bizzXceleration: Performance, Value and Profit

It's time for a brief data interlude to check in with the "real world" and see how it's doing. With today's Employment data the markets were pretty happy so as a consequence not only did they dance higher but the it looks like the chances of a correction are well behind us. Given all that and what we've had to see before about L.T. trends, PE's, Employment, yadda, yadda we could dance back thru stuff, update the charts and say about the same thing. We're going to let it rest a bit, start with the markets and then focus on some other economic data.

This is a policy-dependent environment where the biggest challenge is for the various fiscal and monetary authorities to gently unwind things while not aborting a nascent recovery. Speaking of which you'll find a very nice composite chart courtesy of the STL Fed's data system in the readings comparing GDP to Employment but then walking you thru what's going on with employment - take a VERY good luck because we've never seen this many people out of work for this long and there are some real structural risks. You'll also find some other stuff reinforcing the notion of a U-shaped recovery plus a bunch of stuff on Europe (Greece), Japan and China. In fact there's a big chunk of China stuff in both the Markets and Economy sections. The readings end up with some very interesting excerpts on credit and monetary policy, which is where we want to concentrate. The video clip is an interview with Charlie Munger done at Stanford (early 2009?) on the Crisis and what he thinks of policy. This is a man completely devoid of ideological biases who makes it his business to understand things - in vast contrast to almost all the other strategists and pontificators. We suggest you pay attention because what he had to say almost a year ago played out about as he called and the ripples are still with us, which subjects we take up next!

What's Going on With the Markets

 But let's start the graph- and chatfests by taking a quick look at the state of the markets, courtesy of INO.com and channeled via Investment Postcards. Now this is actually an interactive tool clip where one of INO's analysts walks you thru the DJIA, the NASDAQ and the SP500 and talks about trends and turning points.

In each case he finds nearly identical results, which is there is a magic resistance level and if the markets stay off, or bounce off, that number they'll still be in an uptrend are likely to head higher. Given that they've effectively been in a sideways trading range since September and the long-term downtrend from Oct07 is still intact we're definitely talking about a trader's market.

The really interesting thing is not all that per se but that so many other folks are seeing it roughly the same way as we're seeing it. So, as usual, the acid questions: at these valuations and given the economic outlook where's the return? Feel free to keep riding this as long as you like but have your fallback positions thought out and prepared. Just as a little anecdote in Jan08 my suggestions to a bunch of folks was to head for the sidelines with short-term Treasuries. Out of maybe 50+ folks (actually on a network basis more like 150+, not counting the blog posts) maybe 1-3 paid any attention whatsoever. Of course my second suggestion was to look into inverse ETFs. No we're not about to repeat all that but over the rest of this quarter and thru the next stimulus will fade and earnings realities will start catching up.

Continue reading "It's All About the Money: Markets, Economy, Credit, Oh MY!" »

Posted by dblwyo at 06:52 PM | Permalink | Comments (0)

Well we've had a few weeks chock-a-block with a few years worth of news, and none of it good. The Fed has started moving to reduce quantitative easing (emergency) programs, sovereign credit crisis appear to be metastasizing from Dubai to Greece to the PIIGS and China further tightened it's monetary policy. There was even a frisson of fear that China was beginning to walk away from the dollar! The last is NOT true though though the former are but, as we keep reminding everyone, we're in a policy-driven and fragile environment where deep structural changes that normally occur gradually over decades are occurring in months or worse, in weeks. The end result is that we have a turbulent situation that's beyond hard to read because no clear patterns emerge that sustain themselves for long. There's a whole slew, and we mean slew, of readings after the break that surveys the landscape that confirms all this and covers ground we've covered a lot in the last nine months. The really interesting, and truly dangerous thing, is that so many folks are so surprised at things that have been visible for months. It was almost exactly at this time last year that we were warning that the economic data was going to be much worse than the markets were expecting - the end result was last year's March Market Madness when the sky truly fell.

Will it happen again? NASA flies what's called the Vomit Comet, a padded airliner, that flies a parabolic arc at the top of which the astronauts get a few minutes of weightlessness to get some experience. But everyone knows that it will end and starts preparing for the return of reality by getting back on the deck. Or risks serious injury. Are we in a similar situation? Meanwhile the WealthTrack video clip will give you a professional view of the state of things, an accurate one we think, and this YouTube clip will give you the popular attitude. Both are important.

Is That All There Is: Market Madness V2.0

 It looks like the "risks" of a real 10% correction are fast fading, despite all the gyrations in the world markets. Of course that's what they were saying in 2007 when we had the Shanghai Surprise (the canary) or the BSC Collapse (the first collapse). Now that's not to say that we're expecting anything like that, but as you'll see in the readings, none of the economic data is particularly good and the outlook is what we've been saying it is - another long jobless recovery and a decade of doldrums.

So, when you look at the chart, we see a downtrend that's still intact, a market that tried to rally over it and couldn't, a bear market rally after surviving last year's March Madness and seem real questions. Are we for example at the top of that NASA vomit arc? Given how badly the markets have misread the economic data this year, and for the last several, we can envision a couple of scenarios. In the short-run this complacent dynamics keeps playing out and the market turbulates sideways for a couple of quarters. Then the real economic data starts to show up, sans the Inventory boost, with stimulus fading, policy beginning to move away from emergency measures and earnings getting away from easy YoY gimme comps. That's a recipe in the last half of the year for a real correction. The question you have to ask is do you want to play that game (which has been going on since September after all)? Or is it time to start thinking about preserving capital. Unless you're prepared to get into the trading game the risks factors are mounting, the return outlooks are deteriorating (where are PEs for example, cf. the readings) and the chances of decent returns over the next several years are fading if not gone.

Continue reading "Welcome to Murphy's World: Markets, Economies, Policy & Fragilities" »

Posted by dblwyo at 10:09 AM | Permalink | Comments (0)

With the last two posts under belts we should have a baseline on how the "New Normal" is going to play out, frankly, for the next decade and how widely our perceptions are shared or reflected among some of the world's most influential decision-makers (Chaos, Turbulence, Fragilities: Defining the New Normal, Blueprinting Business Performance, The Cusp Point is Here: Lessons From Davos). Now it's time to look at the consequences for markets and the economy. If you'll recall we've said the economy is policy-dependent while the markets were afloat, likewise, on a policy-funded carry trade and complacency. Which means that the major factors we see in the NN (jobless recovery, weak demand, deleveraging, slow sub-potential growth, re-balancing = trade wars, worldwide over-capacity) were not reflected in an arguably over-valued Market which was pricing an immaculate V and ignoring all the fragilities, risks and turbulence that we're facing. Something we've been saying since the Summer but hammering on since the early Fall. In the readings we've provided earlier links to previous posts as well as white paper collections on the markets, the economy and investment strategy that not only go thru all that but provide a lot of tools and machinery for analyzing it and investment management. So let's dig into the state of things.

Markets Re-discover Reality

In case you haven't noticed the markets are still marching in lockstep and those have been down (EM's down over 5% and developed markets down over 4% in Jan to date). The proximate triggers were a minuscule, almost meaningless tightening in Chinese monetary policy, the re-discovery of sovereign debt risks in Europe (causing a renewed flight to the $ and re-invoking $Down, Markets Up dynamic) and a growing awareness of a weak recovery. Combined with being 1/2-way thru earnings season and suddenly realizing profit growth was still largely cost-cutting (wow, deja vu') and not on organic revenue growth (Technology is a separate issue but we did cover that previously:Talking Business: the Outlook vs. the Preparations).

Because the markets are all still moving in lockstep (again a hallmark of being driven by internals and not fundamentals) we don't really need to put up the charts on each of the separate pieces but you can see Sectors & World Markets, Finance/Rates/Commodities(Oil) and Gold/Dollar Markets by clicking thru on the highlights to take you to the various composite chart sets. The composite at right compares and contrasts the short-term vs. the long-term but some complementary views of the intermediate term are here and here.

Continue reading "Policy-dependence, Transitions and Turbulence: Market and Economy in the New Normal" »

Posted by dblwyo at 08:06 AM | Permalink | Comments (0)

The Markets have been tanking most of this week and have given up most of mini-bubble beyond 1100, which if you recall was our upper resistance limit in previous posts. It's doing so because a bunch of things have come together, though semi-predictably there's a chorus of voices blaming the President's announcements of a major reform to restructure the Finance Industry and change what it's allowed to do and how it functions. Given the poor quality of earnings since last March, recent reports showing how weak the core businesses are and Industry behavior over the year with regard to reform that announcement was, at best, a trigger that crystallized an already saturated solution. What really saturated things and put them on the cusp point of teetering over an edge was a slew of disappointing earnings, an improved grasp on the real economic outlook and China's major changes in policy. ALL of which we've been discussing for months.

Rather than reviewing all that it's collected in the readings but we're going to use it as our fulcrum to focus on the salvo across the bow fired on reform, and ask you to start with investing eight minutes in listening the President's announcement. This is not just political theater, though there's some of that, it's to the point, substantive, grounded and a sensible reaction to being stone-walled by the industry for one year (bear in mind the Administration reached out to the Industry within days of taking office and has been trying to reach out for months).

Continue reading "Comes 'round, Goes 'round: Hastening Forward Slowly to Finance Reform" »

Posted by dblwyo at 10:15 AM | Permalink | Comments (0)

Hopefully the last post was useful - in case you didn't know it we had several objectives and key points. The first thing was that we directly challenged the intellectual foundations that lies behind 95% of the investment management principles people have been recommending for three decades (the EMH), which includes much of the misused Wall St. math, much of the theory behind index funds (to a limited extent) and definitely Buy-N-Hold. We hope you took away the fundamental lesson that BnH is so much quackery. At the same time that "indictment" was also not support for much of the arm-waving that passes for "active" investment advice - it's still hard to beat the market and it takes some work and, especially some thought. What we did was lay down the foundations for two Principles and Two Guidelines.

