bizzXceleration: Performance, Value and Profit

Given all the turmoil we thought it might be time to pull together another graphically-based assessment of where the markets have been and where they might be going. So instead of putting our summry together with the regular market readings in the Readfest we'll try for a comprehensive review of the various marketspaces followed by our regular excerpt exercise. And as usual we'll start with the SP500, which we use as our benchmark for central tendencies.

BtW we won't necessarily be updating our Structure/Fundamentals/Technical/Sentiment framework because, for all practical purposes, what we had to say the last time is holding up pretty well. And you can consider our running posts as sitting within that context and updating it for currency as appropriate. Market Assessment: Running of the Bulls or Cusp Points ? In particular this post refreshes the technical assessment though they're consistent and implicitly refreshes the sentiment assessment. Which, just for the record, we consider much too optimistic but increasingly woven with fear. 

Now as to the SP500 take a look at the composite chart at the right which puts 10-Day and 6-Months together. In the 10Day you can see where the Fed saved civilization for us philistines and speculators (we're just waiting for the pundits to start with the Sodom and Gommorrah metaphors). And then we started to slowly give it back. We've talked several times about the "SAVE" and the current Business Cycle so our views on the context should be pretty clear. What was interesting is that the stair-step we noticed and commented on in our last market post continues. The downtrend wasn't broken and the "rally" stopped right at the 50-day MA. A sign of at least profound uncertainty and perhaps weakness. Now in the prior two downsteps the "flags" were busted to the downside but not this time, not yet. Which means the running debate between the "there's lots more to come" school (ours) and the U-shaped mild recovery and late year uptick school continues to be played out on a daily basis. The upcoming Employment reports will be fascinating for, among other things, their impact on the outlook. For a comprehensive review of the overall economic situation try WRFest 30Mar08(Economy): GDP, Housing, HF, Oh My !.

BTW - we strongly suggest you keep reading, or at least keep skimming, to the other markets section where we discuss Interest Rates, Gold, Exchange Rates and the Oil's interactions and the risks of a dropping dollar leading to an unpegging by the major exporter nations. Which could add another big brick to the wall. 

Market Comparisons

The composite chart at right compares foreign and US Markets to each other on a 6Mo and since Jan07 basis. Again it looks to us like the interpretation is pretty straight-forward, consistent with what we've been saying for quite a while AND indicates a change in the dynamics. The markets are proxied by ETFs though there's some currancy translatation issues if you want local returns but are Europe (IEV), Japan (EWJ), China/Asia (EPP), Emerging Markets (EEM) and the US (SP500, RUT, Nasdaq). The foreign/emerging bubble appears to be gone, markets are moving largely together but, as folks have been noticing, US relative performance ain't bad.

Sector Comparisons 

These two composite charts look at SP major sectors using ETFs as proxies again in two groups. The first those that had been performing at or below the general market trends and the second the sectors performing above. The sectors are Finance (XLF), Healthcare (XLV), Staples (XLP) and Discretionary (XLY) in the first composite, again on a 6Mon & Jan07toDate basis. Actually you see our themes playing out in a way. Nobody's really gone anywhere except Finance and Discretionary on the downside. Which gets back to what view of the outlook is priced in.

In the second composite the sectors are Technology (XLK), Utilities (XLU), Industrials (XLI), Energy (XLE) and Telecom (IYZ). These are the sectors that have been doing relative better. Oddly in the last six months the only sectors doing worse than the SP500 are Tech & Telecom, though the latter has been in the dumps for a while. Everybody else except energy is flat but in the last six months even Energy is down. There are a bunch of pieces you need to put togther here by the way. If our thesis about worldwide linkages is correct sectors that benefited from globalization will show damage and perhaps more than expected, e.g. Industrials. And while we strongly believe that Energy and Commodities will be under imbalance pressures for a long time there's both a short-term speculative component and an intermediate developing country component that might take hits. As for the other sectors it's a worthwhile exercise to compare our GDP component work (More on GDP and Economic Outlook) to sector earnings and ask youself if the analysts expectations will hold up.

Other Markets

Now the overall situation is getting complicated, inter-linked and convoluted enough we'll also add in an overview of some of the other key market indicators: Interest Rates, Gold, Exchange Rates and Oil (though again we'll point out that the recent economic updates dive into the monetary indicators pretty deeply). The first composite chart is a 1-year look at 10-Yr Treasures (TNX) and the XAU gold indicator together. Notice that TNX has dropped precipitously while XAU has jumped in almost a mirror image. Part of that is inflation hedge as rates come down. 

The other interesting comparison is between exchange rates and Oil. Here another 1-year composite with the Euro/$ rate on top and the DJAID Oil index on bottom. The $ has fallen significantly and rapidly against the Euro as the interest rate differential between the Fed and the ECB has widened. Not a surprise - they're focused on inflation and we're focused on avoiding a Recession turning into something worse. But it is the biggest policy gap in a long,...long time. Gee, oddly as the $ gets cheaper Oil gets much more expensive. Wonder how that happens.

The biggest danger here is that the ME/Gulf states peg their currancies to the $ which is both costing them money, depreciating their investment returns and generating high inflation. If you haven't noticed rising food costs are generating accelerating unrest thruout the ME and the rest of the world. Similarly China keeps the Yuan pegged to the $ to help out its' export industries but as the result of all the money flowing into China inflation is getting pretty serious there to. If both these groups were to unpeg their currencies from the $, as many have urged them, you'd see a major collapse in it's value. And resultant huge pressures to raise interest rates to protect it. Which would in turn feedback and accelerate the economic downturn.

Whee, we'd have fun then ! 

Posted by dblwyo at 06:19 PM | Permalink | Comments (0)

Well it's time to return to our regular programming having spent much of the last week or so focused on the minor distractions of collapse in the credit markets and the resultant collapse of Western Civilization as well know it. Despite widespread acknowledgement of the reality of that near-death experience and the Fed's miracle of financial engineering the other 90% of the the marketplace and economic news didn't get the attention it deserves. In the excerpts postings you'll find stories on GDP and its' near stall as well as all the other data (Home prices and sales, Consumer confidence and spending and factory orders among others). All of which was NOT, we repeat NOT, good. Meanwhile credit conditions continue to tighten and the economic contagion appears to keep spreading to Europe and Japan. In particular we'll call your attention to the excerpt on Housing where the headline and talking head coverage was almost malfeasantly misleading. We analyzed it earlier this week in a dedidcated post but you'll find more below, especially CalculatedRisk's comments on a recent John Mauldin newsletter that details how no bottom is in sight in Housing. This and similar deeper understandings about the business cycle, etc. should stand you in good stead - a) we're early days as yet in the downturn, b) none of this appears to be generally accepted and c) is not therefore reflected in stock prices. Just to pull the pieces all together here's the pieces we've put up in a sort of logical order.

