buy/sell/hold decisions made. From that comes the action taken.
This situation is largely due to tradition and training: traditional among individual investors, training among the professional crowd (the CFA program, for example). It is what the financial media obsesses on while providing limited, yet sorely needed, education on what constitutes good portfolio management.
As one of the two essential elements that drive stock prices up or down (the other being financial market liquidity), earnings results can dominate the moment, as they appear to have done thus far this month. When good earnings results motivate investors to act positively, the momos (the real power in today’s market) join the party, as they are indifferent to the reasons that drive investors and are far more interested in an excuse to act. As long as money is abundant (financial market liquidity), the upside bias exists. Which brings us back to earnings results.
As long as companies deliver positive earnings results and financial market liquidity remains ample, the bottom-up crew can move markets (aided and abetted by the momos, of course) to a significant degree. Should earnings falter, however, then the dual impact of declining results and diminution of financial market liquidity (in the form of redemptions and withdrawals) can produce a negative feedback loop to the real economy (Soros’ “reflexivity”). Yet, more importantly, within this investing approach lie the seeds of its own destruction.
Bottom-up investing is aided and abetted by ivy tower fantasies about efficient markets, assisted with high-sounding phrases like “price discovery” and “capital asset pricing models”, and supported by economic methodologies that are anchored in traditional metric analyses. Such traditional economic methodologies do, however, come with two significant blind spots: the inability to forecast with any degree of accuracy and consistency (certainly commensurate with a practice that fancies itself as a “science”) and an inability to do global macro analysis particularly well.
The first point is self evident and saturated with historical fact. For example, one need only look at today’s consumer confidence miss to see just how off the mark these “social scientists” can be. The second point was made most evident in the debacle known as the Great Recession. Moreover, the inability to do global macro well also comes with an inability to incorporate contagion’s speed and source (real and/or financial economy).
This is a big part of how the world works in Wall Street. It is the dynamic reality that exists in the surreal world of finance. It is the state of denial that many who play the investing game occupy. And it is why it is so essential to step back and smell the global macro rose, which right now has a decidedly foul odor to it.
But, hey! “Who cares?”, say the bottom-up boys and girls. "Earnings are good and that’s all that matters to me."
Friday, October 14, 2011
This week's Quotable Quotes takes a look at China's ghost cities via a recent (March 2011) investigative report from SBS Dateline (Australian TV). If investors are looking for the other economic shoe to drop on the tenuous global economic environment, this very well could ultimately be the source.
To view the video, click here.
Wednesday, October 12, 2011
The financial media is at it again. "Stocks soar today because..."(you fill in the reason). "Stocks plunge tomorrow because"... (you fill in the reason).
What the financial media fails to recognize is that, over the past several decades, the structure of the market has changed. Today's short-term market moves are at the margin and being driven not by rational ivory-tower-pipe-puffing-erudite academics but by momentum chasing lemmings who have copycat methodologies that require they follow the mob.
High correlations and high volatility are market outcomes in this reign of the momos. Yet, from a real world economic perspective, the financial media insists on attributing their actions as rational. They are not. They are, however, rational from a personal perspective: they are animal-spirit driven creatures intent on maintaining a lifestyle they have become accustomed to. Who can blame them? They are simply exploiting the system as it functions today.
Investment Strategy Implications
Investors look for reasons to take action. The agnostic momos look for excuses.
Investors look for fundamental and/or technical analysis reasons to act. The agnostic momos could care less.
Keeping my house in Greenwich is how I first described this syndrome, in which the momos' relative performance vis-a-vis their "competitors" trumps all else. In order for them to keep their house in Greenwich, they must not underperform their "competitors". Hence, the mob rule of the momo lemmings' effect and its effect on the markets.
It, therefore, behooves the financial media to get up to speed and start educating the investing public about how the changed structure of the market has changed how the game is played. Which brings us to this question: Is the financial media's job to educate or to entertain? (I guess the answer to this question can be found every weekday at 6 PM eastern.)
Monday, October 10, 2011
Memo to the momo lemmings: It’s more than the Eurozone that’s the problem.
Applying simplistic analysis, the momo crowd has unleashed yet another round of risk-on trades this morning. Jacking stock prices back near their 200 day (exponential) moving average – at least when it comes to developed markets. Emerging markets (remember them, the global economic sector where all the growth is supposed to come from?), however, are lagging the party thus far.
Yet, beyond the short-term wiggles and squiggles that the momo crowd tends to heavily influence, the longer-term picture paints a rather different story. As the accompanying chart** shows rather clearly, the Mega Trend* is decidedly in bearish mode. Moreover, both MACD and RSI are hardly exhibiting robust support for the rally, with MACD yet to crossover to the positive side (when the blue line crosses the red).
As the chart shows, the past is fairly clear what happens when the Mega Trend turns negative. Moreover, only when MACD and RSI register an internal non confirmation (as it did so significantly in the winter of 2008 into the spring of 2009) is there cause to believe the establishment of a negative Mega Trend is at the point of reversal.
To be sure, RSI did register a modest divergence last week but MACD did not. And while one indicator is fine, two is always better.
Investment Strategy Implications
The momo crowd is enthused that another round of inadequate political action will save the Euro day. And perhaps the movement they have fostered these past few days has some lasting power to it resulting in the aforementioned reversal conditions. However, with earnings season starting this week, there is every reason to expect the optimistic bottom-up projections will follow the macro economic forecasts for the third quarter, which were well below economists’ expectations. And that reality may trump the momos rationale du jour. Yet, when it comes to the momos, here's something useful to remember:
Being agnostic when it comes to the longer term and the real world of earnings and economics, they will follow whatever short-term trend they manufacture. That's what lemmings do.*use search function on the top left to read about the Mega Trend.