Principle #1 - you need to actively managed your investments.

Principle #2 - you need to invest in those assets where you clearly understand the performance factors.

Guideline #1 - invest in those assets where you are pretty sure that the margin of value over price gives you a margin of safety and a good probability of a decent return.

Guideline #2 - you're going to have to spend some time working at this. Buy and forget will kill you. There's a tradeoff between the amount of risk, the amount of work. NB: we actually did a lot of the work for you by providing a strategic assessment of the Economy, Markets and Business Performance. And by updating and discussing our Four Factor Model.

So the next question is, what do we mean by active and how do you go about? Well you can start by listening to the most recent WealthTrack interview on the outlook for one thing. (WT is one of three goto information sources we're going to suggest you need to monitor frequently).

Continue reading "Active Allocation, Active Investing: Investing Guidelines for Lost Decade #2" »

Posted by dblwyo at 05:46 PM | Permalink | Comments (0)

Not to rush everybody along but after the big overview and the detailed dissection of the turbulent markets the natural question is what now? That breaks down into two parts - framing the question and getting down to specifics. On the "teach someone to fish" theory we believe starting with the framework means reactions and decisions will be informed and, most importantly, adjustable. So that's where we're going to start. Specifically with thinking about the design, concepts and constructs for Investment Strategy. Along the way we're going to take a big pass at EMH (Efficient-markets Hypothesis), suggest where it does or doesn't work and propose some alternatives. EMH, otherwise known or translated as the Buy-N-Hold strategy in practice but usually implemented by buy-forget-regret, has a few minor "weaknesses" that got a lot of folks into trouble who didn't check the fine print. Of course it made a lot of money for those who took advantage of the first set of suckers, oops, investors and those who did read the find print.

EMH in Practice: Markets vs. the Economy

This paired composite look at YoY changes in the SPX vs. GDP. Notice a couple of things very carefully. First off the cyclic patterns mirror the GDP almost exactly. Next, the almost part comes when some piece of irrationality gets carried away. If EMH worked none of that would be true. BtW, hopefully you remember all the long-run GDP vs. Profits vs. SPX charts we keep throwing up. None of the standard shibboleths or mythologies of investing are supported by those charts. Though on some timescales in some instances the notion that the markets anticipate the economy has some merit (that weaselly enough for you?). The trick is to know what works, why and to judge how the factors are playing out.

We've got two timeframes going here so you can see how long and how well it works and then so you can actually see enough detail (1980 on) to see what's actually going on. HINT: if the EMH was entirely accurate in a pure form markets wouldn't gyrate but would look at l.t. discounted cash flow and real earnings and converge on a steady-state having nothing to do with economic cycles; adjusting only for major changes in structural factors because those changes the driving forces. Known cyclical patterns shouldn't be surprises, but of course they are since real analysts don't actually analyze reality, just what they want to look at. The difference between a known pattern and a widely ignored one, btw, should be arbitraged away by the markets if the EMH was true. Which is how Warren plays the game.

Continue reading "Investing in Turbulence: EMH, Irrational Markets & Pragmatic Decisions" »

Posted by dblwyo at 12:29 PM | Permalink | Comments (0)

So far it looks like a few folks are getting some benefit from our major refresh of the outlook for the economy, markets and business (our major focal points) but let's focus specifically on a slightly deeper dive on the markets.Thought we'll start with a little re-setting of the table with regard to the Economy (bearing in mind that payrolls come out tomorrow).

PBS hosted this "debate" between a think tank and a Wall St. economist on next year's outlook. Much more polite than you're used to, it being PBS of course, but here's the real test - are they really that far apart. We'll leave the answer open as an incentive to listen, and listen carefully, but a couple of hints. How strong will the recovery be and what will job creation be like? What are the downside risks and the odd of a double-dip, or at least a W? The updated outlook actually gives you all the ammo you need to both answers those questions and to know exactly why these guys are much closer than calling it a debate would imply.

Turbulent 2009 Markets

We make a distinction between chaos, where the outcomes are uncertain and very slight differences in starting points can lead to very different results, and chaos (oops - turbulence), where the behavior of things might be a tad chaotic on a small scale but there is an overall pattern. The trick is to find the pattern and figure out what describes it and how the drivers are behaving and likely to behave. If you decode the pattern you're likely to be able to figure out where things are going and how to navigate much better.

This chart is a look back, annotated, for the SPX in 2009. The annotations pretty much lay things out, at least IOHO, so we won't repeat them. But to the point of our distinction we would call this a very turbulent chart indeed, with lots of different forces causing wide and wild swings in the market. Including the threat of a chaotic breakdown as the patterns were appearing to break with  possible collapse of the banking system.

Continue reading "Chaos, Turbulence and Policy: Market Lookback, Outlook & Risks" »

Posted by dblwyo at 11:34 AM | Permalink | Comments (0)

Since we're about to dive into the first working day of the new year and the new decade we thought we'd provide a bit of review and an outlook on things.Comment - if it's not clear the intent of this post is to make the review and outlook available to you all, for free btw, in downloadable form. In fact we do so with three different alternatives: clicking thru the Summary graphic below, online viewable at Scrib or directly by clicking thru on the highlighted file name. Please do so as we feel that the real value here is in the comprehensive views across the major economic, market and business factors as well as their integration.

Now, let's start with this recent PBS Newshour interview from their show conducted at the recent Am. Economics Assoc. meetings. Several short interviews with some very serious players indeed, including Bob Shiller and George Akerlof.

We hope you take the few minutes (about 8) necessary to watch - or even go to the web site and read the whole story/transcript here. We think it's worth your time.

The central question(s) being raised was "why you didn't you tell us that we were headed for the ditch?". The answers are somewhat various but converge on three key ones:

1) Actually we did, several of us in particular, but nobody paid any attention because everybody wanted to believe this was Dr. Pangloss's world.

2) Everybody got too wrapped up in and by the "animal spirits" of the moment and forgot both that markets go down as well as up, and that they REQUIRE more supervision than we remembered.

3) Everybody got focused on their own little niche and didn't see the big picture of how it all tied together. We knew there were lots of problems scattered around that were serious but nobody put all the pieces together.

Continue reading "Review & Outlook: Economy, Markets and Business in the New Normal (COMMENT!)" »

Posted by dblwyo at 06:21 AM | Permalink | Comments (0)

Here's hoping you had a great Christmas and are enjoying the weekend. It's time for a quick update and snapshot of the markets and economic information from the last week or so. It being the end of the year, and the decade, a lot of look-backs are starting to show up and some of them are interesting. Not least of course being that this last decade had negative returns and the worst performance of any decade since the Great Depression. On the economic side of things Durable Goods came out, and the MtM change wasn't what the forecast was expecting but doesn't look too bad on a YoY basis. But, not to dampen your season's spirits, our preferred indicator of future demand (the change in Wages + Employment) isn't looking so encouraging. And, this being a time for reflection, we've also included a couple of decade look-back/look-aheads and associated deep attitudinal shifts. In particular the radical change in attitudes toward equities. So let's see if we can find some signal in the noise.

Current Market Situation

Here's four views of a market composite (UL - last few months, UR - the "carry trade" indicators [$ & Gold], LR - decade view and LL - 2Yr view). Recently the markets have been in a narrow trading range (UL) but broke above it slightly. Interestingly despite dollar strength and gold weakness. If all the myths floated over the summer and fall were true that shouldn't happen. We think it's telling us that the carry trade WAS the driver, it's coming off (or being displaced by the Yen) and, fascinatingly, stocks and the $ went up together! We take that as a sign of an optimistic outlook, combined with end of year dressup.

On the other hand the (LL) shows there's still a ways to go to break above our infamous down-channel. When we go with the flow and look back over the decade it really is kind of depressing. Stocks are still lower than they were in mid-98, have a ways to go and will face stiff resistance at the next Fib level. If the Fall was the end of the world, March was the banks are/aren't failing, spring and summer - oh, we guess they aren't then the Fall was carry-funded fantasies. As Ritholz says in the readings we may still have some upside but we're really facing a range-bound and volatile market for at least the next decade (especially if you believe all the evidence we piled up on structural challenges).

Continue reading "Markets & Economy: Noise, Signal, Some Worrisome Signs" »

Posted by dblwyo at 04:51 PM | Permalink | Comments (0)

Let's serve it up all at once. The very extensive readings start with current comments on Market Technicals segue to the outlook and valuations and then bridge to investment strategy implications. Since the Markets are being entirely driven by Central Bank Policy which is in turn dancing around the turbulence of the Economy we then pick up the Economic situation. We've been covering that directly and indirectly (embedded as the starter points in business performance discussions) all along so we won't pick up much on particular data sets. Instead the readings focus on implications and consequences, include a lengthy discussion of policy and lay down some markers on really big picture implications and structural outlooks. Obviously each excerpt deserves a post and discussion of its own and combining the two major topics makes our usual readings section long evern for us. But this way you can step back, hopefully, and get an impression of all these factors and build your own mental model of how they're doing individually and all together. This is a system with many moving parts and it's those interactions that determine the outcomes we all care about. In our discussions we're going to focus on key, central driving points that tie it all together and leave it to you to at least skim the readings and tack them to our framework.

Continue reading "Antipasto Appetizer, Bouillabaisse Main Course: Markets, Economy, Policy, Outlook" »

Posted by dblwyo at 07:38 AM | Permalink | Comments (0)

Well Happy Thanksgiving - now that the holiday in the US is over and we're getting back to realities it's time to consider what little surprises were brought to us. One of course is the downward revision of US GDP numbers from 3.5% to 2.8%, a whopper of a surprise, though in our preferred YoY approach it was a drop from -2.3% to -2.5% "growth". Among other real surprises was the announcement from Dubai that the government was going to seek to re-structure the debt on some very grandiose real estate projects. There's a great deal of confusion and x-connections making things harder to de-cipher, not least of which is because Dubai is one of the UAE members and not the major one. So what debt gets supported or not by which government is up in the air. Nonetheless the threat of sovereign defaults shook up markets around the world.