•  The Great Circle: Where We're At in the Business Cyle Reviewing the nature and structure of business cycles and the specific data for this one.
• More Dialog: Facing Harsher Realities in Housing Deep dive on a comprehensive review of the situation in Housing which argues that we're at best approx. 1/4 of the way thru the total adjustment process at best. Depending on how you frame it with further sales and price declines, more huge waves of foreclosures and an extended bottoming process before price declines stop.
• Economic Dashboard: Current High-Frequency Indicators A comprehensive summary and analysis of our complete suite of monthly high-frequency indicators. Two in particular were "interesting" - the indicator of future consumption is combined growth in real wages and employment which has turned negaive. And YOY growth in the real money base continues to shrink because of the credit crisis.

So as you skim over the excerpts we'd suggest reviewing those three posts which provide as complete a framework and simple a toolkit for do-it-yourself economic analysis in easy-to-see graphic form as we can manage. And if you've got any questions about our hyperbolic summary of the troubles in the credit markets may we suggest reviewing the following:

•  A Dialog Concerning Three Systems: Real Economy, Finance & Credit
• Continuing the Dialog: Facing Realities in the Credit Market
• Five "Funny" Things on the Way to the Market
• Adult Supervision Re-emerges: Bush Proposal for Regulatory Overhaul

Now in the spirit of "seeing things as they are" we'll ask the semi-rhetorical question - would one of the most conservative and ideological administrations in post-war history be proposing the most sweeping, deep, structural and systematic regulatory reform if the situation wasn't forcing the deepest re-thinking of the financial systems. If you continue to doubt then our first post this morning was particuarly to your address:

• Sunday Morning Reflections: Learning to See Things as They Are
  

Economy

Economy Nearly Stalled in 4th Quarter The economy nearly sputtered out in the final quarter of last year and is probably faring even worse now amid the continuing housing, credit and financial crises. Many economists say they believe growth in the current January-to-March quarter will be even weaker than the 0.6 percent figure of the previous quarter. A growing number also say the economy may actually be shrinking now. Under one rough rule, the economy needs to contract for six straight months to be considered in a recession. The government will release its estimate for first-quarter GDP in late April. Consumers, whose spending is indispensable to the economy's vitality, boosted buying at a 2.3 percent pace in the fourth quarter. That was better than the 1.9 percent growth rate previously estimated but still marked a slowing from the third quarter's 2.8 percent pace. Businesses -- nervous about customers' waning appetite to buy given all the problems in the economy -- cut back sharply on their inventories of unsold goods. That shaved 1.79 percentage points off fourth-quarter GDP, the most in more than two years. Spending by businesses on equipment and software, meanwhile, rose at a pace of 3.1 percent in the final quarter of last year. That was slightly less than previously estimated and marked a slowdown from the prior quarter's 6.2 percent growth rate. Businesses profits also took a hit in the final quarter. A measure linked to the GDP report showed that after-tax profits fell 3.3 percent at the end of last year, after being flat in the prior quarter. There was a bright spot in the mostly gloomy report, however. Sales of U.S. goods and services to other countries grew at a 6.5 percent pace. That was better than the 4.8 percent growth rate previously estimated, although it was down sharply from the prior quarter's blistering 19.1 percent growth rate.

• Home Price Index in U.S. Fell Record 10.7% in January, Shiller Survey Says
• Consumer Confidence in U.S. Falls; Outlook Drops to Lowest Level Since '73
• Factory Orders Decline for Second Month
• New Home Sales Hit 13-Year Low
• Consumer Spending Weak in February

Did Economy Really Escape Fourth Quarter Drop? One tiny nugget of good news in the latest gross domestic product report is that the U.S. economy managed to avoid contracting by eking a 0.6% gain. Or did it? A separate measure of the economy touted by Federal Reserve officials last year — gross domestic income — posted its largest decline, at a 1% annualized rate, since the 2001 recession, according to the same GDP report. GDP is a consumption-based measure, adding up consumer, business and other spending and investment. In contrast, GDI is income-based, adding up things like personal income and corporate profits. GDI is included in quarterly GDP, but not in the first estimate. GDP-based models in Nalewaik’s study pegged odds for the past four recessions at their starting points at 52%, 40%, 45% and, for the 2001 recession, just 23%. GDI-based measures, in contrast, signaled odds of 78%, 44%, 72% and, for 2001, 70%. After all, if GDI is to be believed, the debate may not be whether the U.S. is slipping into recession in 2008, but whether it’s already been in one for months.

·         Estimating PCE Growth for Q1 2008 The two month estimate suggests real PCE growth in Q2 will be under 1% - but still positive. Looking at the data, real PCE has been essentially flat for four straight months. Based on various economic reports, I'd expect March to be even weaker. This suggests that real PCE in Q1 will still be positive, but somewhat below the two month estimate of 1%. In Q4, real PCE increased 2.3%, but real GDP only increased 0.6%. With real PCE below 1% in Q1, I'd expect a negative real GDP report for Q1. This is very similar to how the last consumer led recession started in 1990.

·         Fisher of Fed Sees US Economy in `Prolonged' Slowdown: Federal Reserve Bank of Dallas President Richard Fisher speaks at a community forum in Waco, Texas, about Federal Reserve monetary policy, the outlook for the U.S. and regional economies and the financial industry. Fisher of Fed Sees U.S. Economy in `Prolonged' Slowdown (vidclip)

·         Davidowitz Says Stores Face `Apocalypse' With Consumers: Video March 28 (Bloomberg) -- Howard Davidowitz, chairman of Davidowitz & Associates Inc., talks with Bloomberg's Betty Liu from New York about the outlook for U.S. department stores, the impact of Federal Reserve monetary policy and tax rebates on consumer spending and the economy. J.C. Penney Co., the third-largest U.S. department-store chain, plunged the most in three weeks in New York trading after the retailer cut its quarterly sales and profit forecasts on slower consumer spending. Bloomberg's Julie Hyman also speaks. Vidclip

·         Jan Hatzius of Goldman Sees `Consumer Recession' in U.S.: Audio March 28 (Bloomberg) -- Jan Hatzius, chief U.S. economist at Goldman Sachs & Co., talks with Bloomberg's Karen Moskow from New York about the outlook for the U.S. economy and consumer spending, Federal Reserve monetary policy and the financial industry. Vidclip

Home prices may not rebound till 2010  U.S. home prices are unlikely to recover until at least 2010, one of the nation's top housing economists said Thursday, adding that home building this year is likely to post its worst year in five decades. Speaking to the National Economists Club, Frank Nothaft, the chief economist for government-sponsored mortgage buyer Freddie Mac, painted a grim picture of today's housing market. Through the final three months of 2007, he said, sales of existing homes were down 29 percent from the same period two years earlier. Forty-six states had falling home prices in the fourth quarter, and prices nationwide were down 9.3 percent. In the Pacific region, which saw the steepest drop, prices fell an average of 17.2 percent, followed by mountain states, whose home prices fell an average of 12.9 percent. "I don't think we're going to see any improvement in the national house-price matrix until 2010," said Nothaft, a respected government economist who's followed the national housing market for more than two decades. He projected a 16 percent drop in mortgage originations this year, for new home loans and refinancing. He expects foreclosures, which rose by about 1.5 million in 2007, to increase even more this year. If there was any good news in the stark snapshot of the housing crisis, it came from a bit of really bad news. The Freddie Mac economist thinks that new single-family home starts this year will be the lowest in 50 years, back when Dwight D. Eisenhower was president. What's good about that? The plunge in new-home construction means that fewer homes will come onto the market in an environment with few buyers.