**click image to enlarge.
Note: the above chart is a weekly chart in which the 50 and 200 day daily moving averages are converted to the equivalent 10 and 40 week moving averages.
Friday, October 7, 2011
Appropriately, this week's Quotable Quotes is the 2005 Stanford commencement address delivered by Steve Jobs.
"I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.
The first story is about connecting the dots.
I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?
It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.
And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.
It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example:
Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.
None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, it's likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college. But it was very, very clear looking backwards ten years later.
Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.
My second story is about love and loss.
I was lucky — I found what I loved to do early in life. Woz and I started Apple in my parents garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation — the Macintosh — a year earlier, and I had just turned 30. And then I got fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.
I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me — I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.
I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.
During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I returned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.
I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.
My third story is about death.
When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.
Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.
About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.
I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.
This was the closest I've been to facing death, and I hope it's the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:
No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.
Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.
When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.
Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.
Stay Hungry. Stay Foolish.
Thank you all very much."
The video version of this speech can be found on my media blog, Beyond the Sound Bite.
Posted by Vinny Catalano, CFA at 11:50 AM
Tuesday, October 4, 2011
To many, especially those in the financial media, a bear market is a statistic. For example, during Monday's swoon, the words "The market, down 20%, is now in bear market territory" could be heard early and often. However, to investment strategists and seasoned portfolio managers, a bear market is not a statistic but a trend established or in the process of being established in which lower prices are the dominant trend. How one comes to this conclusion is a process of the methodology employed. And only time will tell if the forecast is correct.
At present, the view here is that the bear is the operative major trend. This is so for reasons described on many previous occasions, most notably the Mega Trend*. If I (and others) are correct and we are in the throes of the bear, then there are three portfolio decisions that need to be made.
First, what is the appropriate asset allocation mix? The answer depends on one's risk tolerance, goals, objectives, constraints, etc.
Second, what is the appropriate sector mix? The answer here depends partly on the answer to first question but also includes a standard reduced volatility exposure (lower beta) via "defensive" sectors. Thus far, in this bear that has produced some good alpha.
Third, what is the most productive tactical approach to take? Here, the answer resides in what phase of the bear we are in. If in the first wave (which is what I believe we are still in), fade (sell) the rallies is the appropriate course of action. Rallies are a feature of the first phase, as the bulls still have considerable residual strength and the supporting argument that we are only in a correction. This is not the case in the second and third phase, when rallies are few and far between.**
There is a related topic to discuss re the bear: "Because."
Like all market factors, the reasons for the bear (or the bull, for that matter) are many and complex. The simple "Because" reasons given so blithely so often in the financial media are the construct of the business dynamics of the financial media industry and human nature. For many, it is hard to believe that cause and effect (the real world reasons for why markets move) is not always the case. The problem with this is simple: the cause is rarely one thing. It is predominantly many issues with many complex dynamics at work.
One last point: the magnitude of a move is very difficult to forecast. Assumptions can (and should) be made. However, given the highly dynamic nature of the markets (see Soros' "Reflexivity" on this*), it is hard enough getting the direction correct let alone how large the move will be and when it will end.
Bottom Line: A bear market is not just a statistic. It is the view (followed by the reality) that a downward trend is in effect that results in significant loss in value or time. It's a bear until it ain't. Or, to quote the famed philosopher, Yogi Berra, "It ain't over 'til it's over."
*Use search function to find prior posts on this and other topics.
**When entering the 2nd and 3rd phase, the asset allocation should be at the desired level.
Wednesday, September 21, 2011
Today, Wall Street's Professional Investor Class (PIC) waits with bated breath for the Fed to provide words of comfort so that one of Wall Street's revered axioms, "don't fight the Fed", will deliver much needed relief to the beleaguered warriors of finance.
One of characteristic of the PICs that is useful to remember is that they are highly reliant on heuristics - rules of thumb that help frame the world into bite-sized analytical pieces. One of the heuristics that has worked from time immemorial is 'don't fight the Fed". For example, last year, around this time, a well-known hedge fund manager advised investors and traders of this well-worn axiom to great effect and result (stocks rose from the fall of 2010 into the summer of 2011). Unfortunately, while the monetary elixir did work its magic on the PICs (they bought stocks), it had little effect on the real economy.
Never sated, the ever-thirsty PICs are back at the don't-fight-the-Fed troff for another hearty slurp of monetary ease = higher risk asset values. From the PICs and Fed's perspectives, the economic rationale for this view is rather simple: Easy money = an increase in the value of risky assets = a positive wealth effect = increase demand = higher GDP (which then = higher wages, increased hiring, etc, etc). Hence, don't fight the Fed ALWAYS delivers. Or does it? And when it does, is the effect always the same under all conditions? Or are the results a product of the economic and financial times?
It may be a risky thing to go against such a dogma. After all, the four most dangerous words in the investment language is "this time is different". And to assume that more easy money will not produce the above listed outcomes is the speak those very dangerous words. Yet, if one believes we are in times that are truly different, particularly in the post WW II era, then perhaps it's time from some fresh perspectives.
Going against such a well-established dogma of day is also especially dangerous given the changed structure of the market. For, when the momo lemmings (who could care less what the drivers are or what direction the markets are headed, just along as stock prices move) jump on the market trend du jour bandwagon, the wheels get turning rather quickly.