Market Situation

We think people should be paying careful attention to Dubai and related tremors but not for the reasons you think, or are being commonly discussed. It being the tailend of the holiday we're going to throw out one chart on the Markets that we've looked at over the last couple of weeks, in some form, but not all the others we typically wrap around it to cover more ground.

Part of the reason is that the fundamental finding remains exactly the sames as it has (we almost ought to let the readers draw it out) but a) we're still in the downtrend, b) the bear rally hasn't touched the upper bounds and in fact keeps failing there and c) we're right at the 50% resistance line on the Fib limits.

What we think is really important is the re-iteration and re-confirmation of the logic chain from the last posting, the notion of fragile markets exposed to surprises and a policy-driven recovery. It's also critically important that you take all those points together as a set - as most investors haven't been. What Dubai was was a wake-up call about the fragile underpinnings that they were getting over-complacent about and the major risks and flaws that still have to be carefully worked thru to keep the wheels on the wagon and keep them turning. Back in Mar07 when the Shanghai Exchange dropped 8% with no warning we talked about the Shanghai Surprise in this post -Tender is the Market. And tried to argue that, based on economic fundamentals, the market was tender, i.e. fragile and tipsy and therefore prone to surprises and upsets. Now the next show to really drop was Bear-Stearns almost a year later but... surely you take the point? :)!

Continued....

Continue reading "Thanksgiving Surprises: GDP to Dubai to "Fragile"" »

Posted by dblwyo at 01:32 PM | Permalink | Comments (0)

Our next planned post was a deep dive on some key business challenges and how well positioned the general distribution of businesses were for the new normal. A structural assessment as a follow-up to the earnings and outlook assessment. Instead we're going to take a "quick" pass at the Markets and the Economy. Partly because the Markets were so much fun this week and there was such a slew of important economic data but also because business performance the Econ/Mkt situation are NOT independent; as we keep harping "performance is everything". On the other side in this turbulent environment where all the old patterns are semi-broken the last string of posts on taking apart various stories that are being told ties directly - one damm thing linked to another as they say. In fact that might be an alternative title for this post but an even better one would be the new paradigm emerges. All of a sudden, evolving and emerging over the last month, the new meme has metastasized to explain it all - RiskOn/RiskOff, DollarUp/MarketsDown, ZIRP/QE for ever, or at least until jobs start recovering if they ever do. In fact the quickie summary we thre out seems to cover it extremely well:

 We think that captures the new consensus pretty well except for the last line, which is our own little contribution thought we've been talking about the others for a while now. But it's the most important and carries the most fraught implications. As John Mauldin put it in his latest newsletter (Where the Wild Things Are). Ask yourself this - assume it all makes sense and the markets will keep running - what's your expected return? What's a fair value? And what's your risk?

Continued....

Continue reading "Markets in a Policy-Driven Economy: Turbulence, Data and Idiocies" »

Posted by dblwyo at 08:36 PM | Permalink | Comments (0)

Time to tag up with the current market situation, starting with two facts we think we've argued and established for months now. The economic outlook is poor for a long time and the market has run and run on sentiment. Beyond that it's fair to say everybody's been scratching their heads so hard we're all balding or worse. But there's a rapidly emerging general consensus for the short-term outlook - this is all about the dollar carry trade. Dollar up, markets down, risk off and visa versa - or as my buddy MacroMan puts it some other pool trade gets the Pink Flamingo. Now we've just spent a whole bunch of time digging thru all the complexities that are artifacts of a policy-driven environment and the whys and wherefores and have found most of the shibboleths poorly grounded in the deep realities. But plausible enough to get some attention. As long as the Employment outlook is terrible rates will stay low and dollars sitting on bank books will be loaned out to hedgies tne carry traders. Which makes this, like all turbulent and unsettled systems incredibly fragile and vulnerable to surprises. Which means the risks are mounting and mounting while the likely returns are retreating and retreating, at this likely earnings growth rates and valuations, at any rate (puns implied and intended!). Prieur du Pleiss (hattip) gets it right with this cartoon.

Main Street for Real

Now a small word of graphic design warning - we want to go whipping on thru several current situations that we've covered before so you can see them all together and recently. But we aren't going to spend a lot of time re-dissecting things so the graphics will be a tad small so click to enlarge. On the other hand there's a rather large inventory of readings and links that you might want to browse, skim and click thru and read where they catch your eye. Something for everybody and everything on the anomolies for somebody.

The composite graphic puts the points on the Wall St. vs. Main St. themes though. Even though the statisitcal economy has turned the corner you'll note that the pain on Main St. is all to real. That's since a) retail sales despite turning up is still badly down YoY, b) is about as bad as it's been AFTER turning up, since 1960, and c) Employment is still headed down despite the upturns to "not as bad as it was" for GDP and Consumption. Having spilled lots of ink we'll leave it there but it sets the stage for looking at some market stuff.

Continue reading "Carry Me Out to 'ol Rateginny: Markets, Dollar, Gold, Rates" »

Posted by dblwyo at 06:40 PM | Permalink | Comments (0)

Recently when the dollar's been up stocks have been down, and visa versa. Lying behind that turbulence is the gyrations between RiskOn/RiskOff trading based on liquidity-fueled speculation and the dollar carry trade. All this turbulence has been with us in some form for almost two years but seems to be dampening down. The two problems with a turbulent environment is that the risk and uncertainty is higher so everyone's looking for the patterns and explanations to make high-information signals out of the noisy data. Part of that filtering is the one we just applied (RiskOn/RiskOff) but there are layers behind it as well. A lot of those layers have to do with the outlook for deficits, trade flows, interest rates and exchange rates. And because we're in a policy-driven environment where deep structural changes that are normally predictable and evolve slowly are moving more like high-frequency technical information and subject to changing policy decisions. In this environment it's hard to decide whether or not turbulence is chaos - unpatterned or unpredictable - or not. Sometimes in fact it's not only hard to tell the differences but there aren't many (aerospace engineers talk about turbulent flow which is best modeled with chaos math for example but can be approximated by better behaved equations work ably enough).

What makes the chaos more likely is when to many folks substitute simple-minded ideologies based on philosophical or political preferences for the best available data, analysis and information. In other words when they worship at certain political shibboleths. We're going to attempt to keep on de-bunking yet another set of those shibboleths as part of our continuing efforts to find the patterns and develop the workable, good-enough models for our needs. This time we're going to focus on the Dollar and its relationships to Trade and Rates, while trusting you to review the prior discussions on the economy, deficits, economic policy, inflation, etc. Just to close the loop though the chart is two analysis of the same 3yr weekly SP500 chart which shows that a) all the downtrends we've been talking about are still intact and b) despite the recent rise it's both bumping against the Fib limits from the Oct07 high and churning around now on shorter timeframes of the recent bear rally. Which way it breaks is going to be a tradeoff between liquidity and reality.

Talking About Trade and Rates

To sort the chaos into patterns and make it merely turbulent we're going to try and present some machinery, admittedly conceptual, to try and explain how trade flows are linked to exchange rates and how those are linked to interest rates. The basic relationship is that Net Exports = Savings-Investment, which makes sense when you think about it but also follows from an accounting identity we've talked about before. Briefly (sorry for the shortness but...) Y=C+I+G+X-I. If Net Exports NX=X-I then Y-C-I-G = NX. But Y-C-G is savings so S-I=NX and voila'.

In the long run (at the bottom of this layer cake) you'd like for trade flows to balance out, that is we buy as much stuff abroad as we sell. That requires that we either make lots of stuff they want or don't buy as much from them as we want or they'd like to sell. NB: we've just explained the last ten years inter-dependency between China and the US. In this example Europe buys US goods but needs $ to do that while we need E to buy their stuff. When we buy too little or they sell to much we end up with fewer E than we'd like and they have a hoard of $. One way for that to balance out is for the E:$ exchange rate to adjust, in this case since they've got to many dollars by a drop in the E:$ rate, which would then work backward to reduce the demand for their goods until things are balanced out again.

Another way to re-balance is for that excess hoard of European $ to be invested in US assets, say stocks, bonds or loans. Which is exactly what's been happening between the US and China, or the $ and the Renminbi. We buy more stuff from them, they end up with too many $ so they loan us the funds which we use to buy more stuff. Simple right? In our equations NX<0 => S<I and R:$ should increase to re-balance things. Oops..that didn't work. So now the machinery runs backward, so to speak. Since R:$ is to low money keeps flowing to the US and we keep borrowing to buy things. Before you get to upset about all that let's bear in mind both sides are culpable. We kept playing grasshopper and they got to bring millions and millions of people out of poverty and keep their country from blowing up. There trade and international relations in one easy two paragraph lesson, right?

Continue reading "Turbulence Isn't Chaos: Dollar, Rates, Trade and Markets" »

Posted by dblwyo at 11:50 AM | Permalink | Comments (0)

An amusingly alliterative title, don't you think? With just that touch of the common with the hattip to what's his name the comedian..John Stewart was it? :) An alternative might be it's still not any different but the delusions are rampant. We also find ourselves in the familiar position of having to much to add to let it go with just an update, especially since the mythologies and delusions continue to run rampant. Specifically we're in a trading market being pushed along by speculative momentum and sentiment and based on the US Fed interest rates funding an all market carry trade. That's one major delusion. A deeper one is that, despite all the claims to the contrary, most of these folks think that it really was going to be a V-recovery and it's dawning on them that's not true, though they haven't adjusted their positions. The third is that the number of ungrounded and ideological shibboleths driving investment and trading decisions is monumental, including mis-understandings of rate outlooks, employment, debt and deficits, inflation and the dollar.

