Quotable Quotes: Optimism

Yesterday’s equity blast off implies an economic glass more than half full. Yeah, baby!

Therefore, a few quotes re optimism seem fitting.




"Man's real life is happy, chiefly because he is ever expecting that it soon will be so."
Edgar Allan Poe

"If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you."
Calvin Coolidge

"Optimist: A man who gets treed by a lion but enjoys the scenery."
Walter Winchell

"The nice part about being a pessimist is that you are constantly being either proven right or pleasantly surprised."
George Will

"Those who wish to sing always find a song."
Swedish proverb

Happy Friday the 13th and have a good weekend.

Technical Thursdays: Forget Goldilocks, Think Gold

On April 24, 2007, I wrote about Gold and its prospects for a run to $1,000 an ounce. In that blog posting, I referenced the special nature of Gold as an investment vehicle, how precious little of its value resides in its industrial use, and that the primary value in Gold is as a hedge against instability and as an alternative to the US dollar. Given the fact that the geo-political climate has remained quite unstable (see yesterday's intelligence report re Al Qaeda, for example) as well as the prospective further weakness in the greenback (not to mention the white hot growth in Asia that has helped fuel demand), Gold's role as an attractive investment seems assured.



One concern that I hear pertains to the potential supply coming from Aunt Tilly and Uncle Willie as they cash in their jewelry and coins. While this may be a factor to be mindful of, the larger concern resides in the bullion holdings of central banks, as they dwarf the current demand/supply equation. At 9x the current supply rate, central banks could easily flood the market and depress the price of Gold in a heartbeat. While this risk exists, the likelihood of such an act seems quite remote as a catalyst for such action appears to be fairly non existent.

Investment Strategy Implications

Since the ETF tracker began trading in January of 2005, Gold has outperformed the market by a wide margin (see above chart). Over the past year, however, Gold has been locked in a trading range that has all the hallmarks of a high end consolidation. And, in the process, has enabled the 200 day moving average to approach its current price.

For both fundamental and technical reasons, Gold continues to be an excellent asset to own with qualities befitting the uncertain times ahead. The terrorist and other threats are with us for the foreseeable future. Coupled with the dismal performance of the US dollar and a domestic political climate that is both locked in gridlock and likely to become more cantankerous the closer we get to 2008, the prospects of an upside breakout and run to $1,000 is not unrealistic.

Note: To view a larger image of the chart, click on the image.

Synchronized Markets: Nowhere To Run

The highly synchronized nature of the US equity markets has become common knowledge to most investors. The same is true for global markets. What is interesting, however, is that comparing the last 100 days of the current bull market with its first 100, US economic sectors have become somewhat less correlated with the broad market (save Utilities) while most global markets have become more so (save Japan).

Investment Strategy Implications

Highly synchronized markets make it harder to diversify away risk resulting in a default to riskier positions (the beta trade) and/or leverage to generate excess returns. This is also true within most domestic markets. Therefore, it should come as no surprise that, given the plethora of investors and the abundance of capital, competing for alpha has become largely a leveraged play and/or the beta trade (see May 1, 2007 blog posting, "The Bubble Machine of Liquidity and Leverage"). Thus far, the apparent market consequences are long periods of tranquility (low volatility, consistent gains) interrupted by moments of financial angst.

Note: To view a larger image of the tables, click on the image.

What to Listen for When Bernanke Speaks Today

Today’s 1 PM speech by Fed Chairman Bernanke will be closely watched by most investors for what he says about the direction of interest rates. It may, however, be a more fruitful exercise to listen to what the Chairman says about key issues such as non-bank lenders than the likely non-statement re his views on rate changes. For example, in his last speech given on June 15th, he stated the following:

“Endogenous changes in creditworthiness may increase the persistence and amplitude of business cycles (the financial accelerator) and strengthen the influence of monetary policy (the credit channel). As I have noted today, what has been called the bank-lending channel--the idea that banks play a special role in the transmission of monetary policy--can be integrated into this same broad logical framework, if we focus on the link between the bank's financial condition and its cost of capital. Nonbank lenders may well be subject to the same forces.”

Where Alan Greenspan was noted for his opaqueness (to put it generously), Ben Bernanke, on the other hand, assumed his position as Fed chair promising a more candid and clear spoken view of his positions. Unfortunately, he learned early on that being too candid can produce more problems than benefits. Therefore, being a good student, the professor is a quick study and adjusted his pronouncements accordingly. But to what level of candor has he moved to in his commentaries?

Having read his (and other Fed head) speeches, the sense I get it that Mr. Bernanke likes to frame his views in larger thematic concepts rooted in his theoretical views on how monetary policy should function. For example, in the June 15th speech referenced above, a careful reading reveals that he is keenly aware of the psychological dynamic of investor, corporate, and consumer sentiment and the impact it has on the real and financial economy. In other words, he tempers his ivory tower views with a real world recognition of how markets and economies work.

As I said, when it comes to matters pertaining to interest rate changes, today’s speech will likely be a non-event. Therefore, what should be a more productive use of time is to listen for the larger thematic issues, such as his views on non-bank lenders and unregulated money.

And read between the lines. He may not be Greenspan but he is certainly not loose-lips Ben. There’s lots of info and insight there.

The Fed’s Delicate Balancing Act

excerpts from this week's report

"One year and counting.

Time flies when you are having fun as the economy marks the one year anniversary since the Fed set its funds rate at the 5 ¼% level.

So, it seems worthwhile to compare the FOMC statement from a year ago (June 29, 2006) with the one issued last week (June 28, 2007). Yet, it is also worthwhile to consider factors outside the FOMC decision and statement to help get a more complete picture of the balancing act that the Fed is faced with..."