Investment Strategy Implications
If you are going to go against a revered heuristic it is useful to have your own heuristic to counter the revered one. My heuristic is this: in a liquidity trap, the effectiveness of monetary policy is limited, at best. Moreover, monetary ease becomes even more limited when fiscal policy is contradtionary (i.e., expansionary austerity). These global macro forces are strong, pervasive, and global in scope.
So, the PICs may rejoice in what they hear today. And risk assets may rise - for a while. But the global macro forces at work can, and I believe will, overwhelm the monetary elixir the Fed will provide. And the PICs don't do global macro very well. (More on this point in a future blog posting.)
Friday, September 16, 2011
"You know Charlie Walser? Has the place east of Sanderson? Well you know how they used to slaughter beeves, hit 'em with a maul right here to stun 'em... and then up and slit their throats? Well here Charlie has one trussed up and all set to drain him and the beef comes to. It starts thrashing around, six hundred pounds of very pissed-off livestock if you'll pardon me... Charlie grabs his gun there to shoot the damn thing in the head but what with the swingin' and twistin' it's a glance-shot and ricochets around and comes back hits Charlie in the shoulder. You go see Charlie, he still can't reach up with his right hand for his hat...Point bein', even in the contest between man and steer the issue is not certain."
Ed Tom Bell
"No Country For Old Men"
"The Planning Fallacy"
NY Times, September 15, 2011
When the Nobel Prize-winning psychologist Daniel Kahneman was a young man, he led a committee to write a new part of the curriculum for Israeli high schools. The committee worked for a year, and Kahneman asked his colleagues how long they thought the rest of the project would take. Their estimates were around two years.
Kahneman then asked the most experienced among them how long such work took other curriculum committees. The gentleman pointed out that roughly 40 percent of the committees never finished their work at all.
But what about those that did finish? The gentleman reported that he had never seen a committee finish in less than seven years and never in more than 10.
This was bad news. They might fail to finish a task that they thought would be done in three years. At best, the project might consume eight or nine years. Yet this information didn’t affect those on the team at all. They carried on, assuming that though others might fail or dally, surely they wouldn’t.
As it turned out, their project took eight years to finish. By the time it was done, the Ministry of Education had lost interest, and the curriculum was never used.
In his forthcoming book, “Thinking, Fast and Slow” (I’ll write more about it in a couple of weeks), Kahneman calls this the planning fallacy. Most people overrate their own abilities and exaggerate their capacity to shape the future. That’s fine. Optimistic people rise in this world. The problem comes when these optimists don’t look at themselves objectively from the outside.
The planning fallacy is failing to think realistically about where you fit in the distribution of people like you. As Kahneman puts it, “People who have information about an individual case rarely feel the need to know the statistics of the class to which the case belongs.”
Over the past three years, the United States has been committing the planning fallacy on stilts. The world economy has been slammed by a financial crisis. Countries that are afflicted with these crises typically experience several years of high unemployment. They go deep into debt to end the stagnation, but the turnaround takes a while.
This historical pattern has been universally acknowledged and universally ignored. Instead, leaders in both parties have clung to the analogy that the economy is like a sick patient who can be healed by the right treatment.
The Democrats, besotted by the myth that the New Deal ended the Great Depression, have consistently overestimated their ability to turn the economy around. They regard the Greek crackup as a freakish, unlucky break, even though this sort of thing is a typical feature of a financial crisis.
Republicans, who should know better, also have an inflated sense of the power of government. In the presidential debates, Rick Perry, Mitt Romney and Jon Huntsman argue about which one oversaw the most job creation during his term as governor, as if governors have an immediate and definable impact on employers’ hiring decisions.
The reality, of course, is that the economy is not a patient. It is a zillion, zillion interactions. Government is not a doctor. Most of the time, it is a clashing collective enterprise that is occasionally able to produce marginal change, for good and for ill.
Democrats should be learning about the limits of social policy. As in the war on poverty, as in the effort to transform American schools, as in the effort to create prosperity in the developing world, it is really hard to turn around complex systems.
Republicans should be reflecting on the fact that if a Republican president were in office right now, and even if he or she did sensible things, the economy would still be in the dumps. It would be Republicans losing “safe” Congressional seats in special elections.
The key to wisdom in these circumstances is to make the distinction between discrete good and systemic good. When you are in the grip of a big, complex mess, you have the power to do discrete good but probably not systemic good.
When you are the president in a financial crisis, you have the power to pave roads and hire teachers. That will reduce the suffering of real people who would otherwise be jobless. You have the power to streamline regulations and reduce tax burdens. That will induce a bit more hiring and activity. These are real contributions.
But you don’t have the power to transform the whole situation. Your discrete goods might contribute to an overall turnaround, but that turnaround will be beyond your comprehension and control.
Over the past decades, Americans have developed an absurd view of the power of government. Many voters seem to think that government has the power to protect them from the consequences of their sins. Then they get angry and cynical when it turns out that it can’t."
Note: emphasis added
Thursday, September 15, 2011
Following on yesterday's market intelligence (what I believe quality technical analysis actually is) posting, a longer term view of the market reveals the erosion in strength that took place this past spring when the market made new highs. The accompanying chart illustrates this quite clearly: non confirmation from all three price momentum related indicators. This helped set the stage for the subsequent and current decline.
To be clear, as noted on numerous prior occasions the absence of external divergences (use search function for prior blog postings) + the modest (not over) valuation levels for stocks + the manner in which the bear got started (from bull to bear rapidly and not in rollover fashion) = a delayed recognition by yours truly to the current bear market conclusion. As Lord Keynes once said, "when circumstances change, I change my views. What do you do Sir?”