Mauldin: Where is the Bottom in Housing? John Mauldin writes: Where is the Bottom in Housing? (hat tips: many!) Mauldin provides a good overview of the housing market. His analysis is based on information from John Burns Real Estate Consulting and T2 Partners. Both Burns and T2 have made their presentations public. There is all kinds of charts and information available, but I'll comment on a couple of points. First, on sales, I think Burns is too optimistic for 2008 and too pessimistic for 2009. Right now we are on pace for just under 5 million existing home sales in 2008, and 600 thousand new home sales (and sales will probably fall further). A forecast for 6 million total sales in 2008 is probably too high. Similarly a forecast of 4 million total sales in 2009 is probably too pessimistic. The reason Burns is probably too pessimistic on total sales in 2009 is because prices will likely decline further than Burns is forecasting (helping sales). Burns is only forecasting a 16% nationwide price decline from peak to trough. Based on the Case-Shiller National index, house prices are already off 10.1% as of the end of 2007 - with much more declines likely in 2008.

Small Firms Find Credit Is Tightening The Small Business Administration has not said publicly that it is worried about a credit squeeze but signs point to a decline in business loans through its main program. Lenders’ credit woes are starting to take a toll on small businesses. Though it may be too early to determine how hard small businesses will be hit, some national surveys show that the businesses are encountering more restrictions at lending institutions, making it harder to get the credit necessary to expand or, in some cases, stay afloat. Last month, a Federal Reserve report found that a third of banks in the United States had tightened their lending standards for small-business loans. Soundings of business owners themselves are mixed because credit availability is not uniform across the country. More than half of those responding to the National Small Business Association’s online poll two weeks ago replied “yes” when asked whether their business had “been impacted by the credit crunch in recent months.” But another group, the National Federation of Independent Business, said that more than a third of the members responding to its February survey said they were borrowing normally, and only 4 percent said there was a problem getting a loan. Euro Money-Market Rates Increase to Highest This Year as Banks Hoard Cash

Fed Auctions Billions in Securities Big investment houses took the Federal Reserve up on its first-time offer Thursday to let them borrow Treasury securities, the latest effort to ease a painful credit crisis. The Federal Reserve auctioned $75 billion worth of Treasury securities. Bidders paid an interest rate of 0.330 percent. Demand was high. The Fed received bids of $86.1 billion worth of the securities. It was the first time the Fed conducted an auction of this kind. The next one will be held April 3. The program, dubbed the Term Securities Lending Facility, was announced earlier this month by the Fed and is intended as a booster shot for financial institutions and for the troubled mortgage market. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions that started Thursday. Big Wall Street investment firms could borrow much-in-demand Treasury securities from the Fed and put up more risky investments, including certain shunned mortgage-backed securities as collateral for the 28-day loans.

• Europe's Central Banks Inject More Funds The News: Major European central banks pumped funds into money markets. The Background: Europe's economy is showing resilience, but authorities sought to ease end-of-quarter strains. The Bottom Line: Rates at which banks lend to each other have nudged higher, toward levels last seen last year at the height of the credit crunch.

Inflation steals the limelight China's already battered stock markets could tumble further against a darkening economic backdrop ahead of August's Olympics Games, as the U.S. recession begins to take its toll and China further tightens its monetary policies to combat runaway inflation. After quintupling in just two years, China's benchmark Shanghai Composite Index has plunged 40% since peaking at an all-time high in October, confounding the expectations of investors who expected the remarkable run to continue through the Games. Troubles in the domestic economy and as well as the international credit crisis weighed on markets, and those troubles are not likely to disappear even after the Olympics, analysts said. While the ongoing unrest in Tibet is unlikely to have much of an impact on the Olympics, the stock market or the economy at large, turmoil never sends a comforting welcome signal to investors, especially when a market is already under pressure.

Japan's Core Inflation Rises, Jobless Rate Worsens  -- Japan's inflation rate climbed at its fastest rate in a decade in February and the jobless rate worsened to 3.9% under data released Friday, raising concerns about the health of the world's second-largest economy. The core consumer price index, which excludes volatile fresh food prices, rose 1.0% in February from a year ago -- the fastest reading since March 1998, the Ministry of Internal Affairs and Communications said. Japan has long struggled with deflation, or falling prices, but Friday's data, which also marked the fifth straight month of gains, show that higher prices for imported oil and commodities are adding pressure on living costs. Separate data released by the ministry said household spending was flat in February from a year earlier, an indication that the economy was getting less support from domestic demand, while exports that have long driven the nation's growth are also losing steam.

IMF Will Cut Euro-Area Growth Forecast for 2008 Below 1.4%, De Tijd Says

Posted by dblwyo at 04:44 PM | Permalink | Comments (0)

Sunday morning is traditionally a day of peace, family, worship and a break. At its' best it's a time to take a step back from the hurly-burly of the week, take a deep breath, clear your head and get re-grounded. We all need such periods and it's no accident that every religious tradition, among other reasons, provides them. At it's best Sunday is a day not just of rest but of reflection. So we'd like to suggest a topic for contemplation - learning to see things as they are.

Now it's not as if we haven't ranted on before about the topic - "facts, facts, what are the facts" - and will keep on doing so. Sometimes the facts as raw data are hard to decipher so you need a framework for ordering them into structured information. Which, in our small way, we make an attempt at providing. And we spent a lot of time this last week on gathering data, putting up frameworks and exploring interpretations on the credit markets, the Fed's recent actions, the stunning and monumental changes in the way we're going to be running our economy and so forth. But we're not even sure ourselves that all that has sunk home because it's still early in the game and it's hard to see what's coming and how it'll impact us, individually and collectively.

We do know though that navigating these turbulant times will require at least three things:

1) a clear-head and a calm mind

2) a focus on the facts based on the patterns and frameworks that work which make sure our mind is clear because we understand what's going on

3) and the ability to act on the implications and conclusions of our analysis.

Now after the break we bring in some other voices courtesy of TheBigPicture who we 'borrowed' three posts, or excerpts thereof, to reinforce our point. One is on the post-fact society - a label we find enormously amusing and another is on the permanent reality distortion field the NAR seems determined to maintain around Housing. Yet that RDF is in fact more damaging to the NAR and the nations' realtors and the Housing market than helpful. Because at the end of the day pretending the world is otherwise can only be gotten away with for so long. Eventually it catches up with you.