Our next major scheduled post was going to be on the dollar and further de-mythologizing in fact. Instead we're going with the flow and putting up our fourth major post on the markets, three in a row in fact, to try and keep trying to correct some of the euphorillusions. Actually this whole set of market discussions are really one long giant post that fits into our series on de-mythologizing so we start the readings off with the complete inventory of Market and Mythologies history and will hope to get back on track sometime in the future. The net result of substituting ideology for analysis is two colliding mis-understandings that are on major tipping points. The first is the obvious carry trade and asset bubbles. The second is employment and the implications for rate policy. We won't re-visit all the mythologies but will concentrate on two: Rates vs Employment and the Bubble(s), but we'll also spend a little time looking at Emerging Markets and Illusions.

Rates, Employment and Inflation

 The first thing to understand about Fed rates is that they don't raise rates until employment is growing again. That's one of the primary purposes in life, a strategic goal and explains why Greenspan's Fed left rates so low for so long (Employment didn't begin a "recovery" until '03 btw). The other thing to understand is the other key factor is Inflation. Now we've discussed both of those repeatedly and some of those discussions are listed in the readings for your review. As it happens almost all of the standard thinking has got it wrong - which means almost all of the headlines and investment decisions floating around are ill-founded, to say the least and being very polite. Employment is going to be very weak for a very long time (it takes 5%+ real GDP growth to start making a dent and we're going to have 2.5%). Inflation is likewise not a danger for the foreseeable future because banks poor position means that all that excess liquidity is going to stay on their books and not in the economy - technically that's called money velocity and it's a measure of how fast the supply of money turnsovers in the economy (cf. the readings). What ties it all together is a modified Taylor Rule that links Employment and Inflation to rates. A version that works very well is:

Rates = 2.07+1.28*Inflation-1.95*Excess Unemployment.

With low inflation and high unemployment the Fed should be setting rates at -5.6% and keeping them there for well into 2011 or beyond. That may lead to future problems but it also means that the only thing keeping the wheels on the wagon is stimulus spending plus quantitative easing where the Fed buys various debt instruments to try and lower rates directly. That means that fuel could be added to the carry trade fire for a while and that the dollar could continue under pressure. It also means that all the surge in asset prices is policy-driven, not based on fundamentals and all the talk you hear about Gold, Emerging Markets, et.al. is based on very shaky foundations.

Continue reading "Cuspiness, Collisions & Conundrums: Market Carry, Employment & Euphorillusions" »

Posted by dblwyo at 02:24 PM | Permalink | Comments (0)

We were going to add a few links with some interesting stories that came out since our last post on the Markets. Interestingly there were so many that adding a couple, or a mere few, to that post seemed in appropriate. Nonetheless if you'd consider this as at least partly an extension it might be a good idea.

The basic themes we struck, and have been striking, are:

1. We could never justify the rally on the basis of fundamentals, economic outlook or valuations and have been viewing it as a relief rally. The continued triumph of optimism over experience, otherwise euphorillusion.

2. The central fact that we think explains about everything is the world's Central Banks have been pouring liquidity into the world's banks who have largely been sitting on. In that process they've in turn made their returns, where they made them, in the last two quarters thru proprietary trading of one form or another.

3. Generally we've taken to calling this the RiskOn trade where the saving of the financial system combined with all that surge in homeless cash led to money pouring into risky assets. If you checklist your way thru all the markets and asset classes it explains about everything from China to Gold to the rise and fall of the dollar. For example when Risk is on money flows out of the US, thereby dropping the dollar, and visa versa.

4. As the recovery gets underway several Central Banks are beginning to tighten up their policies and are preparing to withdraw liquidity. That will tend to reduce the liquidity pools.

5. At the same time it is slowly and reluctantly beginning to dawn on folk that the economy is not going to see a V-Recovery. Which shows up, for example, in last Friday's debacle when consumer spending was so much worse than expected. Or, as we put it, supwise, supwise (in the immortal words of Gomer Pyle, FRB).

A Glance at the Markets

Given that the markets are all moving together we can continue to look at the SP500 as the proxy for just about everything else, suitably adjusted for differences in liquidty, risk preferences and illusions. So here's a little market snapshot we took yesterday that highlights the situation as we see it.

What we see is a technical pattern called a "fallling wedge" where the market is very shortly going to have to make up its mind about which way to break. On the last several months history having it break yet again to the upside wouldn't be a great surprise. Having it break to the downside would be merely rationale and on any number of grounds (earnings, profits, economic outlook, valuations). Barry Ritholz put up a couple of David Singer annotated charts on Head & Shoulders patterns today that are linked in the readings you ought to look at as well, though they are a bit more complicated.

Notice as well that volatility is increasing. Prior to the sandpile collapse last Fall when the VIX got to 30 it meant a major drop in the market. Now we'll see, won't we? Notice that the MACD indicator is beginning to tip over on the bottom of the weekly chart as well. Since everybody's expecting a correction it ought not to exceed 15-20%. It'll be when the real economic realities sink in next year that fundamental re-thinkings set in on valuations.

In the meantime we suggest you at least skim the readings on Central Bank policy as well as several others on the market situation and outlook.

Continue reading "It's Still Different: Refreshing Policy and Market Info" »

Posted by dblwyo at 03:50 PM | Permalink | Comments (0)

Surprise, surprise is the start of the punchline to a terrible junior H.S. joke about Gomer Pyle and the neighbor girl told when you're to young to know better and still puzzled by life's mysteries. Now that we're all older the supply of mysteries seems to keep going and it's one damn surprise after another. In fact there were so many that instead of a couple of updated additions to the prior post we ended up with a huge inventory that calls for a separate one, driven by the two big surprises: Th. GDP number and Fr. market shock. What they have in common, other than surprise, is that they're tied together by a mystery. That mystery is the mythologies we've been working our way thru, doing our best to debunk and de-mystify, and look for the structure and relationships.

A Quick Look at the Market

 That we're completely being bombarded shouldn't be a surprise - we are after all dealing with the after-shocks of the biggest disruption in the economy and markets since the 1930s where all the old structural relationships got shaken up. One thing that happens in complex systems subject to shocks is that it takes them a long time to return to stability and normal operation. When the shock is severe enough the linkages and parameters get changed so that the old system is not the new one. That's exactly the case here. Let's take a quick look at the markets to start with.

You should read this chart composite clockwise starting with the UL corner and working round. The point there being that March saw the world is ending as economic reality sank in and as fears of bank failures exponentiated. When that got fixed by the stress tests we got back to some measure of sanity but followed it with ill-grounded optimism bordering on illusion and went for a liquidity and leverage driven mini-bubble not based on realism about economic growth, earnings and profits or valuations. All of which led immediately to the UR chart - the real question is will fantasy return triumphant or will self-delusion be reduced enough to return to reasonable estimates and valuations? In the readings BtW Prieur du Pleiss has one of the best summaries we've read (Stocks and risky assets stumble ) on the subject. The bottom two charts tell us something, technically speaking, about where things might end up if reality wins. That reality is defined by whether or not the continuing turbulence of a fragile system continues to see the Central Banks trying to pump money in and what the Financial System does with it.

And a Look at GDP

One way to sort out the pattern from the noise is to find a set of instruments and filters, and we like YoY% changes which makes economic patterns about as crystal clear as they get. The bottom chart here shows us GDP, Consumption and Employment and, on the surface, it's nothing but good news. We'll make it official - the Recession is indeed over as measured by GDP. Of course there are several catches which we've yaddayaddad about forever. The recovery is not just highly but utterly dependent on government policy (Fed rates, quantitative easing, tax cuts & transfers, stimulus spending) which are going to be vitally necessary for a long time. The real key is how fast, when and if the economy transitions from a dependency on policy to internal, self-sustaining and organic growth. Which really means when does it start creating jobs and beyond that when does it make up for all the lost ones.

Continued ...

Continue reading "Surprise, Surprise:Not a Rally and It's Still Different" »

Posted by dblwyo at 07:38 AM | Permalink | Comments (0)

After the last three days in the market our prior post on the Markets outlook might be looking a tad prescient, but who knows? Two other previous posts focused on longer and deeper structural issues (From Mythologies to Realities: Economy, Employment, Credit & Trade, More De-mythologizing: a Little Markets, Some Economics, Lots of Policy) and tried to debunk a lot of the ideological shibboleths (including a definition of shibboleth!) that's influencing too much of people's thinking. If you've been reading along we've hammered several themes repeatedly: a weak economic outlook, a jobless/loss recovery, a market that's widely and wildly over-valued based on any of the fundamentals and a deep...deep...deep need to re-think investment strategies (more on that we hope in a subsequent post). Between aberrant behaviors and poorly grounded shibboleths the really central question is WTF is going on? We think we've finally arrived at a fundamental answer - or at least the beginnings of one.

To summarize the rest of this post, somewhat, we think what we're seeing is a shift from a Risk Off (fear and loathing on Lombard Street) to a Risk On set of speculative trading where vitally necessary policy steps that kept and are keeping the economy from collapsing are also both restoring confidence but are also putting to much liquidity back in the markets and lowering the risks of screwball trading while simultaneously re-assuring folks that the risks of catastrophe are reduced. Which, as a bottomline consequence, means that all the running up markets are built on foundations of sand! Which means that our advice to start preparing your storm shelter should be taken to heart - think back to BSC as an early warning sign. Or, in some ways, the March Market Madness which resulted from economic realities finally sinking in. It looks to us as if sentiment is shifting so we're going to have one hexx of a fight between sentiment and sense.