Going forward, a look back at the chart shows no signs of strength from MACD. This is perhaps the most reliable of the three indicators in confirming market direction. As is plainly shown, the crossover to the downside is solidly in place with no positive (bullish) crossover in the offing. Until that occurs (and it will, eventually), investors are advised to assume that the current rally is highly suspect.
Wednesday, September 14, 2011
...and somebody is going to be real wrong.
If you have not heard from your friendly technical analyst, maybe it's time to find someone else in that field.
In what can only be described as coming straight out of the Edwards and Magee technical analysis bible (“Technical Analysis of Stock Trends”), the accompanying chart is a classic example of not one but two technical analysis chart pattern icons: Head and shoulders top and a bearish pole and flag.
This plus the fact that nearly 90% of the global indices I track are flashing bearish Mega Trends (use the search function on the top left for prior blog postings explaining this tool) is about as bearish as one can get.*
The first wave of a bear market almost always looks like a correction. Bulls will argue convincingly that key metrics like earnings and interest rates support this view. However, the anchor for this argument - solid earnings - can be easily undermined should the global macro story develop into something far worse than the bulls currently envision. For a recent example of this, just look at what happened from 2006 (S&P 500 operating earnings at a record $87) to 2007 ($82) to 2008 ($49). In this regard, the MERI (use search function again) is practically screaming earnings disappointments beginning next month. That could start the chain reaction of doubt, which is a strong characteristic of the second wave of the bear (as price crashes below the previous lows).
For a market priced for an economic muddle through, the worse case scenario is yet to be realized. Moreover, with limited flexibility to provide meaningful counter cycle actions, governments will be in no position to act effectively. Then there is the self fulfilling aspect of the negative wealth effect on the global macro environment that declining equity values tend to produce, which will almost certainly accelerate the downward pressure on the global economy (and earnings). Lastly, there is the unknown. Can anyone say with absolute certainty that all is good in China?
There's more. But suffice to say, an uncertain environment is hardly the prudent time to be fully invested.
Investment Strategy Implications
The advisable strategy appears to be to move as close to the exit door as possible. In portfolio strategy terms that means
1 - Reduce the equity exposure to a safe level, which for accounts managed and advised by Blue Marble Research is 60%. This means fade (sell) the rallies to, at least, maintain a constant percent equity exposure, but to preferably reduce down to the close-to-the-exit door level.
2 - Shift assets holdings to high quality dividend paying stocks.
3 - Be prepared to reduce the equity exposure to below 50% once the second wave gets underway. This means sell into the declines. The first wave of the bear gives you ample opportunity to sell the rallies. ("Looks like a correction to me.") The second and third waves do not.
Like I said, somebody is going to be real right and somebody is going to be real wrong. Of all things so uncertain in these times, one thing I am certain of: we will find out soon enough.
*Previous blog postings describe the unusual nature as to how we entered the bear (use search function). But the past several weeks have made it all the more traditional.
Wednesday, September 7, 2011
Tuesday, September 6, 2011
...and that's exactly the point.
More and more I hear the phrase "stocks are cheap".
In a market dominated by institutional investors, why isn't the "smart money" (as they are fancifully called) buying the obviously cheap goods up for sale? Is it because cheap is about to get even cheaper once earnings season rolls around? Or is it just another case of the momo lemmings (a/k/a momentum driven fast money hedge funds and HFTs) following the price trend du jour?
The accompanying table* is the Capital IQ consensus numbers for each quarter for this and next year. Applying the forecasts to the current price of the S&P 500, the P/E ratio for year end 2012 (just 16 months away) sits at 10.27 times projected earnings and at 11.40 times next year's projected price (increased by 11%, the long term average return for large cap stocks). To put this in perspective, these are numbers that are well below the recent historical average P/E of 15.
With the 10 year US Treasury rate below 2% and corporate profits projected to grow at a fairly nice clip, what's stopping the "smart money" from stepping up to the plate?
*click image to enlarge
Friday, September 2, 2011
Today, I am reinstating a popular blog service that I provided several years ago: Quotable Quotes.
In the past, I would seek out interesting and often humorous quotes from the very well known to those of lesser fame. In this updated version, I will include comments and other relevant data that are appropriate to the current economic, political, and market times.
The first installment (below) begins with a letter sent to and published in The Economist from noted economist Richard Koo. The emphasis (bold and italics) is added by me to accentuate key points that struck me as especially useful in understanding key elements in the investment decision-making process.
The second is an excerpt from Martin Wolf's most recent economic commentary. I encourage all to read his complete commentary (link provided, FT subscription required).
I trust you will find this reading well worth your time.
August 20, 2011
A different kind of crisis
SIR – The title of your leader on the debt crisis was well chosen (“Turning Japanese”, July 30th), but you missed the point. The Japanese problem of the past 20 years, together with the American and European problems of today, boils down to one fact: the economics profession has never considered a recession that could be caused by the private sector minimizing debt in order to repair balance sheets after a debt-financed bubble in asset prices. As a result, the profession has no clue as to what is the right thing to do.
In this rare type of recession, monetary policy is useless because people with negative equity will not borrow, no matter what the interest rate. Nor will there be many lenders when banks have such huge problems with their balance sheets.
