bizzXceleration: Performance, Value and Profit

MARKET READINGS

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, according to Morningstar Inc. For the past nine years, it has fallen 0.37% a year, and for the past eight, it is off 1.4% a year. In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over. Until last fall, many investors had viewed the bursting of the tech-stock bubble as a nasty but short-term setback. The market had resumed its upward march, reaching new highs in October. Then the credit crisis began weighing on stocks, as did the possibility of a recession. Conventional stock-market wisdom holds that if investors buy a broad range of stocks and hold them, they will do better than they would in other investments. But that rule hasn't held up for stocks bought in the late 1990s or 2000. Over the past nine years, the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar, including commodities, real-estate investment trusts, gold and foreign stocks.

·         This One's for Jay: Investing Strategies for a Dicey Market Obviously our view is that there's a long way to go to bring valuations into line with the business cycle and enterprise performance outlooks but we've been wrong, or at least badly timed, before; and surprised of course that the Universe didn't fit our "model" :). But all in all it seemed like a good time to translate the thrust of our arguments into some investing strategies (bearing in mind that blind advice on the web is potentially worth what we're paying for, this is intended as a representative exercise for you to go do your own homework and any negative consequences are on your own head. In the process we'll point you to PoliticalCalculations SP500 return calculator which you ought to have handy. What we're going to do is lay down a baseline courtesy of David Swensen, Yale's sui generii investing genius, who provides THE measuring rod here. But, given that he's smart, successful and wealthy, we're still going to argue at least a bit. Below is an excerpt from a recent NYT story and while you're reading it take a look at the accompanying table on returns for the SP500 based on Poltical Calculations tool. Below the line we'll pick up some more arguments but our bottomline is that Swensen's right but doing it his way is going to be a very low return world for a long-time to come. Is there a way to take his basic approach and modify with some work and sweat ? We think/hope so.

Sell stocks while the selling's good The euphoria over the Dow's 400-point day isn't going to last. But smart investors can avoid the worst of any train wreck ahead by unloading most stocks and nongovernment bonds soon. Central banks and corporate leaders are locked in the battle of their lives this month as they join in efforts to head off the worst credit crisis in at least four decades, pulling every monetary and fiscal trick in the book -- and inventing some mutant new ones. Yet veteran observers are swiftly coming to the conclusion that attempts to regain world financial stability could be doomed due to a stunning crash of commercial-debt financing and lack of trusted leadership, and they now believe private investors should take advantage of any rallies to purge their portfolios of most stocks and nongovernment bonds. Yes, you heard me: On a rebound toward the 1,350-to-1,400 level of the S&P 500 Index ($INX), consider exiting shares of all but the strongest, most creditworthy companies. This bear market is likely not ending soon, the recent 400-point jump in the Dow Jones industrials ($INDU) notwithstanding. If that sounds like a harsh judgment, or too late, it's because equity investors have been mostly shielded from the wreck that has befallen credit investors. But the firewall that has long existed between the two sides of the global financing system is burning, and it won't be long before the spreading credit panic works its full destructive power on stocks.

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. Two weeks ago, the world financial system hung by a thread as a battle raged among corporate leaders, government officials, portfolio managers and independent traders to control its destiny. Half wanted to pull it down and spill the globe into economic Armageddon for personal profit, while the other half fought to stave them off. It will be months before we understand exactly how the good guys won; for now, we know only that the Federal Reserve Board staged a stunning coup d'etat in Washington last week, fulfilling its goal of stability at any cost. Backed by allies in the Treasury Department, the bank regulator brazenly tossed aside decades of precedent and law to wrest control of the brokerage industry from its usual overseers at the Securities and Exchange Commission and forced the reckless directors of Bear Stearns into a shotgun marriage with JPMorgan Chase that appears to have prevented disaster. Before Fed chief Ben Bernanke and the head of the New York Federal Reserve Bank, Tim Geithner, displayed such unexpected cunning and speed, the world equity and debt markets were on the verge of collapse. In a climate lacking leadership and trust and characterized by a total lack of transparency, a crash was possible. And that's why I wrote a column suggesting that readers sell all but their strongest stocks on any bounce to the 1,350 to 1,400 level of the SP500. Now here we are that level, and I am happy to rescind my blanket sell recommendation, as the worst of the threat has likely passed. Don't get me wrong: The credit crisis isn't over, massive mortgage losses still imperil bank earnings, recession will still wreak havoc on corporate results, and the bear market could well continue at a lackluster pace for many more months.