Reviewing the Bidding: Current Valuations

 We won't review the bidding on earnings, profits, the economy and valuations in any great detail since we've run off quite a bit about it. But we will point to this chart drawn from a BNN interview with David Rosenberg of Glushkin-Sheff, a gentleman whom we've cited several times before.

Frankly we don't think there could be any worse news, particularly when you look at the realities of earnings. NB: despite what the MSM is telling you earnings are NOT coming in that good. In fact, despite 75% of companies beating estimates, they are beating those estimates because they managed expectations down so low. Something that happened beginning the Tech Bubble and has, if anything, continued to get worse. When you check the readings excerpts after the jump you'll find a couple of key sources on that and several other topics.

Operating earnings are before minor details like interest, depreciation and taxes while reported earnings are after those adjustments have been made. You actually need to look at both, and implied in our prior comment, put them thru a very fine-tooth examination. Which the sell-side analysts are NOT doing for you!

From all our prior postings on various takes on long-term earnings and PE valuations you might recall that we think a 15 PE is optimistic and a 20 PE indicates somebody under the influences of massive hallucinogenic optimism. What can we say though about a PE of 120? We'll let that case rest there but will also point you in particular to the first reading (again from Jim Jubak) discussing the relationship between stocks and the dollar.

Continue reading "Really Different This Time: Liqudity, Rates, Markets & Risks" »

Posted by dblwyo at 02:24 PM | Permalink | Comments (0)

Like a couple of famous bunnies the Market just keeps on running and running - the question we've had for quite a while is why and how? The short answer, ioho anyway, is that's running on momentum. Otherwise known as sentiment or psychology, or in our coined word, euphorillusion! Strangely a recent survey of Wall St. strategies has the market ending the year at the same level they forecast at the beginning and about where it's at now. Now we've recently spent a lot of time, both in gathering, posting and leaving those posts up for you to read, on the Wall St. bonus issue. Strangely enough that's coordinated in multiple ways. What got all this going was when, after the stress test we remind you, financial earnings stopped dying. On the other hand they sure haven't been very good - the market died a small death today when Dick Bove downgraded Wells Fargo. A little while ago Whitney put GS on hold/neutral because it's more than fully valued. If you've been paying attention there's a lot of problems lurking on the banks books and the only lines of business making money have been proprietary trading. To the extent that the Financials have been driving things we think that's a foundation of quicksand. The other thing is earnings surprises, which were based on cost cuts although some companies have recently been surprising on the top line, after lowering expectations. Our bottomline is twofold - as long as its running let it run and ride along with it. But start prepping and decide what you're going to do; and we'd repeat it still might be time to take profits off the table if you're the least bit ancy.

Current Market Situation

Let's take another overly complex look at the market situation with a four-part composite chart. The reason we combine these, aside from compression, is that it forces you to consider four time frames simultaneously, which we think is revealing and important.

We'll come back 'round but let's start in the LR corner with the key point. After the 'world is ending' collapse in March and the "no it's not rally" what we see is that the market is just reaching back into the downtrend channel that's been going on since Oct07. In other words we were in a normal recession bear market that collapsed twice. Once when the sandpile of leveraged debt (remember those financials) in Sep/Oct08 and again this last Spring. Now we're still in that downtrend.

Continue reading "Markets Away: Run Baby Run? Or Stumble? Or What?(Updates)" »

Posted by dblwyo at 07:52 PM | Permalink | Comments (0)

We could title this post a lot of things but wanted to focus on a metaphor we've been using because it's powerful and accurate. The Battle of Moscow in 1941 was when the Russians were saved, after letting themselves be surprised thru wishful thinking and ideological self-delusion (our term has been and is euphorillusion) by last minute miracles (Zhukov's Mongolian divisions were marched thru the streets of Moscow in a "parade" straight to the front). That was followed by many things but a central one was the extendes Stalingrad Campaign (as part of the larger Uranus) in 1942 which was only the end of the beginning. The beginning of the "middle game" was the giant battle of Kursk in 1943, where the Russians entrapped the Germans into the world's largest tank battle and defeated them, partly thru better intelligence and decision-making, partly thru luck but mostly thru a lot of darn hard work. Last Fall, as is now becoming all too clear, was our Moscow. We've been saying that for a while but how close we came to the edge of a worldwide collapse in the financial markets is becoming clearer and clearer. This last Winter and Spring was, and is, our Stalingrad. So, consider this post an addendum to the last as well as its own thing. We're going to largely let some key excerpts speak for themselves with a little judcious commentary but will also point to a selected set of excerpts to back up many of the points after the break.

Fall in Moscow: Near-Death Experiences

 Don't let anybody kid you, it was as the Iron Duke said in another context, a "near-run thing, a damn near-run thing". Not only did LEH, FNM and FRE die but MER disappeared but we were within a hairsbreadth of seeing Citi, MS and GS go as well, despite the denials at the time and, especially on the part of GS, since. NB: we have no problem with the artful dodging of Paulson and other policy makers - tell the idiot horses that the fire was out of control would have triggered the panics they were trying to stop. Let us let an excerpt from Andrew Ross Sorkin's just out book tell the story, but we'll draw your attention to the stock charts....even might Goldman almost died in those few days and hours. And below we'll also point to the charts on credit....which we've talked about before. Just in case the point's not clear - the financial system is still broke and credit is shrinking....without continued Fed support the whole thing will blow away. We're a long way from fixed and from starting to fight Kursk.

Continue reading "Moscow, Stalingrad, Kursk: Edge of the Abyss to "Recovery"?" »

Posted by dblwyo at 07:54 AM | Permalink | Comments (0)

This is going to be another longish post, focused on the current market situation, the outlook, special cases and the emergence of new approaches to investing. The last is the most important, deserves careful consideration and lots of investigation and will be our capstone. But the bottomline is that the old shibboleths are beginning to go into their death throws and new paradigms are emerging. We'll be following that line of thinking but the old 60/40 equities/bonds asset allocation based on the Efficient Markets Hypothesis, buy-n-hold and ride the trends are going away. We have some thoughts on what replaces them but it's going to be a very different world for a long time to come.

Markets, Earning(?) and Euphorillusion

Let's start with the current market situation. The top sub-chart shows the SP500 YtD and shows some of the technical signals that called for turning points. Some of which panned out and many (the yellow warnings) that didn't. Reviewing the bidding we started the year sliding until the real economic data led to fears of Armageddon and panic. When it appeared the banks weren't going to all die (say thank you Timmy) we got a major bear market relief rally that's almost died again several times but each time found hope in green shoots and earnings. There are several huge problems there: the earnings aren't really good but based on cost-cutting and expectations managment, much of the volume has been concentrated in very few stocks, i.e. the Financials, and is even less grounded in reality and what we've really been experiencing is a sentiment driven market. The bottom sub-chart brings back a little reality...the downtrend is intact.

Re-visiting some key charts we've concatenated from previous discussion might put things back in their proper context. The top chart shows cumulative growth since 1950 in real GDP, Corporate Profits and the SP500. Notice we got two market bubbles, a profit bubble this decade and that the markets barely kissed the long-term trend of real growth before taking off again. Where's the reality in that? Two other major things to notice though - before delusional thinking took over everything followed conincident structural trends AND the markets had long secular cycles (uptrends and downtrends) along that deeper path. There are two possible futures implied here. One, we return to sanity and enter a decade of the doldrums. Or we sustain the fantasy based on who knows what. IN EITHER CASE the old "stocks for the long-term" shibboleth dies and active investing based on structural, secular and technical integrated analysis becomes the new paradigm. The other thing to notice in the bottom sub-chart is that the profits were a combination of structural sub-part performance in the real world and leveraged risk-taking in the financial. Now do you think the Finance Industry's going to be able to replicate that? And at what cost to the rest of the world?

Continue reading "Where's the Money: Markets, Outlooks & ReThinks" »

Posted by dblwyo at 09:58 AM | Permalink | Comments (0)

If we'd put up this post over the weekend Monday's "bump" would have us temporarily claiming prescience again but the naysayers would point to yesterday and today as proving our senescence instead. The fundamental problem the Markets face right now is just that - they're pricing in beyond perfection to Nirvana in earnings and valuations and the economic data flatly contradict it. All the facts on the ground about earnings coming from continuing cost costing while revenues continue to show y-o-y declines combined with every single econ datapoint lying painfully at the bottom of the cliff tell us so. Our last market post (Brown Shoots, Weak Markets, Resilient Business ?) said it was time to take money off the table and we repeat, reiterate and reinforce that recommendation now. Even though if you'd acted on our advice you'd have lost something in the last several weeks that something was based on as airey a set of finance earnings as was ever fabricated that trigered the recent runup. (More Darkside Earnings Tales: Banks,Goldman und Unsinn). And all that's before we accurately price in the longer-term economic outlook. Remember investment returns result from buying at low prices and right now markets are weigh over-valued IOHO ! Again we've got an extensive reading section to back all this in addition to our own analysis but if you read nothing else read (****) IS THE RECESSION REALLY OVER?.

What's Really Going On ?

 Let's start with this composite SP500 chart which shows YtD daily and since Jan07 weekly along with some indicators. On the daily chart you can see where the economic realities dawned on people as the Q1 data flowed in leading to the huge panic drop (NB: we published our quarterly newsletter in Feb. warning about that and whammo...something that's happend with every edition so be warned...just sayin). That was followed by the widespread discovery that the Armageddon Panic was overdone and the world wasn't coming to an end. Strangely enough though the Mar. lows actually brought the markets back to the long-run market and economic trends since 1990 (actually 1950 ! as we've discussed). Now we called for a correction in late June/early July and it looked like we were getting it until GS and the rest of the Wall St. crowd took us all up again on the backs on public money and proprietary front-running trading (can anyone spell fiduciary ?). Markets are now over-valued and way...way ahead of the economic data, for the next several years in fact. At minimum now is NOT the time to buy in unless you're holding period is ten years !