In this environment, therefore, government must borrow and spend the savings generated by the deleveraging in the private sector in order to keep the economy from entering a deflationary spiral. But as John Maynard Keynes noted, it is almost impossible to maintain fiscal stimulus in a democracy during peacetime. It is this difficulty that prolongs this type of recession; it took Japan ten years to climb out of the policy mistake of premature fiscal consolidation in 1997.
The drama in Washington and other capitals is almost the exact replay of that confused policy debate in Japan. And the drama will continue until the public realizes that this is a different disease requiring different treatment.
Nomura Research Institute
August 30, 2011
Struggling with a great contraction
Mr Obama wishes to be president of a country that does not exist. In his fantasy US, politicians bury differences in bipartisan harmony. In fact, he faces an opposition that would prefer their country to fail than their president to succeed. Ms Merkel, similarly, seeks a non-existent middle way between the German desire for its partners to abide by its disciplines and their inability to do any such thing.
Chief economics commentator
Thursday, September 1, 2011
The time and segments are as follows:
Foxbusiness.com at 1 PM (eastern)
http://www.bloomberg.com/radio/ around 3 PM (eastern)
Prospective talking points:
1 - Overly optimistic earnings expectations by bottom-up analysts. A rude awakening awaits when 3Q11 earnings season gets underway. My proprietary MERI sits at -11.
2 - How the current bear market got started in an extremely rare fashion and why, for most investors, the current market rally will be so hard to sell into.
3 - My recent 10 day trip to Brazil. Impressions on the country and questions as why the US does not have a stronger presence there.
Posted by Vinny Catalano, CFA at 10:12 AM
Friday, August 12, 2011
Despite all the high-minded statements about market efficiencies and the alleged clairvoyant talents of the fast money crowd, here's a cartoon* that illustrates how the markets really work.
*Source: The Economist. click image to enlarge.
Posted by Vinny Catalano, CFA at 10:19 AM
Wednesday, August 10, 2011
It isn't everyday that we get to hear the former vice chairman of the Goldman Sachs Group share his thoughts and insights into the current economic and market environment.
Currently, Rob is professor of management practice at Harvard Business School and co-chairman of Draper Richard kaplan, a global venture philanthropy firm. Rob is also the author of the just published "What To Ask The Person In The Mirror": Critical Questions for Becoming a More Effective Leader and Reaching Your Potential.
In addition to discussing key aspects of his book, my podcast interview with Rob produced several very insightful thoughts on these most turbulent times, including the "series of sagas" investors are coping with, the implication of the changing structure of the market (e.g. capital impact on commercial banks during market swings, initiators and accelerators, pro-cyclicality), and President Obama and the question of vision and leadership.
To listen to the interview, click here.
Tuesday, August 9, 2011
I am headed to Stiletto City (a/k/a foxbusiness.com) where you can watch me attempt to describe how the policy response to the Global Stock Market Panic of 2011 will determine if the experience will be like 1987 or 1929. Segment begins around 1 PM (eastern) and can be viewed at foxbusiness.com.
Friday, August 5, 2011
Here are two data points* that suggest that the drop in stocks is the 2011 version of an old fashioned stock market panic.
The valuation table lets the market tell you what P/E and S&P 500 operating earnings fit the current level. From this one can decide which combination makes the most sense. Unless earnings are about to fall off the cliff and/or their risk factors have risen dramatically, the P/E combination of a below average P/E of 14 times $95 is the most central point. Other combinations imply plunging earnings with rising P/Es (not logical) or plunging P/Es and rising earnings (also, not logical).
The chart shows the one month performance of selected global markets as of 12 noon (eastern) today. The point here is simple: unless one believes that a global recession is just around the corner and that emerging markets and high quality European companies are going to impacted in such a way that global growth and corporate profits are about to fall off the cliff, then the synchronized plunge makes no sense. Yes, one could argue that developed economies and the higher risk components within are at risk. But does that mean everything at every level is about to come to screeching halt, including those areas where growth is good and profits are both of a high quality and strong?
Investment Strategy Implications
The most logical culprit for this global stock market panic is a momentum-driven-hedge-fund-induced-high-frequency-trading-exacerbated panic than a justification for a global economic catastrophe lurking just around the bend. If true, this is a powerful indictment against the failure to appreciate the changing structure of the market. Also, if true, then investors should recognize this for what it is: a panic within a bull market correction.
*click images to enlarge
Yesterday, legendary technical analyst, Bob Farrell, published a one pager describing the extremes the market has come to in a very short time frame. The title says it all: "Capitulation".
The advice Bob renders is to avoid trying to catch the falling knife but the extremes reached yesterday are a reference point from which a test will likely ensue in the coming days. Should that test succeed, then the odds are favorable that a multi week rally will follow. Or as Bob puts it: "An initial rally will likely be a one or two day affair because all those who were buying the dips will now be selling the rallies. If the benchmark lows hold on a retest, then the market could set up for 2-3 weeks of recovery."
To be clear, Bob does note that a lower low may occur and that may set the reference point at a lower price point (his avoid catching the falling knife). However, my take of his advice is: if the 1 to 2 day rally is followed by a probing of yesterday's closing of 1200 and that does not produce another wave down, then the retest would be considered successful.
Thursday, August 4, 2011
Bloomberg radio today around 4:15 PM (eastern). Taking Stock with Pimm Fox. A little chat time with Pimm and Courtney.
Discussion will likely include my newly created reverse engineered valuation model: the Best Fit P/E Model. Also on tap - why the demise of the bull may be greatly exaggerated and some thoughts on Tuesday's NYSSA Market Forecast event.
Tune in, if you're so inclined.