It may take a while but it does. And there "being nothing new under the sun" let us announce the new Age of Kipling. A poet much referenced, little read and often neglected and grossly misunderstood. As an example sometime really read his poem that includes the famous "east is east and west is west" sometime - you'll find the conclusion very different than any time we've ever seen it quoted and used.(The Ballad of East and West) You can find him online complete here btw. But in turbelent times we think a different one is appropriate:

If

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:

If you can dream -- and not make dreams your master;
If you can think -- and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two imposters just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build 'em up with worn-out tools;

....see the URL for the whole and perhaps consider this one as well:

 "I Keep Six Honest..." 

READINGS

Investing in a Post-Fact Society One of the concerns we have expressed here over the years is that there was much more -- and less -- to the post 2001 recession recovery than met the eye. Several years ago, this was a controversial position. We first suspected we were on to something, however, when the many critics of this view found it much easier to use epithets  (negative, naysayer, perma-bear) than to do the credible critiques of our positions, or any kind of critical  analysis.  It reminded me of an old lawyer's joke: "When the facts go against you, stress the law; when the law is against you, emphasis the facts; when your case has both the law and the facts against it, call the other lawyer an asshole." As of March 22, we are still in the early stages of any sort of widespread understanding about this post-recession recovery cycle. Many people are just starting to realize how much fertilizer has been spread around. Many of the stated economic gains have been a false ghost. Whether it was overstated job creation (NFP), understated inflation (CPI) or "inflated" growth (GDP), a shocking amount of the debate about the economic expansion has been primarily spin.

Good Advice During Turbulent Times What happens when markets suffer a panic? Well, a lot of things: investors deal with emotional outbursts, a frenzy of talking heads, and lots of really bad advice. At the same time, these dislocations create opportunity -- if you manage to keep your wits about you. From an interesting article in the WSJ this week, comes this modified list.

How Counter-Productive is Realtor Association Spin? One of themes we've looked at over the years is the spin that some trade groups put out on top of their data releases. Some Trade Associations, like the ATA tonnage index, or the Home Builders Index, simply put out the straight dope -- an unvarnished, unblinking look at their industries, so their members can better make informed business decisions with the available data. Other groups massage the data, spin the message, and try to present their info in the most positive light  -- regardless of the underlying data. They seem to believe that if only the public believes things are okay, it will become a self-fulfilling prophecy. The National Association of Realtors falls into this latter category. They have been calling the bottom in Housing, well, ever since the top 2 1/2 years ago; Their consistent claims of stabilization and price improvements later in the the year -- as prices have continued to slide -- have earned them the title of Worst. Forecasters. Ever. What is more damning, IMHO, is that they are not just wrong, but purposefully misleading for commercial purposes. I believe that is defined as Fraud.Occasionally, they manage to find success -- but only when a complacent and/or ignorant financial press fails to do its job. Today, we see evidence of that in an embarrassingly incorrect front page story in the Wall Street Journal: Wave of Foreclosures Drives Prices Lower, Lures Buyers. And what were those numbers? The year-over-year data for existing home sales were DOWN 23.8% below February 2007 levels. That datapoint never found its way into the WSJ article at all. I cannot recall a more blatant misreporting of fact, or a larger or more embarrassing error in a front page WSJ article, ever. While the NAR might be high-fiving each other over their successful deception at the Journal, they may wish to reconsider.

Posted by dblwyo at 06:44 AM | Permalink | Comments (0)

Well, well, well. This is startling news but the Bush Administration under Sec. Paulsen's leadership has proposed a broad overhaul of national financial regulation. Think about that for a minute - a strongly conservative President under the leadership of the ex-CEO of Goldman is not just beginning to re-think their regulatory approach but is putting a major proposal on the table that's the first major re-thinking since the Great Depression. And from what little I can see of the early sketches it's an extrordinarily profound, comprehensive and thoughtful proposal. More interestingly it's been worked on for over a year and largely in secret. The latter may be the most astounding part. But the case has certainly be made and the timing of the announcement couldn't be better.

You really need to pay attention to this one because, win, lose or draw, the Finance Industry, the Markets and the Economy will not be the same ever again.

And leave you with two key observations - that this passes in good form is in all our best interests. Whatever you can do to get behind it we'd suggest you do. Second - the last big bout of regulatory reform brought you SOX. The two are fundamentallly different cases, especially since this get's to the beating heart of our economy. Nonetheless SOX consisted of 1/3 really good business practice that companies should have been doing anyway but weren't. And 2/3 regulation by rule and inspection that resulted in difficult and expensive regulation but not necessarily reform. The big question here becomes not just policy but enforcement mechanism. Since this is just a quick note with much more to follow we've decided to share som old jottings of ours on thinking thru alternatives to regulatory reform. Please excuse the informalities and idiosynchracies. Dloadable file: "Notes on Regulatory Reform"

Meanwhile here's the jump off excerpt:

Bush Seeks Financial Regulation Overhaul The Bush administration is proposing a sweeping overhaul of the way the government regulates the nation's financial services industry from banks and securities firms to mortgage brokers and insurance companies. The Fed would be given broad authority to oversee financial market stability. That would include new powers to examine the books of any institution deemed to represent a potential threat to the proper functioning of the overall financial system. The administration divided its recommendations into short-term goals that could be adopted quickly, intermediate recommendations and an "optimal" regulatory framework, which contains a radical restructuring of how the government supervises banks and other financial institutions. The recommendations are the product of a yearlong review that was begun in an effort to modernize the government's regulatory structure so that the country's financial services industries could better compete in a fast-changing global economy. The proposal would allow the Fed, in its new role as "market stability regulator," to dispatch examiners to check the books not just of commercial banks but of all segments of the financial services industry. The administration proposal would also consolidate the current scheme of bank regulation by shutting down the Office of Thrift Supervision and transferring its functions to the Office of the Comptroller of the Currency, which regulates nationally chartered banks. The plan recommends that the Securities and Exchange Commission, which regulates stock trading, be merged with the Commodity Futures Trading Commission, which regulates futures trades for oil, grains and various other commodities. The plan would create a national regulator for the insurance industry, which is now largely governed by the states, and would create a Mortgage Origination Commission to try to address the abuses exposed in the current tidal wave of mortgage defaults. The role Federal Reserve Chairman Ben Bernanke and his colleagues have been playing to shore up the financial system would be formalized in the administration plan by giving Fed officials greater power to detect where threats might be lurking in the system.

Posted by dblwyo at 05:12 AM | Permalink | Comments (0)

With the release today of the Personal Consumption data we now have the complete suite of H.F. economic indicators thru Feb. available so we're going to update them all and the associated charts. As you'd expect, at least in our views of the world, there were no real surprises and consumption continued its' downtrend. Now if you pay attention to the headlines spending edged up 0.1% and was flat after adjusting for inflation. But in real consumer spending was up ~ 1.7% YoY, which sounds like good news until you understand that it ran above 3.0% for most of the last two years and began slowing in the Fall. And further that real Retail Sales has turned negative. After the break we'll go into that as well as the investment indicators, the outlook for consumer spending and the monetary, price and interest rate indicators. By and large all of which showed continued deterioration.