The bottom chart is even more interesting. The market corrected backup to one of the natural boundaries between the Oct07 high and the Mar09 lows to about 38%, or 1018. That's all in the context of course of this last two years and not looking for limits on the longer-term. The technical indicators would tend to support all this. Here's where all this is important - if the market corrects as it should will it hold and what resistence levels of on the upper chart ? Notice that in the May-Jun-Jul period it was bouncing off 875 prepatory to the "real" correction. Holding at 875 would be encouraging but based on all these whacky interpretations of the outlook. Which means that a correction back to the 800-825 levels would make more short-term sense. In other words a better than 15% correction should be, on the facts, well in order and setting aside our conviction that the Mar lows were more realistic in the long-run. If you'll continue on to the readings you'll find some backup charts on sectors and world markets; pay especial attention to Shanghai which led up and is leading down.

Let's Talk Earnings

Central to all this is what are realistic expectations for earnings (again there's another chart we've used before in the readings) which we set out hear. That starts with what do we mean by earnings ? S&P reports operating earnings - what the companies tell us ignoring "1-time" events, as reported - what they tell us also including those events and estimates including screwups done top-down. There have been so many "adjustments" for the last several years we're much more inclined to take the center column as closer to the truth, which makes a huge difference. In Dec10 it's the difference between $20.10, $9.14 and $12.50. On the data the latter two are much more indicative IOHO. Then what PE do you use ? As David Rosenberg points out even in Mar. PE's only got down to 12.4, not the 6-9 that would have been appropriate for a real downturn. We'll let you read this chart results (HT: Macroman) and the charts in the readings which show what an outlier the going forward fantasies are, for yourselves. But at reasonably optimistic PE's and earnings an 800 on the SPX is right in line while a 400 is not out of line on realistic assessments based on appropriate economic growth estimates and multiples. Keep in mind - we have yet to correct for the Tech Bubble !!!

If that happens look out below.

Which leads us to the fundamental fundamental questions.

Where's the Beef?

Keep in mind that a) this whole last decade has seen essentially flat to negative investment returns and two major bubbles that are NOT corrected for. In other words the markets have yet to adjust to the new normal and reset their expectations accordingly. The other thing to keep in mind is that the new normal will be a nation of consumers rebuilding their balance sheets, i.e. forced savers. Beyond, and all of these are point we've been repeating almost ad nauseum, there are likely to be fundamental value changes. So a nation of frugal shoppers who have learned that they can't borrow their way to happiness is a far cry from the nation of spendthrifts who borrowed our way into trouble. Our buddy Jake over at Econpic captures the history as well as anyone with this cute little chart. We're coming off a period of almost three decades where per capita net worth climbed steadily. People have had no other expectations for better than a generation. Grasshoppers indeed. Now, in a certain sense, all the net worth gains since 1968 have been wiped out.

Certainly we know a lot of folks who talk and act like that's how it's going to be. Who knows when a more stable new normal will appear and how they'll adapt ? We suspect it's never going to be what it was. At a minimum that means a slower growing economy, at least until repaired balance sheets support new investment and new growth a decade from now. It also means lower valuations.This all leads us to a straightforward conclusion, especially when coupled with our previous discussion(s) on the longer-term economic outlook.

We are looking at a low-growth doldrums for the next decade.

And nobody is adjusting, adapting or acting to prepare.

Continue reading "Where's the Beef ? Panic to Euphorilusion and No Reality" »

Posted by dblwyo at 01:12 PM | Permalink | Comments (0)

We're going to take a quick pass thru the economic situation, markets and - picking up on last post's theme's - talk a bit about business resilience or not, as the cases may be, with examples. Last week's payroll employment data seems to have convinced folks that what we've been saying for months about non-existent green shoots, a weak outlook, a drawn-out recovery and a de-leveraged jobless future is in fact what's the outlook. Interestingly you need to tear yourself away from the US and major foreign business and financial news and listen to BNN; in the readings you'll find some selected vidclip URL's that are NOT there by accident and we highly recommend them all but especially the two *** ones. The market has bounced on PEs not on earnings and that's the story of the moment with the longer-term implications of all this still being struggled with. As we've tried to make clear this is a matter of responsive adaptation in the shorter run and adoptive innovation in the long. Also in the readings you'll find some specific cases on how well that's working and the brave new world we're all facing. The NYT did provide a superb graphic slideshow illustrating how a business cycle works which, if you'll click thru on the graphic, you'll be taken to. Watch it and think about it. We've talked about business cycles a lot and even provided a tutorial earlier so were particularly happy to see this; a superb use of new technology that gets the story right (NB: we've also notice that the YoY meme is really getting much wider spread use as well !).

Back to the Future: Employment & Consequences

This little gem of three composited charts tells multiple inter-locking stories with the top part showing the YoY% changes in Employment and Unemployment since 1998 monthly. Like we've been saying, a leveling off in the rate of decline is NOT a recovery, and you can see both the steepness and depth of the decline as well as the slight leveling - though Unemployment continues to worsen. Folks are starting to pick up on the differences between unemployment in folks actively looking for work and those pushed out of the labor force (Many Left Uncounted in Nation's Official Jobless Rate). That rate of unemployment is 16.3%. Those points are reinforced in a longer-term context in the 2nd sub-chart which shows Employment dropping -4%, Hours Worked -6% and Unemployment increasing by 70% !!! If you think the consumer is coming back any time soon think again. Worse yet the 3rd sub-chart gets back to our long-running theme about how weak job creation was during the recent "recovery" (reaching almost -4 million jobs in the hole) and how disastrous it's become. We're now about -12 million jobs in the hole. REALLY think about that - how long will it take to even get back to breakeven ? Bearing mind that unemployment will keep increasing for some time - perhaps thru all of next year ? What can we say except OMG X 2. First time for the numbers and second because almost nobody gets it.

Market Realities Return

The green shoots and China will save us theories led to a major bear rally between March and May though we've gone nowhere since then. In the last few days (largely on BNN again admittedly) we've heard pundit after pundit talk about the same things we've been jabbering away at. And in the last week we've seen a bunch of market analysis on the likely breakdowns in the market, for which you'll find another bunch of URL addresses to reinforce that point. If there's one must watch please watch the online vidclip presentation of MarketClub's tool demo assessing the SP500. Wonderful. Here's two SPX charts compounded to make our points, which are nearly identical. As you can in the top chart the critical level is about 880, which we busted yesterday on weak volume. If that keeps up, depending on how earnings run, then we can expect things to run down. But where ? In the lower sub-chart we look for some natural limits using Fibonacci limits. A first bottomline here is that you should be on the sidelines - as we said last major market post - take your money off the table ! The next stopping point is ~840, which we consider likely. If that's breeched the downward momentum will build and running down to 780-790 is highly likely. Depending on how things look, the news is running and what the sentiment is that might be breech as well. If that happens then we're back in the where's the bottom in a long-run sense. A question extensively previously considered but if you want to look at an updated long-term chart click thru. Which we recommend and you can't say you haven't been warned ! :)

Business Reactions and Performance

 Recent earnings estimates have been extensively revised downward, which you can see by consulting the S&P Earnings Estimates. They're calling for earnings of $55.54 and $74.02 in '09 and '10 with PEs of 16.55 and 12.42, which leads to estimates for the SP500 of 919. In other words a flat market at best, though if you use our Graham-Dodd approach lower PEs, like 10 or less, are appropriate. But even so that's telling us two major strategic things, actually three. 1) There's a lot of risk in valuations, 2) the recent runup was the limit for two years (and possibly more if you go with our pessimistic outlook) and 3) real earnings in a terrible economy are going to be the critical determing factor.

Gee, somehow or another we've circled back to business performance, short- and long-run. Our recurrant mantra is understand the strategic context (Economy and Geo-Politics), understand how each Industry is trending and then understand how each company is dealing with the things it cannot control and the things it can, now and for the future. There's a vidclip in the readings of Ivan Seidenberg being interviewed on Rose which is as perfect an exemplar of this sort of balanced thinking. The take on the current secular trends and how Verizon is being positioned is outstanding but the look ahead to the worldwide future of the Telecom Industry is worth the time.

In the readings there are some specific examples for your skimming pleasure. The section starts with some examples like a Greek Shipping company as well as Apple, talks about the Finance Industry which is the exact opposite of an industry adapting well. They're still locked into the way things were, not the way they are or will be. The lack of effective response and thining ahead can only be described as stunning. Then we have Rio Tinto, the Australian mining company who road the commodity boom into worldwide acquisitions sprees starting to spin off pieces as the result of the downturn. Talk about foresight and mis-readings ! NOT !! We spent a whole long post taking apart the Auto Industry but the outlook for sales is abysmal but the triple tsunami is the growing capabilities of the rapidly developing world, e.g. China's acquisition of Opel and the fact that India has turned out a great car in the Nano. Sadly it would appear that the kind of innovative adoptiveness required is more on display outside the developed world than in it. A theme enormously reinforce by Saab's moving to migrate production of the Grippen to Brazil - really.....really....really think about what that says not just about opportunity but about capabilities. Aircraft are among the most complex and demanding products in the world - advanced fighter aircraft are another order of magnitude. Meanwhile pharma sales are going to decline in the developed world so Big Pharma is looking outside the US, which has been its development base since it's founding. Now the Rapidly Developing Economies are very exposed because they are so export oriented to the downturn and future weakness. But in the long run.... ? Well...we'll leave it at that because we think the implications are both obvious and taken apart in depth and detail in the last post.