Note: The updated MGP data is posted. Left side of this page.
Posted by Vinny Catalano, CFA at 8:29 AM
Wednesday, August 3, 2011
Son: Hey, dad. How do bear markets get started?
Father: Well, son, after stocks have been going up for a few years they then go sideways for a while. While they go sideways, the price and its moving averages begin to converge. At the same time, markets begin to diverge from one another.
Son: What happens then?
Father: Well, stocks begin to rollover, going down in a rather gentle manner.
Son: Why is that?
Father: You see, son, investors are still big believers in the bull market. So, when the price starts to go down they don’t believe it will go much lower. In other words, they are complacent at the start of a bear market.
Son: Is that what is happening now?
Father: No, not exactly. Yes, stocks did go sideways for a while. So that part of the story is true to form. But the moving averages have not crossed, nor has the longer term moving average, its 200 day, which has yet to roll over and point downward. Also, when the sideways action was occurring, very few divergences emerged between markets, and those that did were very minor.
But that’s not the big thing.
Son: No? What is?
Father: Bear markets are sneaky. They start out with disbelief as they gently rollover. Kind of like a sleepy bear waking up from his long winter nap.
Son: Well, dad, that doesn’t sound like what I see on TV today.
Father: No, son, it isn’t. What you see and hear today is fear. And fear is not how bear markets start out. Fear is a characteristic of bull market corrections and end of bear markets, not at their sneaky, sleepy starts.
Of course, this is way bear markets have happened for more than 50 years. So, maybe this time is different. But you know what they say about that?
Son: No, dad, what?
Father: The four most dangerous words in the investing vocabulary is “this time is different.”
Son: Thanks, dad. You’re the best!
Posted by Vinny Catalano, CFA at 11:03 AM
Monday, August 1, 2011
Tomorrow I will moderate the summer edition of NYSSA's signature event series:
The 14th Annual NYSSA "Summer Market Forecast"
* Robert Steven Kaplan, former vice chairman, Goldman Sachs
* Phil Orlando, CFA, Chief Equity Market Strategist, Federated Investors
* Phil Roth, CMT, Chief Market Technician, Miller Tabak + Co.
* Don Rissmiller, Chief Economist, Strategas Research Partners
* Sean West, US Policy Analyst, Eurasia Group
We will cover the key issues impacting the economy and markets. Needless to say, there will be no shortage of areas to explore.
To learn more about the event and to register, click here.
Posted by Vinny Catalano, CFA at 5:31 PM
Friday, July 29, 2011
How would you like the chance to play US Treasury Secretary and President of the United States and decide who gets paid and who doesn't? Well, thanks to BGOV's interactive tool you can.
Next Tuesday is D (default) day. On the assumption that Obama will not invoke the 14th amendment (he won't) and that the tea partyers in the House won't relent (anarchists of the world unite!), the US Treasury will have to start the process of prioritizing its payments for the month of August.
According to BGOV, the US government bills due for August are $306.7B. The revenues projected are $143.9B. To avoid a technical default, the interest payments are $29B. That doesn't leave a lot of bread for everything else (pulling the social security plug on grandma?).
Speaking of bread: According to the Bible, Jesus had to turn a few fish and loafs of bread into enough food to feed the multitudes who had gathered. The task set before the US Treasury and Obama are the modern day version. (After all, he is The One!)
To access the BGOV interactive tool, click here.
Thursday, July 28, 2011
When it comes to Expansionary Austerity, the UK has had a full year head start over the US, having implemented a series of cuts advertised to produce fiscal order, which will then produce a robust economy and jobs growth. So, it seems quite logical to look at how that's going in the real economy and, more importantly for investors, how the market perceive the situation.
From a real economy perspective, the most recent data from the St. Louis Fed shows quite clearly that the "cut to grow" philosophy at the heart of Expansionary Austerity has yet to deliver as promised. Half of the indicators tracked (industrial production, real retail sales, real compensation, real private final consumption expenditures, and real gross fixed capital formation) are all headed in the wrong direction (down), with the other half not exactly exuding the robust economy and jobs growth advocated for.
From a markets perspective, as the accompanying chart shows, the picture is fine - for now. If, however, price crosses to the downside and the two key moving averages (50 and 200) head in the same southerly direction, it will be hard for the bulls to draw any conclusion other than a bear market has begun.
Investment Strategy Implications
The conservative government in the UK adopted its version of Expansionary Austerity a year ago. Therefore, investors would be well served to consider it a test case (both economically and in the markets) for what the US may experience. Based on the record thus far and considering the global macro implications that the much larger US economy is likely to have the global economy, the prospects do not look encouraging.
To rephrase Orson Welles from the accompanying 1970s commercial, "We will sell no stocks before it is time."
As noted in my Timing the Bear Market blog posting last month, bull market tops are different from bull market bottoms. Tops tend to have a rounding pattern to them in which sideways action leads to a rolling over phase during which price breaks below its 50 and 200 day moving averages and both moving averages cross and head downward. This action signals the end of the bull market, which is eventually followed by a cascading down of price in an accelerated fashion. Market tops also tend to produce divergences, both internal (intra market) and external (inter market).*
Do any of these conditions presently exist? In a word, no.
There is some evidence of this process underway but not to the extent needed to ring the bear market bell. But what of the big price swings these past months, investors might ask? It is fruitful to remember that big moves within trading ranges rarely have market trend changing qualities. Yes, there are the rotational aspects that can be exploited (sector to sector). However, when it comes to a market directional change, big price movements at key inflection points (including the aforementioned moving averages) have greater significance than intra trading range swings - regardless of the magnitude.