What we want to jump off with those is a deeper dive into the things that show where Consumer spending is going. There are three primary drivers: real Wage growth, Employment growth and the ability to borrow. As we've discussed the latter held up consumer spending thru the downturn thru MEW but is rapidly going away for the obvious reasons. So let's take a look at a longer baseline for Wages and Employment. In some ways the charts almost speak for themselves but let's add a few words. In the first sub-chart you can see where real Wages have actually been trending down except for two blips since Jan00. The latest and biggest blip was the god's gift of lower oil prices and inflation in late '06 which probably held things up thruout '07 and staved off a recession then. That's all reversed. Employment growth was never very robust and has slowly been deteriorating the middle of '06 in a very steady downtrend. The latest YoY numbers were ~ .6% which is recessionary in and of itself. As we proceed along the cycle you can anticipate further declines in both these numbers. So as you look at the charts below, which cover a shorter timeframe, keep all this in mind.

Current Indicators: Consumption + Investment

Let's start by looking at the combined chart for current activity. The upper sub-chart shows real Consumption (PCE), real Retail Sales and Auto Sales on a YoY% basis. After holding steady for a while PCE has been drifting down but the real interesting thing is real Sales. Retail has been slowing sharply since the late Fall no matter what the headlines would have had you believe while Autos, which are on the r.h.s. btw, have been negative the entire period here.

On the Investment front New Home Sales continue to abysmal indeed with a 3MoMA showing a YOY% decline of 34% ! The other fun news we went into in detail yesterday with a thorough composite view of the longer term outlook. Which is indeed looking like a harsh reality that still hasn't sunk in yet (More Dialog: Facing Harsher Realities in Housing).There was a blip in New Capex Orders which we don't have a good explantion for though it may just be a return to the bigger downtrend. We'll have to see how that plays out as it isn't consistent with any other data - it is amusing though that all the headlines were touting the surprise MtM negative s. 

Future Indicators: Wages + Employment

We started by taking a look back to Jan00 at the growth in these but let's focus now on our normal charts which related them together and to consumption and sales activity. At this finer level of detail you can see that Real Wage growth is not only headed down but turned negative in the Fall and appears to be acclerating. Other than job market pressures consider that the Oil Inflation tax on spending power. Similarly Employment growth is very low though not yet negative. The result is W+E growth which has turned negative.

Over the long-run changes in PCE are driven by W+E changes which you can begin to see in the second sub-chart but is very...very clear when comparing it to real Retail Sales. In fact the uncanny tracking may just be a charting artifact but it's kinda scary to me. Think about this little relationship:

W+E(-) ==> Real Sales (-) ==> PCE (-) ==> GDP(-) ==> Employ(--)

where (-) is a minus sign or downtrend with the number indicating the relative strength.

Interest Rates, Money and Rates

We could probably leave it there but let's try to pierce the veil of money a bit since, as we should all be in the process of learning by now, money, rates and credit markets are vitally important to the functioning of the real economy (Wall St. turns out to impact Main and visa versa indeed). BtW just in case you're not too concerned we reviewed the last minute avoidance of the collapse of Western Civilization in the previous post. And discussed five fundamental structural changes you ought to pay some attention to. Five "Funny" Things on the Way to the Market

Anyway back to the regular program of looking at the details.The first sub-chart shows the spread between 3Mo Treasuries and paper which is still wide but narrowed a tad, which is a good thing. Interestingly the Fed Fund vs 10Yr Treasuries widened considerably, which might be taken as either a return of a normal cyclic expectations, i.e. a normal yield curve. Or as an indicator that the credit crisis, which resulted in credit tightening and reduced credit availability, is still with us. In other words no matter what the Fed has been doing on rates the pipes are so clogged up that the funds aren't getting to the economy (Continuing the Dialog: Facing Realities in the Credit Market). That latter view is reflected in the inflation-adjusted Monetary Base indicator. Think about that one very carefull. The MBase is the amount of effective funds available to run the economy, inflation-adjustments put it into real terms and the YOY% changes tells us how it's working. Unfortunately it doesn't appear on this frequency to be working very well at all since YOY rates are still -3% !!! Notice that the abrupt shrinking of the Mbase corresponds exactly to the onset of the crisis last August ! The Fed may have save us from collapse but there's still a lot of work to do here. Let's try that again and this time with some oomph, please !

No matter what the Fed has done the real money supply has been shrinking

since the start of the credit crisis and nobody has noticed. 

The next sub-charts show CPI as being well out of the comfort zone around 4% and PPI being downright scary in the neighborhood of 10%. Aside from being transmitted into CPI unless the slowing economy manuver works think about what that implies for margins and earnings - a pressure showing up in the Consumer companies and a threatened trucking strike. Normally you'd expect to see interest rates headed up in that sort of environment but the divergence between the 10YR and inflation is pretty wide. Which is not independent of the third sub-chart which shows contineud YOY declines of -10% in the dollar and increases in Oil prices of ~ 70% !! Whee, are we having fun yet ?

BtW as those all interact with a lower dollar increasing oil prices and feeding back to inflationary pressures which in turn drives up oil and drives down the dollar. If the Chinese and the ME ever stop pegging their currencies to ours interest rates will have to take a huge jump to protect the dollar AND keep pulling in the foreign fund flows that are keeping us afloat. Comes 'round, goes 'round indeed. 

Posted by dblwyo at 03:06 PM | Permalink | Comments (4)

In the last 10+ days we experienced four major changes in the way the world works that haven't gotten the attention they deserve. Though all of them made the front page of the WSJ with long, in-depth and excellent articles. And several other places as well. So let me try and point them out as a prelude to follow-on detailed discussions but first ask a key question - how do you boil a frog ? Surely everybody's heard that joke by now but the sad part is my first time was over two decades ago by a speaker talking about changes in the world and business. Guess what - they all happened by and large, nobody payed any attention and everybody was "surprised" when the tipping points were crossed. Just as they've been surprised by the economic data and market disruptions of the last few months. We'll probably get the same reaction from our review and discussion of those four things but once more into the breech, dear readers. Our friend at Non-Sequiter pretty well captures it though.

Just in case you missed it here are the four things and an appropriate headline (we'll put up more detailed excerpts in our readfests so don't take notes). And it's not as funny, so may not hit home as hard and be dismissed as too intellectual but the chart at right is a repeat from an earlier post on business strategy. And it deserves another looksee because it provides a pretty good blueprint and checklist of the big picture you ought to be a little aware of. Especially with all these deep structural changes. Remember those frogs ! 

1. Market Collapse - over St. Paddy's weekend the Fed avoided a major collapse of the credit markets which would have taken out the underpinnings on all markets and perhaps the economy as a whole.

• Has the Fed redeemed itself? The central bank's cunning after-hours plan to sell Bear Stearns to JPMorgan may have prevented the collapse of the financial system and total economic ruin. 
  

2. Structural Changes - the Fed's actions were unprecedented since the Great Depression because for the first time they extended lending to non-bank and non-regulated financial institutions, the "shadow-banking system", that now occupies the role that only commercial banks had before in creating credit and allocating capital.