Continue reading "Brown Shoots, Weak Markets, Resilient Business ?" »

Posted by dblwyo at 11:41 AM | Permalink | Comments (0)

It's been quite a week for the data that was and the data that was reported, starting with a much more pessimistic World Bank Report leading, allegedly, to a major market drop that was entirely recovered by a slightly more optimistic OECD report that saw a "full" recovery along with some US domestic data, e.g. consumer income, spending and savings. For the record when you actually read what was written and dig into the headlines as usual were almost completely distortionate. We sound like, and are, a broken record on this topic but will keep replaying the old songs as long as no one else is despite a desire to moving on. The chart is a short-term look at only two data indicators - real personal consumption and real retail sales and makes one of our major, critical points: the rate of decline has stopped accelerating but is still about as bad as it's ever been. Abysmal to put a word on it that's both accurate and revealing, and ignored apparently. Rather than spend this whole post on digging thru the other data and re-repeating ourselves we'll point you to this downloadable PDF file of all the recent data on both a short- and long-term basis so you can see that ever series confirms this and how bad they all are in historical context: Recent Economic Data.

The Real World Economic Outlook

In the readings you'll find addresses and excerpts for both the World Bank and OECD reports as well as some news stories. In the Markets section you'll also find discussions on BNN regarding each of the BRICs specifically. This chart encapsulates what the OECD really said and shows maps of the '09 and '10 outlook as well as graphics for the BRICs and the major developed economies. What they really said was "weak recovery in sight but damage will be long-lasting". In fact if you do some more digging around the have an associated part of the report that ALSO says that long-term economic potential has been badly damaged and will result in anemic "growth" for a long-time to come. NOT what appeared in the headlines - adjusting for differences in weighting factors their outlook is identical to the Bank's as well as that of private forecasters (another one of the BNN vidclips). The sad fact is that this not what most are reporting, seeing or acting on. You'll find graphics with more details in the readings BTW.

Structural Changes: Reversing the Virtuous Cycle to a Vicious Cycle

The World Economy has undergone tremendous structural evolution, even abrupt re-structuring, in the last decade with the BRICs as a whole crossing thresholds into entirely new economies. Those changes will remain but they are both one time events that set the stage for new secular evolutions and will proceed at slower rates in the future. If everybody's ignoring the real data the implications of these shifts are even more neglected; that is they are not reflected in investors or business executives planning. A primary driver that's going to shift is that US consumers have been the driving engine of worldwide economic demand and they are shifting from dissavers to savers as they re-build their balance sheets. They are not the only ones that will be de-leveraging and re-building their balance sheets either - the entire worldwide financial system will as well. The devil's bargain that is unraveling in front of your eyes is that the developed economies borrowed from the rapidly developing ones who, in turn, built export based economies based on that demand and exported their "excess" savings as loans to finance the excess consumption of the world's grasshoppers (puns intended). Now that set of feedback loops will be running in reverse which means that Chinese growth, for example, will be lower in the future. By some estimates as much as 2-3% or more. That means that demand for commodities won't grow like it did, impacting countries like Brazil and Australia, nor will demand for the tools and equipment that made it workable, impacting Germany and Japan for another. One of the lessons of the last lost decade is that the markets went nowhere per se but certain anomolies did well for a time, e.g. real estate, emerging markets or commodities. If the point isn't clear the under-pinnings of those anomolies just got knocked out and will stay knocked out for a long time. But, because the "common wisdom" is looking for a return to old patterns we'll likely see a short-run effort to speculate on those patterns. Which explains the recent runups in emerging markets, oil and commodities. We won't repeat an earlier NYT chart on the implosion in world trade but here's the link so you can re-examine it as statistical evidence for how these cycles have reversed: World Trade Implosion.

Structural Changes and Strains

Which is not to say that the structural shifts in the world economy won't be continuing in some form, albeit at a lower level. Bridging back to the last post on the strategic outlook for the Auto Industry we borrow this chart from one of the reports we pointed to in our update on the industry outlook in the Rapidly Emerging Economies (REE). Our friends at Booz & Co also provide this more detailed prognostication: World Auto Demand Outlook.We think those outlooks are reasonable, fact-based and are representative of the huge shifts facing every industry. Shifts it's NOT at all clear they are preparing for or able to adapt to. At the same time we think that the actual levels will be reduced and the numbers will take longer to reach. That's on the assumption that the reductions in worldwide growth and the shift in demand don't strain the socio-political institutions of the BRICs to far. On that topic we'll point you to these discussions (G-20 Persepctives: How Well Do Bears Dance ?, Brave New World: the Emerging Balance, Pluralities, & Non-zero Sums, Existential Crisis Around the Agora II: New World Stories). The fundamental points here are that the development of the BRICs (or REEs) is fragile and dependent on the institutional framework. When Chinese growth drops to 8% they are under strain, if they drop to 5-6% that's more threatening to them than a sustained -6% would be for US.

Trade, Growth and Innovation: Choices About the Future

What's enabled and sustained all this change and growth is world trade. Trade is, on the whole, unambigously beneficial to all participants though certain sectors of the economy and segments of the population suffer serious adjustment impacts and costs. For example in the '90s everybody was  afraid of the Four Tigers after been afraid of Japan during the '80s. They missed the fact that what was going on was the shift of 15thC economies to 20thC ones with labor shifting from agriculture to manufacturing. China is playing out that adjustment on a ginormous scale. As a result they shifts will continue, if they are sustained for a long...long time. When you compare China's coastal areas to their interior you are in effect making a comparison across those years. The coast is a REE and the interior is just the opposite. We are faced with several alternative paths forward which depend on maintaing stability, the continuation of trade and economic growth and renewed innovation on the part of all parties. These chart tries to capture (too many) things but shows how the gains from trade effect wealth at a point in time, how each economy changes and what might happen depending on the paths we end up on. Almost needless to say the red and yellow lines are colored for a reason - on those paths like the possibilities of severe disruption. Even the blue path, a muddling thru, will see severe strains. It's the green path we need for things to all hold together. And that requires large-scale innovation.

Meanwhile the readings excerpts below contain a number of vidclip excerpts from BNN, the only financial news network aside from PBS' Nightly Business Report, worth listening to IOHO. The discussions on the world outlook and the investment climate are extended and worthwhile. The sections on each of the BRICs highlight the differences, though occasionally you need to watch out for someone talking their book, e.g. Russia. Also included in that section are some grahpic summaries of world markets worth looking at. By the way the "drugged wallabies" story is also in that section. It turns out they make the crop circles but also, at least to our mind, characterize how most observers are looking at the economic, investing and geo-political situations. For the record we stand by our own last two posts on the Economy (The Vast, Ignored Difference: Economic Bottoming vs Recovery) and the Markets (Time to Fold 'em (Updates): Market Outlook vs Investment Strategies), as well as our assessment of business performance (Beyond Specifics to Principles: Business Performance Principles & Outlooks). Each component is critical in its own right but what really drives things is the interaction between the three !

UPDATES: Oil, Corporate Bonds and Investor Reality Gasps (GraspNot ?)

In case you haven't been scrolling down onto the readings there was something on the strategic outlook for oil which resonates with our basic theme here of the consensus being a drugged walleby - to wit $250 oil is a pipe dream based on things as they were not as they're going to be. Well the IEA updated it's outlook recently and confirmed that; as well Iraq held its first major oil exploration and development auctions yesterday. You'll find some added readings in the markets section along with some more superb BNN vidclips as well as a couple on the corporate bond markets. The Mike Santolli (Barron's) interview is particularly interesting for what he has to say about the deep changes in investor's view things. Lo and behold it reinforces are theme. Wonder how that happened ? :)

Continue reading "Drugged Wallabies, Crop Circles and World Economies (Refreshes)" »

Posted by dblwyo at 08:27 AM | Permalink | Comments (0)

Well in the course of normal sequencing it is, and was, time to look at the markets and relate them to our prior take on the economy (The Vast, Ignored Difference: Economic Bottoming vs Recovery). Believe it or not we were all set to go over a week ago but when the god of timing fried our connectivity and we just got it fixed yesterday. And trying to blog, upload and link in graphics is a painful experience over the SBUX WiFi network for some reason. But, as my ex-girlfriends tried to tell me, timing is everything. What we have to say is what we were going to say and what we've been saying for about six weeks or so: this market is more than fully valued, it may run up on pure sentiment but its got nowhere to go from here. In fact based on our economic outlook its got nowhere to go for at least the next two years if not longer. That being the case if you have any profits it's time to take 'em off the table and get a drink. It's also time to re-think your investment strategies. But the involuntary delay works to our collective benefit since the markets might seem to confirm our argument so far this week, the commentariat is beginning to sound like us and today's econ data is more confirmation of sparse and wither prone green shoots. Just for the record Industrial Production was down YoY by -13.4% compared to last months -12.7%; in fact the rate of decline is still severe if slowing.

Market Assessment

Starting with the current market situation take a look at this chart composite. In the long-term (since 1990) chart you'll notice that we got two bubbles but the market has essentially gone nowhere for over a decade. It did bounce off the lower Fib level in '03 but busted it and climbed back up in the March Madness but would appear, on this scale to be failing at the next level of resistance. We're probably lucky it didn't bust the lowest level around 450. BtW S&P estimated as of early April that 2009 earnings would be $44.10 and $44.78. At a 10 PE, well you do the math...also notice that S&P is implying a zero growth in earnings as well !

the lower chart looks at the SPX since Jan08. In the first ten months we had a "normal" bear market followed by the panic in the Fall and a near total rout in March as it dawned on folks that various warnings about a very weak economic situation were indeed true. Nothing like a dose of reality to have the Bears come of their caves and the Bulls to run for cover. Thru last week we'd bubbled up a bit but so far this week that bubble has been largely erased. At best we're in a trading range. But valuations are pretty high and built on a recovery in corporate profits which is NOT in the offing at all. Like we keep saying this is going to be a long, drawn-out recovery that's a long way from getting started. The end of cliff-diving is NOT the beginnings of growth.