U.S. Stocks Fare Better Than Most The U.S. is at the epicenter of a financial crisis that is reverberating across the globe, but its stock market has outperformed its counterparts abroad. The Dow Jones Industrial Average has fallen 7.9% this year, while the benchmark indexes in Germany, France and Japan have dropped at least double that amount. India is down almost 20%, and China has tumbled 32%. The performance of global markets so far this year is "a textbook case of the U.S. being the relatively defensive market," says Kevin Gardiner, head of global equity strategy at HSBC in London. Although the U.S. economy appears on the brink of recession, he says, its stock market has incurred fewer losses than markets in countries where economies are in far better shape. The industrial average also fell considerably less over the past six months than key indexes in Japan, China, France and Germany. The latest losses in markets outside the U.S. signal that investors remain deeply worried about the global repercussions of the financial crisis in the U.S.

• Shanghai Market: Cliff Diving  Remember when the Shanghai stock market declined 9% on Feb 27, 2007? That caused shock waves around the world, including a 400 points decline in the DOW index the following day. Well, that was nothing and hardly shows up on the following graph.

Junk Bond Losses Top $35 Billion as JPMorgan, Hancock Say Worst Isn't Over High-yield, high-risk bonds are off to their worst start ever, and the biggest investors say there's no recovery in sight. Junk bonds have fallen an average 3.9 percent this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes. Some funds managed by John Hancock Advisers LLC, OppenheimerFunds Inc. and Fidelity Investments are down more than 7 percent, showing that even the largest investors were caught off guard by the collapse. While the Federal Reserve has slashed benchmark interest rates by 3 percentage points since September, it has been unable to get investors to increase their purchases of the riskiest assets. The declines are choking off financing for speculative- grade companies, boosting defaults. The debt is likely to ``struggle'' for months as the economy enters a recession, according to JPMorgan Securities Inc., the top high-yield research firm in Institutional Investor magazine's annual poll. The slump is hurting more companies than ever before. Some 51 percent of U.S. corporate borrowers are rated below investment grade, up from 28 percent in 1992, according to S&P. About $1 trillion of the debt is outstanding, compared with less than $10 billion 30 years ago. The market isn't ``necessarily pricing in the recession that's most likely coming,'' said Henry Choi, managing director and head of the U.S. high-yield team at Morgan Stanley Investment Management in West Conshohocken, Pennsylvania. 3/14 Altman Says Corporate Defaults Could Exceed 12-13%, Patterson Sees Corporate Defaults Rising Through 2009

Wall Street May Be Facing Up to $460 Billion Credit Losses, Goldman Says Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said. ``There is light at the end of the tunnel, but it is still rather dim,'' Goldman analysts including New York-based Andrew Tilton said in a note to investors today. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 percent. Goldman said the $460 billion in credit losses it foresees may ``result in a substantial tightening in credit conditions as these institutions pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios.'' Credit-card loans, auto loans, commercial and industrial lending and non-financial corporate bonds make up the rest of the $460 billion in credit losses.

CREDIT AND REGULATORY READINGS

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. On the Richter scale of government activism, the government's recent actions don't (yet) register at FDR levels. They are shrouded in technicalities and buried in a pile of new acronyms. But something big just happened. It happened without an explicit vote by Congress. And, though the Treasury hasn't cut any checks for housing or Wall Street rescues, billions of dollars of taxpayer money were put at risk. A Republican administration, not eager to be viewed as the second coming of the Hoover administration, showed it no longer believes the market can sort out the mess. Then the Fed lent directly to Wall Street securities firms for the first time. Until now, the Fed has lent directly only to Main Street banks, those that take deposits from ordinary folks. That's because banks were viewed as playing a unique economic role and, supposedly, were more closely regulated than other types of lenders. In the first three days of this new era, securities firms borrowed an average of $31.3 billion a day from the Fed. That's not small change, and it's why Mr. Paulson, after the fact, is endorsing changes to give the Fed more access to these firms' books.

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.

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.

PREVIOUS POSTS

A Dialog Concerning Three Systems: Real Economy, Finance & Credit

Continuing the Dialog: Facing Realities in the Credit Market

Adult Supervision Re-emerges: Bush Proposal for Regulatory Overhaul