Investment Strategy Implications
Is a bear market headed our way? Most definitely. When? When the above related conditions are met.
The macro picture looks pretty dismal. Yet, it is vital to remember that stocks are primarily driven by two factors: valuation and financial market liquidity*. Only when the macro picture begins to impact these two factors will stocks be poised for a trend change: at the nexus of fundamental and technical analysis.
What might be the catalyst that provides the impact? Expansionary Austerity is the leading candidate.
*To learn more about the Mega Trend and Divergence Principle as well as the two factors, use the search feature at the top left of this blog.
Wednesday, July 27, 2011
Given the near certainty that in the short run the new economic philosophy being adopted by most western economies, Expansionary Austerity, will result in a major economic contraction, there very likely will come a time in the not too distant future when enough US voters in 2012 will turn to someone else to help rescue the US (and, therefore, global) economy. In this regard, two names come to mind: Michael Bloomberg and Hillary Clinton.
Both have the business credentials to help the troubled economic climate ahead. Mayor Mike, for all the obvious reasons (turning $10 million into $10 billion speaks for itself). And Hillary because of the economic success of the Clinton years. Of the two, the edge has got to go to Mrs. Clinton.
Hillary Clinton has the tenacity and, now, the individual track record to mount a formidable attack on the President Gandhi. And when Bill Clinton injected himself into the recent debt ceiling fiasco by stating that he would invoke the 14th amendment and make the courts stop him (as opposed to President Gandhi, who relies on lawyers and experts to guide him virtually every step of the way), he showed what leadership looks like (a quality sorely lacking in the White House these days).
Consider it: Hillary in the White House and Bill at Treasury. One with the diplomatic and legislative bona fides, the other with strong economic credentials. A real two-fer, if there ever was one.
Obviously, there are many obstacles that stand in the way of a second Clinton presidency, most notably getting the nomination. But there may come a point over the next 6 months when fear rises to such a level that the unthinkable today becomes the best course of action. And at such a point, a draft movement would be all the impetus needed to start the process.
Sunday, July 24, 2011
foxbusiness has posted my Friday appearance, in which I describe the new economic philosophy that is being adopted in western economies: Expansionary Austerity.
To view the interview, click here.
Thursday, July 21, 2011
Here's a rather sobering view for those investors seeking to beat the best asset class (equities) over time.
The accompanying table* illustrates the asset allocation decision only. It assumes that an investor does not outperform during the up or down markets but is able to make consistently excellent asset allocation calls (being largely in up markets and even more largely out of down markets).
Numerous studies show that for well diversified portfolios the asset allocation decision overwhelmingly determines investment performance (85% of investment performance). Therefore, getting this call right matters most. Getting this call wrong, however, destroys investment performance to a considerable degree and makes outperforming the market (alpha) that much more difficult.
Understanding this fact helps explains the momentum lemming, risk on/risk off nature of the market (especially the current environment). Falling too far behind is, for some, running the risk of losing their house in Greenwich.
*click image to enlarge
Monday, July 18, 2011
The Wall Street Journal online just posted a lead story titled "Dearth of Demand Seen Behind Weak Hiring". The opening paragraph states the following: "The main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies, according to a majority of economists in a new Wall Street Journal survey."
Well, guess what? Over a year ago I conducted a Beyond The Sound Bite podcast interview with Bill Dunkelberg, Chief Economist with the National Federation of Independent Business. In the interview, Bill stated that sales, which are derived from demand, is the key metric the jobs creation engine in America - small business - uses when making their hiring decisions.
Therefore, contrary to those politicians who seek to gain political advantage by spinning the story to the uncertainty factor dealing with regulation and taxes as to why jobs are not being created, as my podcast interview from June 2010 and now the WSJ and those economists surveyed makes clear: the primary reason why businesses not hiring is "weak sales".
In these highly politicized times and when a premium is paid to complicating just about everything, the correct answer is often the most obvious. Just like deciding who should head the jobs creation effort in the US. Should it be a small business leader or someone from a large company who fires US workers and hires foreign ones?
Wednesday, July 13, 2011
“I got a FEVER! And the only prescription...is MORE COWBELL!”
-Bruce Dickinson (Christopher Walken)
There are two reasons why the stock market is trading where it is. One deals with valuation levels. The other is liquidity. These factors are the most direct to stock market levels. From a stock market point of view, the larger macro economic, political, and societal (including cultural and demographic) issues matter only to the extent that they ultimately impact the inputs to the valuation levels – cash flows, growth of the cash flows, and the uncertainty (the risk) of receiving those cash flows – and liquidity, specifically liquidity to the financial system.
It is on this second factor, financial system liquidity, that many fast money professional investors (hedge funds, high frequency traders, prop desk traders) are paying the most attention to in today’s testimony by Fed Chairman Ben Bernanke. As the primary market forces that move markets at the margin, fast money types want to know that the Bernanke Put (rising prices of risky assets help produce the wealth effect, which helps the broad economic environment) is still operative.
Based on what they heard thus far, all is good. Or as the Saturday Night Live quote above suggests, the fast money crowd has a fever (they always have a fever) and generous Ben assures them that there will be more cowbell.
Investment Strategy Implications
Hang in there. A resolution to the sideways market is not far off. As noted on several recent blog postings, the clock is ticking and appears to be set to strike midnight very soon.
Will it ring a new day for the bulls or will investing Cinderellas themselves with pumpkins and not stagecoaches for transportation? Right now, it's anybody's guess.