• Ten Days That Changed Capitalism The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse

3. Regulatory Changes - these financial institutions have proven beyond doubt that they require adult supervision and as a result a four decade+ national debate over the extent of regulation will complete a course reversal begun by the tech bust and Enron, et.al. Even a Republican administration as well as the key policy-makers at the Fed envision closer supervision and regulation.

• Paulson Calls for Broad Look at Financial Regulations The crash of Wall Street's once mighty Bear Stearns underscores the need to bring investment houses under the kind of federal oversight that has long been given to commercial banks, Treasury Secretary Henry Paulson said Wednesday. 
  

4. Long-term Investment Performance - with the downturns we've basically experienced a "lost decade" of low to non-existent stock/investment returns where too much money was chasing too few good opportunities and then leveraged up to the point of insanity. Underneath that rather deep structural fact/change is the even deeper one that the US economy has matured and no longer offers major new  engines to drive returns, economic growth or jobs.

• Stocks Tarnished By 'Lost Decade' -- U.S. Shares in Longest Funk Since 1970s. The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm...

5.  Finance Industry  - the  Finance  industry as whole has had at least the last two decades of product and business model innovation proven to be  unworkable and unproductive. As  a  result it will be  facing  a huge re-thinking  in  its' business models, strategies, products and operations.  Especially in  its'  compensations,  controls and management systems.

• End of Wall Street as we know it Financial firms have relied on a highly flawed business model for years. The time has come to fix it. The standards that rule most businesses­­ - avoiding excessive leverage, reining in rampant pay and the massive dilution that goes with it­­ - didn't apply to Wall Street. 
  

Posted by dblwyo at 06:59 AM | Permalink | Comments (2)

In the spirit we're pursuing here of asking what are the facts, no matter what headlines or denials seem to obscure them, we'd like to focus on this week's Housing data. Which is about as bad as it gets but NOT as bad as it's going to get. Over the last few months we've shifted from denial to contained  to serious (though one still is croggled by the uptick in Homebuilder stocks !) to more and more accurate grasps of the breadth and depth of the problem. However now that Paulson, the Fed, and market commentators are starting to mumble things like 2010 those harsh realities still don't seem to be reflected in anyone's thinking about the economy, business cycle or market outlooks.

So in the spirit of letting the data speak we're going to borrow some charts from CalculatedRisk and put them in our framework. On the grounds of why do something badly that an expert has done extremely well. The key questions are where are we at and where are we likely to end up. First off we've obviously been in the most unusal Housing bubble in the post-war period. Home construction is a major driver of Investment spending directly and Consumption indirectly. As you can see on the bottom sub-chart a boom above trends started in the late '90s but turned into a real bubble after '03 and is now in a steep and precipitous decline. CR's other key point is that such drops always lead to a recession. If the general economic downturn mirrors the Housing decline we've got serious problems ahead. The top sub-chart is even more interesting because it starts to tell us, being inflation-adjusted, how far we went in prices, how far we need to come down and how long the adjustment process might last. The Composite-10 national averages peaked in 1990 and took 7 years to adjust, find bottom and then begin climbing out. And on that measure we're only about a year into this downturn. All that unsinn you heard about a bottom this year or even in '09 looks wildly misplaced. Even finding a bottom in '10 looks very optimistic, at least for prices, though sales may bottom earlier.

Existing Home Sales

The headlines were about as disinegenous, wrong and bad as it could possibly get (in fact BigPicture had a great rant taking the WSJ to task). They said that Feb. existing sales picked up over Jan. Good golly - they always do. That's the seasonal pattern. If you look at CR's chart you'll see that sales overall are still headed down, that YOY there was a big...big fall off in existing home sales and it's likely to get worse. Not least, as the 2nd sub-chart shows, because the inventory of homes for sales shot up dramatically in Jan. and Feb. Now tell me, how does one reach any kind of benign, sanguine or other polite word interpretation of that data ? For those you can are you willing to share your drugs with the rest of us ?

New Home Sales

The picture for New Home Sales is no better. Sales continue to decline, with all that implies for real estate investment and associted consumption. Based on the sales rate, while absolute inventory showed a slight decrease - which got too much ink IOHO, the months of supply continued to shoot up. Again there wouldn't appear to be any positive way to spin those facts. Despite the NAR continuing efforts to bath the rest of the world in it's reality distortion field - an effort BTW which harms their own cause because it leads to homeowners being grossly unwilling to lower their selling prices to rational levels.

Again and again - what are the facts ? Here the facts would argue that at the very best we're barely 1/4 of the way into a prolonged and painful, very painful, adjustment process. And that might be optimistic from the long-term price chart we began with. Just to put a point on it consider CR's recent post on Lennar's terrible news:Lennar: Housing Market Conditions "continued to deteriorate" in Q1

Posted by dblwyo at 09:30 AM | Permalink | Comments (0)

The prior post focused on putting the systemic risks in the Credit Markets as clearly and simply as we could manage and we'd like to continue that discourse by looking at what other folks had to say. The graphic at right take you to a recent apperance on Charlie Rose by Andrew Ross Sorkin discussing the BSC deal. Bear in mind that was the Mon. during the height of the crisis but it's not bad "Inside Baseball" despite the lack of detail. And despite the fact that the discussion and subsequent NYT stories still don't quite have it right. Before diving in however let's borrow a point from one of our favorite scifi characters Lazarus Long.

"What are the facts? Again and again and again-what are the facts? Shun wishful thinking, ignore divine revelation, forget what “the stars foretell,” avoid opinion, care not what the neighbors think, never mind the unguessable “verdict of history”--what are the facts, and to how many decimal places? You pilot always into an unknown future; facts are your single clue. Get the facts!"

The link to Galileo is that he's credited with being the Father of modern science by placing an emphasis on what the actual data is really telling us. When you listen to the Sorkin interview here are some points we'd like to add:

1. BSC was effectively bankrupt because of margin calls by its' trading partners.
2. JPM's "price" for BSC wasn't $2 or $10 per share. It will be the estimate $6B of hard dollar costs, taking $30B of bad paper and 2-3 years of writedown exposure plus all the additional time, effort, money and other resource required to manage the acquisition.
3. IOHO JPM is unlikely to be fully compensated for many years for these costs and risks and what they did is more in the nature of a public service; continuing the traditions set by the first J.P. Morgan himeself. Considering what they are risking I sincerely hope they make alot of money.
4. Any acquirer of BSC had to have a high-quality and large enough balance sheet to absorb the bad paper. They also had to be a regulated entity to have access to the Fed financing that makes this workable and addresses the need to re-start the credit and capital markets. Requirements #2 eliminates most of the other large banks, several of whom should be looked at as effectively insolvent and most of whom are facing continued writeoffs, as we learned today. Requirements #1 and #3 eliminate the non-regulated financial firms, e.g. Goldman.
5. This was a miracle.

