Friday, July 29, 2011

Pulling the Social Security Plug on Grandma: The BGOV Interactive Tool

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

Great Britain: The Expansionary Austerity Canary in the Economic Coal Mine

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.

Is It A Bear Market Yet?

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

Cold Turkey: Expansionary Austerity's Aftermath

Get a good look at how the global economy will likely look after Expansionary Austerity works its magic.

President Hillary Clinton

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

Expansionary Austerity: A New Economic Philosophy

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

Why It's So Hard To Beat The Market

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

Better Late Than Never

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

Bernanke to Wall Street: More Cowbell

“I got a FEVER! And the only 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

Destination Resolution

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.

Destination Resolution

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

Talking Head Alert

Recent media appearances for myself ("Taking Stock with Pimm Fox") and my good friend, Vahan Janjigian ( with Tracy Byrnes), are posted.
To view and listen to the interviews, click here.

Jobs: Methinks I See A Pattern

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

Not My Job: The Economic Consequences of Advocacy

"Never underestimate the power of a few committed people to change the world. Indeed, it is the only thing that ever has."
Margaret Meade

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.