Friday, July 8, 2011
From a technical analysis perspective, the initial stock market reaction to today's dismal jobs data (on all levels, most notably the 0% wage growth) does little more than move equity markets away from the top end of their multi month trading range. In the process, it moves stocks closer to the more important issue: a resolution of the sideways action.
As the accompanying chart implies (click to enlarge) and the historical information provided by S&P's Sam Stovall suggest*, price and moving averages are likely to converge in the not too distant future (did someone say August 2nd?).
At present, the Mega Trend (use search function on top left for information re the Mega Trend) is bullish. The interplay between price and its moving averages are positive. However, as noted several times previously, market tops tend to be quite different than market bottoms. The sideways affair is almost always the precursor to the rollover phase (which is when the Mega Trend reverses and the bear market is confirmed) followed by the tumble and the OMG moment for far too many investors.
An accompanying set of market action circumstances almost always occurs when the resolution takes place: divergences.
Inter-market divergences** signal broad market weakness. Confirming action signals broad market strength. At present, most markets are moving in sync with the US large cap group and are or are close to confirming a prospective new high. That said, further sideways action or a premature upside breakout could produce a deteriorating condition between and among markets.
The resolution of the sideways action should signal the next major stage for equities: a resumption of the bull or the return of the bear. The fact that the timing of the current resolution will likely occur in August is eerie. For August is the month that precedes the historically poorest performing time of the year: the fall.
Funny how these things seem to work out.
*see blog posting below, "If Sam Is Right".
**Intra-market divergences also signal market weakness, just to a lesser extent.
Thursday, July 7, 2011
As investors contemplate tomorrow's jobs data, the accompanying chart (click image to enlarge) from McKinsey & Co. showing the state of jobs creation in the US over the last 3 economic recoveries stands out for all the wrong reasons.
Hmm, let's see. Globalization plus free trade agreements plus technological innovation plus stock oriented executive compensation schemes plus high growth in emerging markets plus control of the political and financial process = labor arbitrage, zero real wage growth (in developed economies), and what you see in the chart to your left.
I guess this is why Mr. Obama chose Mr. Immelt to help create jobs in the US.
Wednesday, July 6, 2011
"Never underestimate the power of a few committed people to change the world. Indeed, it is the only thing that ever has."
Today's NY Times' article "Big Business Leaves Deficit to Politicians" affords me this opportunity to comment on something I have been wanting to touch on for some time: the economic consequences of advocacy.
In regards to the main topic of the Times article - the US federal deficit, the article references that big business is "part of the problem", that big business "...consistently lobbies for a higher deficit. The roundtable defends corporate tax loopholes and even argues for new ones." This is true. But the article fails to go to the reason behind the actions taken by business - it's not their job.
Business (big and small) do not act for the collective good because it is not their job. A company may be headquartered in a country and even do most of their business in that country. Moreover, the senior management of the company may be lifelong citizens of that country, served in the military of the country, and be as patriotic as the next guy. However, when it comes to business, where one's heart is not where one's pocketbook is.
Their job, specifically senior management, is to advocate for their business. They are compensated according to how well their business does regardless of the consequences in a larger context. And this means pursuing any and all means necessary (and, one assumes legal and even moral) to achieve their financially driven goals: earnings and growing at a rate of return in excess of their cost of capital.
This advocacy approach is rooted in two areas:
1 - The big shareholders rule. A CEO will not keep his/her job very long if they are not advocating for their enterprise as aggressively as possible. Activist shareholders see to it that the CEO feet is kept firmly to this fire.
2 - The ideology of acting in one's best interest results in the collective being best served. According to this thinking, this is the way the world works and works best. All other approaches are fraught with conflicting efforts and outcomes (think laissez-faire versus socialism).
Acting in one's best interest also includes advocating in all related corporate realms - which includes the political and regulatory environments.
In sum, it is unfair to criticize senior management for doing their job, as there is no motivation for senior management to do anything other than act in their own (business and personal) selfish best interest. To do otherwise is, at a minimum, career suicide*.
As for the consequences to the larger economic environment that such an approach might have, the answer is not clear cut one way or the other and is, frankly, an area where the economics profession would be well served to provide some opinions and guidance. What does seem clear, however, is that without counterbalancing forces at work (representing other socioeconomic interests), the focused power of the advocacy of one constituency in a position of competitive advantage acting in their own selfish interests can easily distort and possibly ruin the greater good.
*And, in the minds of some, business and economic suicide.
Thursday, June 23, 2011
In this interview with Tracy Byrnes, I bring back a point I made on a number of occasions in the past - the conflicted position of the US worker, who also happens to be the US consumer. In a globalized world, one wins (consumer) while the other loses (worker).
To view the interview, click here.
Apparently in saying nothing yesterday the Fed Chairman did say something. By denying more financial morphine for risky assets, the markets reacted as King Lear did when his beloved daughter, Cordelia, said the same to him. The moral of this story: When the truth produces the tantrum, sanity is surely in question.
Wednesday, June 22, 2011
So, Chairman Bernanke spoke today. And what did he say? Well, it kind of reminds me of this scene from "The Godfather":
Sonny: Hey listen to this…the Turk wants to talk. Eh gosh…imagine the nerve of the sonofabitch, eh? Craps out last night, and wants a meetin’ today.
Tom: What did he say?
Sonny: What did he say…Badda-beep, badda-bap, badda-boop, badda-beep…
Posted by Vinny Catalano, CFA at 4:35 PM