The key to all this is the breakdown in the mechanisms of the credit markets which posed a systemic risk. A point both admitted and strongly reinforced by Paulson's speech today. We're going to have to completely re-think our regulatory regime and extend it to the shadow banking system. This is the beginnings of a major re-thinking and re-structuring of the Financial Industry - how it's regulated, how it operates, its' business models & strategies, its' compensation programs and how it makes its' money. Those are the criteria we'll need to be paying attention to for the next few years.

After the break we provide an excerpt on Paulson's speech plus two more really outstanding Rose programs with Larry Summers and Paul Volcker. Who if you listen carefully provide much hard-learned wisdom on what broke, why what the Fed did was vital and the extent of the systemic risks. Listen carefully because the language is so careful you miss the sound of the Angel of Death's wings brushing us.

Paulson Calls for Broad Look at Financial Regulations The crash of Wall Street's once mighty Bear Stearns underscores the need to bring investment houses under the kind of federal oversight that has long been given to commercial banks, Treasury Secretary Henry Paulson said Wednesday. In a speech to the U.S. Chamber of Commerce, Paulson said the Bush administration will soon release just such a blueprint in an effort to promote a smoother functioning of financial markets. For months the financial markets -- rocked by the double blows of a housing and credit crises -- have been suffering through extreme turmoil, threatening to plunge the U.S. economy into a deep recession. The modern U.S. financial system is a complex web of financial players -- institutions and individuals and practices that are subject to different rules and regulations. Commercial banks, long a financial bedrock, are subject to regulations and supervision. Paulson said he "fully supported that action" but said it also raises important policy considerations about the oversight of investment houses. The secretary said that commercial banks' access to the Fed's emergency lending "discount window" has traditionally been accompanied by regulatory oversight and supervision. "Certainly any regular access to the discount window should involve the same type of regulation and supervision," Paulson said, in an apparent reference to the Fed's temporary extension of this emergency lending to investment houses.

• A continued discussion about the purchase of Bear Stearns with former Secretary of the Treasury and current President of Harvard University, Lawrence Summers.
• A discussion about the economy with Paul Volcker, former Fed chairman and one of the most respected figures on the economy, in an exclusive interview.

Posted by dblwyo at 02:34 PM | Permalink | Comments (0)

The title is a play on Galileo's most famous work ( D ialogue Concerning the Two Chief World Systems)in which he discussed the sun-centered vs the earth-centered models of the solar system (actually the Universe). He almost lost his life, and Bruno did, for espousing the Copernician view despite prior decades of Church sponsorship for his research. The real reason wasn't so much the obvious disagreements but this was at the height of the Wars of Religion where the Church was facing the most serious challenge to it's authority and legitimacy in its' history. When Galileo challenged a worldview he was challenging the authority of the Church and politicians have no sense of humor about things like that. Well today we're faced with a discussion of the nature of three systems: the Economy (Business Cycle), Markets and Credit. Over several months now and with several key recent posts we've been offerring up our view of what we think the Copernician model should be. Judging from today's news headlines about the "surprising" drop in capital orders, new home sales, or the earlier ones on New Homes the common wisdome can by and large be characterized as Aristotelian, that is based on a badly flawed model of the way the Universe is built. Which did explain some data until the larger picture emerged.

Rather than keep stretching the metaphor here let me put a point on it. Last week we were faced with a systemic crisis in the Credit Markets, which normally function smoothly, transpartently and invisibly, that could have led to serious worldwide economic disruptions. Serious as in the D-word or worse. Now I consider that a low proability outcome but the catastrophic consequences are so severe that anything necessary to avert that should be done. I'm also convinced that the Fed has finally found/create a set of policy tools that will enable it to support an orderly un-winding of this mess. The trigger for this post is that, while we've covered all this ground before, some friends e-mailed me a few questions and it was startlingly clear that by using mild and abstract labels that the emotional implications were escaping everyone. So we're going to try and be a bit more blunt here.

To get started let me borrow the dictionary definition of Systemic:

of, relating to, or common to a system: as
a : affecting the body generally
b : supplying those parts of the body that receive blood through the aorta rather than through the pulmonary artery
c : of, relating to, or being a pesticide that as used is harmless to the plant or higher animal but when absorbed into its sap or bloodstream makes the entire organism toxic to pests (as an insect or fungus)

1rst Exceprt

First off the Credit Markets are broken as badly as they've been in our lifetimes. The Fed may finally, repeat repeat repeat, MAY have finally found an instrument to manage orderly writedowns by re-liquifying the market thru taking the ugly stuff off the financials books in return for payback. In the long-run they may actually make a lot. That just keeps the machinery turning over.

 

Make absolutely no mistake about it - while we were all out having fun the markets almost collapsed weekend before last and would, almost literally, taken Western Civilization as we know it with it. The price for Bear was NOT $2 or $10 - it was taking $30B of synthethic debt off it's books that it couldn't trade because nobody thought they were solvent, i.e. could pay their bills. They were and are so tied into all the other major institutions that if they'd gone bankrupt - which they were going to have to do Mon morning - just about every major financial institution in the world would have found itself facing huge writedowns and a giant cascading run on the bank.

 

The reasons for that are that nobody will buy the funny paper, even at cents on the $ because they're not sure what it's worth.

 

My recommended fix is something like the Resolution Trust Corporation which would be funded by the gov't and Fed operations that would force homeowners to write down the value of their houses to something reasonable, pay their remaining mortgages, force the originators and banks to write down their investments and ditto for the other financial institutions.

 

Anything less and you continue to have a risk of systemic collapse - too bland and not emotional enough to convery what might have happened ? Think of an alien space virus running thru the linkages in an entire ecological basin infecting each plant, animal, the soil, the water and the air. And when it enters the body of a living thing it causes their respiratory and circulatory systems to slowly congeal until they can no longer function. And then imagine that at some point the virus auto-catalyzes into metastasis and each infected individual suddenly collapses and infects the things around them in an ever-widening circle of macro catalysis.

 

Does that help ? Since you're not sleeping at night anyway thought I'd give you something to think on.

 

Try these as backups since I just put them up in the last few days trying to specifically analyze these inter-related problems.

 

Credit Meltdown, Economy and Consequences: Putting the Pieces Together

Key Postings III: Credit Breakdown, Liquidities and the Fed

The Great Circle: Where We're At in the Business Cyle

WRFest 23Mar08(Economy): Jaded and Faded

WRFest 23Mar08(Markets): From Margin Call to Great Unraveling

 2nd Excerpt

Q: Things are bad but you're really, really concerned that things could over the cliff altogether?

A:

How to put this ? Absolutely. But I don't consider it a high probability event. The caveat being that the risk was systemic - everytying unraveling all at once. They went from a credit crunch to a liquidity (got no money to pay my bills) to a solvancy (my margins are being called and I can't sell anything for 1/2 what it's worth so I'm bankrupt) to a close brush with financial collapse.