"Gone are such phrases as a “cooling of the housing market” and the “lagged effects of increases in interest rates and energy prices”, despite the fact that all these issues remain very much on the minds of investors and many economists. However, relying solely (or even predominantly) on the FOMC statement and actions leaves an investor with a very incomplete picture.

To round out the Fed’s view of the world, it is advisable to..."

Investment Strategy Implications

"Contrary to the more traditionally thinking economic advisors, it does seem fairly clear that living in the era of globalization and financial innovation warrants a more comprehensive and even out-of-the-box perspective on economic conditions. Accordingly, as long as the Fed remains vigilant to the non-traditional aspects of a transitional world economy, the odds of a fat tail episode and a financially-induced downward spiral are diminished. However, the odds are not zero. Whether they can pull this off while sustaining global growth with moderate inflation remains to be seen."

also in this week's report

* Current Blue Marble Research Fed Model
* Model Growth Portfolio
* Key Economic Indicators

Note: To view this week's report, please click on the Blue Marble Research services link to your left.

Quotable Quotes: Expectations

As the 2Q07 earnings season gets underway, a little expectational thinking appears to be in order.




“There is no terror in the bang, only in the anticipation of it.”
Alfred Hitchcock

“Climate is what we expect, weather is what we get.”
Mark Twain

“If one does not know to which port is sailing, no wind is favorable.”
Seneca

“You got to be careful if you don't know where you're going, because you might not get there.”
Yogi Berra

Have a good weekend.

V - TV Alert

It seems that Friday, July 6 is V -TV day.

Canada: 9:50 AM - BNN TV "Market Morning"
Global: 10:05 AM - CNBC "Morning Call"
India: 12:45 PM - New Delhi TV "NDTV Profit"


Happy viewing.

All times listed are US Eastern times.

Technical Thursdays: Rates Matter

As the chart to your left shows quite clearly, when the 10-year Treasury recently broke out of its multi-year downtrend, the move was more dramatic than your standard upward blip. In fact, I am fairly certain that most market technicians would argue that the breakout was more than a mere coincidence as the sharp upward move occurred right at that multi-year downtrend line and after an extensive multi-year base building process.

So, what are fundamentally oriented investors to make of this?

The fundamental connection lies in the attempts of central bankers to address the issue of excess global liquidity. As central banks do their best to drain excess liquidity without precipitating a financial meltdown, the logical result is rising rates. Thus far, the carry-trade enabled “conundrum” appears to be slowly unwinding. And reality appears to be returning to the fixed income world.

Therefore, if you believe as I do that rates should be higher, the question is not whether rates are going higher. Rather, can rates go up without producing (or at least facilitating) an out-of-control financial meltdown (a/k/a contagion)? In other words, what central banks are trying to do is ease off the liquidity gas pedal without causing the brake to become the accelerator.

Investment Strategy Implications

The technicals strongly suggest that the rate increase is here to stay, the magnitude of which is hard to say. What is not hard to say is the direction, which is up. And the equity valuation impacts are obvious.

When Complex Markets Are Not Transparent

The complexity issues described in yesterday’s weekly report are amplified by the fact that so much that occurs in the financial world today is hidden from view. This is especially true for the multi-trillion dollar unregulated money worlds of hedge funds and private equity. For competitive and other reasons, full transparency does not exist and a “trust the experts” mentality rules. I suppose, as long as the results are there, who is to question the 21st century’s version of masters of the universe?

The point of this falls back to one of the three valuation inputs – the discount rate. One might suspect that astute investors would consider adjusting the traditional discount factor for a world so complex and opaque. Yet, most investors, particularly professional investors appear to be content and accept conventional valuation inputs in a most unconventional time.

Investment Strategy Implications

When complex environments are not as transparent as they should be, risk should be higher and, therefore, valuation lower. A further point for my primary argument that stocks should remain undervalued*.

*Note: Undervalued does not mean down. It simply means that wherever fair value is, stocks should not reach that level. For example, if fair value were determined to be 1700 in the S&P 500, equities could rise from present levels. However, my research argues that they should not reach fair value.

Welcome to The New Era of Complexity

excerpts from this week's report

"Entering the year, the three components of valuation – earnings/cash flows, growth rates, and discount factors – were fully supportive of higher prices. Moreover, the lifeblood of higher values - liquidity – was abundant. Therefore, the potential for a closing of the valuation gap was very good. The primary caveat expressed on these pages stemmed from a concern re the high degree of complacency among the majority of professional investors. As I conducted my early 2007 Market Forecast events, I was surprised by the degree of the sanguine certainty of so many in a world rife with uncertainty.

The primary concern I expressed at the start of the year was centered not on traditional economic issues..."

"Risk in a complex, interdependent world is different from risk in the traditional sense. It is comparable to the difference between a closed economic system and one that more globalized. More moving parts mean more potential for both reward and risk. Thus far, all that has been seen is the good stuff. The Great Moderation, as it is called, is cited as..."

"I became aware of issues like fat tails thanks their constant references in speeches by Ben Bernanke and NY Fed President Timothy Geithner, among others. Naturally, whenever a phrase that key Fed officials and other learned thinkers appears with a fair degree of frequency, I want to..."

"Fat tails are high volatility occurrences that are several standard deviations away from the norm. Such low probability events using Gaussian distribution principles are so rare as to render them irrelevant. But using a distribution rule such as Power Laws, the probability of such occurrences increases exponentially..."

"According various research reports, the more networked the world becomes, the more interdependent it becomes. And a more interdependent world adheres more to Power Law distributions than Bell Curve ones..."

"The implications for valuation under a Power Law versus a Bell Curve are significant..."

also in this week's report

* Current Blue Marble Research Fed Model
* Model Growth Portfolio
* Key Economic Indicators

Note: To view this week's report, please click on the Blue Marble Research services link to your left.