 

That said I also believe the that Fed's buying bad paper from broker-dealers who are not regulated using adaptations of more traditional intervention instruments was brilliant, a marvelous performance under pressure and may start freeing up the logjam. BSC won't be the last of the problems but we may now be in position to manage an orderly re-liquification of the credit markets, re-pricing of risk and de-leveraging. I repeat orderly. When the machinery of the system siezes up as badly as it did though it's like an engine without oil - with the same sort of consequences.

 

We're about 1/4 or less thru the credit market workdowns, about 1/4 of the way thru the Housing mess and barely started on the cyclic downturn.

 

NOBODY but nobody seems to grasp any of that judging from the headlines. The good to outstanding news is the people who matter do.

 

Posted by dblwyo at 11:28 AM | Permalink | Comments (0)

This has been an interesting, even bizzarre, market as those who feel that the kitchen sinks are accounted for and discounted in prices "debate" those who feel it hasn't been. As you might have gathered we're definitely in the latter camp. Along with such minor and inexperienced observers with names like Feldstein, Summers, Greenspan, Krugman and Volcker. In the long-run what we're seeing here is the beginnings of a "great unraveling" where the excesses in financial markets and the industry as whole are undone and then repaired. And when the unsustainable levels of Consumption that have been financed with debt-based funny money are also. In fact we're in the early stages of a reversal of over two decades and beginning to enter an entirely new and different regime for which noone is prepared, at least broadly speaking.

In the short-run we may get a bounce as optimism triumphs over both experience and the data.

 In fact from the chart at right you can get a sense of how this argument has been playing out. It shows the SP500 for the last six months. After a bit of contemplation and reflection we noticed something interesting which is captured in the added trendlines. As the financial breakdown has played out we got a stair-step market that's moved thru 2+ phases. In each of the phases you can see a flag or pennant forming with lower highs and higher lows which is often taken to be a sign of a breakout to a new upturn. Yet in each of the prior two cusp points there was another breakout to the downside where the downtrend became steeper. The Fed's drastic actions last week may have cleared the clogged arteries but that'll just enable the machinery to conduct an orderly unwinding IOHO. In the short-term, and since we're using a chart thru the end of last week without capturing the first part of this, we might see the uptick continuing. The technical test will be if the market manages to climb back above the 50-day MA, which so far it hasn't done. Historically btw March has always been one of the best months for markets so if a new bounce isn't established it could get to be an ugly summer. My favorite financial columnist (Jim Jubak) has about 50% of his portfolio in Cash for example ! Unless you're a trader that's probably a very good strategic position right now. Even if we break thru the 50Da MA that will still not reflect the underlying realities of growth prospects, earnings and necessary PE revisions. Again of course in our 'humble opines !

Now to be fair several key players have actually been bothanticipating and positioning themselves for this mess and done so presciently and brilliantly. The hedge fund managers who profited in the $Bs come to mind as does Wilbur Ross who began re-positioning his companies early least year. But the man who takes the cake is Bill Gross, the Bond King, who's been pretty forthright on his views (his monthly PIMCO columns are always a worthwhile reading investment and can be compared to Buffet's shareholders letters - Buffet of course has also proven prescient and well-positioned). If you click to read nothing else read the NYT story on how he's been running PIMCO in this crisis. 

Just for fun, and infotainment,lets hat-tip Mr.Ritholz at BigPicture with his take...

Last week, I questioned the conventional wisdom which claimed that there was Not Enough Bullish Sentiment? It seemed that there were plenty of Bulls who looked at the 15% pullback in the S&P500 as an ordinary dip-buying opportunity.In a moderate recession, an 85 day, 15% drop would likely be insufficient to reflect the changes in both growth and earnings -- much less a deeper, more protracted recession.The counter-argument is that the Fed has flooded so much cash onto the system, the recession no longer would matters.Looking from a sentiment perspective, its hard to say that the we've seen the sort of fear that typically accompanies a lasting market bottom. There's still plenty of speculative juice around. Consider these headlines from over weekend:The closest thing to an admonition of caution was Barron's Technical columnist, Michael Kahn, who called this The Market Bottom That Wasn't. That doesn't mean we can't see a decent bounce here -- there's lots of liquidity, and as we saw last week, the market stopped going down on bad news. That's usually good for a 5-10-15% counter trend rally. We saw that begin last week.But Dow 20,000 this year?  I highly doubt it . . .

UPDATE: Yahoo Finance had an interesting online opinion poll that pretty well captures the diversity in the debate on the outlook. Notice that the answers are pretty evenly distributed.

Markets & Investing

What Created This Monster? LIKE Noah building his ark as thunderheads gathered, Bill Gross has spent the last two years anticipating the flood that swamped Bear Stearns about 10 days ago. As manager of the world’s biggest bond fund and custodian of nearly a trillion dollars in assets, Mr. Gross amassed a cash hoard of $50 billion in case trading partners suddenly demanded payment from his firm, Pimco. And every day for the last three weeks he has convened meetings in a war room in Pimco’s headquarters in Newport Beach, Calif., “to make sure the ark doesn’t have any leaks,” Mr. Gross said. “We come in every day at 3:30 a.m. and leave at 6 p.m. I’m not used to setting my alarm for 2:45 a.m., but these are extraordinary times.”Even though Mr. Gross, 63, is a market veteran who has lived through the collapse of other banks and brokerage firms, the 1987 stock market crash, and the near meltdown of the Long-Term Capital Management hedge fund a decade ago, he says the current crisis feels different — in both size and significance.The Federal Reserve not only taken has action unprecedented since the Great Depression — by lending money directly to major investment banks — but also has put taxpayers on the hook for billions of dollars in questionable trades these same bankers made when the good times were rolling.“Bear Stearns has made it obvious that things have gone too far,” says Mr. Gross, who plans to use some of his cash to bargain-shop. “The investment community has morphed into something beyond banks and something beyond regulation. We call it the shadow banking system.”It is the private trading of complex instruments that lurk in the financial shadows that worries regulators and Wall Street and that have created stresses in the broader economy. Economic downturns and panics have occurred before, of course. Few, however, have posed such a serious threat to the entire financial system that regulators have responded as if they were confronting a potential epidemic.

Posted by dblwyo at 08:00 PM | Permalink | Comments (0)

In the midst of all the sturm und drang over the near collapse of the financial system there were stories aplenty about the economy which recieved little or no attention, at least in the sense of being reflected in the level of emotional investment in paying attention. Given the un-remitting run of bad news it seems to us that everyone's more than a little jaded (the other day Joe Kernan on CNBC even went so far as to say he's tired and wants to move on). And the meme is still widespread, prevalent and embedded that the full extent of an economic downturn has been "faded", that is incorporated into everyone's thinking, business plans, investment outlook and earnings and valuation estimates. UNSINN ! Or in English, nonsense. What the Fed did was get the machinery working again with a new set of tools so that we can in fact have an orderly unwinding of the excesses and a downturn won't bring about a major economic collapse. In yesterday's post (The Great Circle: Where We're At in the Business Cyle) on the Business Cycle we tried to intercept and filter what still appears to be the standard wisdom by