GDP vs Profits vs SPX

 Earlier we dissected (Beyond Specifics to Principles: Business Performance Principles & Outlooks) the relationship between aggregate/cumulative growth in the economy and corporate profits since 1950 and broke it down by Finance vs Non-Finance. The key finding was that there was a highly aberrational bubble in profits this decade, which drove apparent profits, but was due mostly to constrained hiring and investment. MUCH worse the aberrations turned out to be concentrated in Finance and had been far...far above trend since the mid-'80s (deregulation anyone ?). The bottom half of this composite reproduces the key chart on Profits vs GDP with Finance vs Non-finance broken out. The top half is the interesting one here. Interestingly, or strangely enough, we can see the two bubbles in the stock market we saw in the technical chart reproduced in this comparison of cumulative growth since 1950. Really stop and think about that for a minute....from 1950 to about 1995 GDP, Profits and the markets all grew synchronously until an investment-driven bubble pushed the markets (twice !) way over long-term trend. The markets are beginning to come back to trend but you have to wonder how far the excesses will lead to a corrective over-shoot. With a weak and jobless recovery likely to drag out over the next five years profits certainly won't be growing though they have yet to return to trend.

Long-term Valuations

We've pointed at Robert Shiller's work on long-term PE Ratios before as being the exemplar of a data-driven approach to looking at valuations. He found that PEs averaged 15.3 from about 1870 to now; and if you take his figures and net out the bubbles the average is about 14.9. By any measure the market is indeed fully valued. The last time we visited Prof. Shiller (Markets Manias: Thinking About the Year Ahead) we coupled that discussion with our favorite Graham-Dodd PE valuation formula of PE = (8.5 + 2*G) X 4.4/Y, where G is the earnings growth rate and Y the AAA corporate bond rate. That prior post reproduces our G-D tables where you'll find a 5% growth rate and a 6% interest rate yields a PE of 13.6; right in line with the other paths to enlightenment. BUT....but...but a 0-3% growth rate, which is reasonable given the economic outlook, and an 8% interest rate, which is reasonable given the downside risk factors to be properly priced, yields PEs in the range of 5-10, depending. Now look back at Shiller's chart and notice that a) we've had a tremendous bubble in PE Ratios as well as ALL the other indicators and b) every other time that's happened we've had a major corrective over-shoot. Lots and lots of different approaches seem to converge in roughly the same region, don't they ?

Re-Thinking Investment Strategies

The mantras that everybody has followed for the last three decades are buy-n-hold combined with asset allocation and those have been based on the "efficient markets hypothesis". In the readings you'll find several selections on the current market situation that (finally) raise exactly the questions you can find us raising about the markets about twice/month since at least January. MUCH more importantly are a key set of readings on the long-term strategic re-thinkings that are beginning to go on. These include two pieces from Mohammad El-Arrian of PIMCO plus another one from Bill Gross and a piece from Joe Nocera of the NYT pointing toward a growing set of challenges to the efficient markets concept. Markets may in fact be efficient if a) they're not distorted and b) all the information about them is available. When those assumptions fail so does the EMT (that's Efficient Markets Theory not emergency medical technician but one wonders). The accompanying graphic is our most recently updated assessment of the markets situation for the four fundamental factors we like to look at: Structure, Fundamentals, Technicals and Sentiment. Each category shows the immediate prior assessment compared to this one. For the record the immediate prior assessment was from Jun08 since the disequilibriums of the Fall and Winter swamped our concerns with updating them. If you'll click on the graphic what you'll actually pull up will be a downloadable PDF copy which we suggest you do dload, read AND think about. The two prior assessment summaries are here and here.

 Alternative Strategies

So what does that mean for your investing strategies ? We think several critical things that are going to be painful and a lot of hard work but less painful than continuing to worship dead shibboleths. For well over five years we've been suggesting that Buy-n-Hold was a dead strategy because we were in a low-return world and one where markets were, being polite, generating a lot of anomalies. Our 2004 take on re-thinking portfolio and asset class strategies against timeframes  is, IOHO, worth revisting for several reasons. (Portfolio Strategy:Mar04). Among those are the structure, timeframes and asset classes. Also among them are the things we got right and wrong, in retrospect, though we'd argue that there was more right than badly wrong and they were good guesses at the time. We took another pass at re-thinking strategies in Jan08 and dedicated a whole post to it. The resulting re-vamped portfolio strategy put a lot of emphasis on ETFs, particularly leveraged and inverse ETFs. (Portfolio Strategy:Jan08). We discussed the reasons and rationales extensively in this post:This One's for Jay: Investing Strategies for a Dicey Market.

Our bottomline is that you need to re-think and re-structure, be more active and look for anomolies and trends. Anybody who followed our Jan08 recommendations made a lot of money last year, and would still be making money. If we'd been all that smart way back when we'd have done better as well. This last decade was dominated by key trends: foreign markets, commodities and real estate to name some key ones. Now the question is what will they be in the future ?

A question for future investigation though right now with everybody wallowing in the same ditches nothing comes to mind. BUT repeating the same tactics that worked for the last set of inefficient anomolies won't work again. For example banking on emerging markets to be the great opportunity is, IOHO, a done and exhausted investment idea. The re-factoring of the BRICs is fully captured, with the disappearance of the US consumer the export-led growth model won't come back and that will decrease worldwide demand for commodities. All large and complex subjects. Made more so because there may be short-term opportunities to exploit everybody else's worshiping of the old shibboleths.

UPDATES:

Merrill Fund Managers Survey BNN talks to Gary Baker, co-head, international investment strategy, Banc of America Securities-Merrill Lynch.

STREET CRITIQUE - Todd Harrison TODD HARRISON, founder and CEO of Minyanville.com. Paul asks Todd about Wall Street's response to the Obama Administration's planned overhaul of the financial regulatory system. Todd also offers perspective on the current market environment.

White Paper No. 46: Is It Different This Time? During extraordinary market conditions of all kinds – good and bad – it is usual to hear people say, “It’s different this time.” Of course, every market environment is different from every other market environment, but what these people are saying is that market conditions today are so exceptional, so completely unprecedented, that investors will need to reassess everything they thought they knew about the investment process – or face serious consequences.

Continue reading "Time to Fold 'em (Updates): Market Outlook vs Investment Strategies" »

Posted by dblwyo at 07:44 PM | Permalink | Comments (0)

We started to answer that titular question two mornings ago and have 90+ min. of writing our post blew-up. Given that we were going to take a rather pessimistic view (surprise) view and the markets rallied enormously on Tu. perhaps it was for the best. Yesterday's drops brings us full circle though - what do the market see ? The runup on Tu. was, in theory, on the back of the Consumer Confidence numbers and ignored the Housing data that came out at the same time and/or any other economic data. On the other hand Treasury auctions yielded a surge in yield yesterday which allegedly drove down the markets as "inflationary" threats to the recovery made traders more wary. Sheesh....that's as bad a mis-judgment as the first, if not worse. We're so far from inflation being a problem that we don't know where to start. So we're going to come full-circle back to our original thesii and walk thru three different views of the SP500 to try and get some perspectives, albeit largely technical. We'll refer you to the prior post for the worldwide economic situation and the extent of the green shoot situation. Just for the record though consider House Prices On Track to Fall Another 10%-15%backed up with Nouriel's latest take on the worldwide economic outlook - Still more yellow weeds than green shoots as the global economy has not bottomed out yet. You'll also find two more detailed dives from CalculatedRisk on the realities of Housing in the beginnings of the readings section. That's immediately followed with a highly unusual interview with David Swensen, the Wizard of Yale, on Wealth-Track which we recommend you listen to, take notes, think about and memorize.

Rosy-colored Puzzlements

Let's start with the shorter-term market situation, starting with this 7-month daily chart of the SPX (click to enlarge). The two technical indicators are now telling us slightly different things. The SlowSto - mostly useful for over-bought and over-sold as well as turning points and the MACD - mostly useful for trend, momentum and turning point confirmation -  gave very clear and reinforcing signals earlier. The two abrupt downturns and the upturn were clearly signaled (red lines and green line) by the SS and confirmed by the MACD. For several weeks now the SS has been fluctuating in over-sold territory and throwing off confusing signals but recently has started heading down; but the MACD is NOT confirming that. Instead we see the market oscillating back and forth (actually jumping) in a fairly narrow trading range. We've outlined the three trading range rectangles we think have been at play since Nov. The red is the bigger picture and sets aside the OMG the economy's broke panic in Feb. and some/most of the banks are fixed fantasy in Mar. The blue is, IOHO, the more realistic one until we get some more clarity and the yellow is where we think we're going to be, or should be. Notice that the top of the yellow rectangle is serving as resistance right now.

Pop UP a Level for Clarity

One of the tricks we've learned from our trading friends is that when we suspect a trend or turning point at one timeframe is being signaled pop up a level and see what's being confirmed or not. In this case that means moving from a daily to a weekly time-period though in the same 7-month timeframe.  When you do that we really do think things become simpler, clearer and easier to analyze. The fundamental trading range, highlighted by the yellow rectangle, seems to us to emerge fairly clearly. Again discounting the panic/euphoria swings in Feb/Mar (why are we reminded of George Carlin's line about the '60s - "chemicals were good to me" ?). The major turning points that were tradeable were very clear as is the downturn in the SlowSto. However the MACD also clearly is still showing upward momentum, albeit a momentum that would appear to be fading. Our bottomline so far would be that the market can't make up it's mind and lacks a clear consensus on future economic trends but wants to believe the best while fearing worse. Put other ways - now is NOT the time to get back into the market unless you're prepared to stay on hold for a long....long time. This looks like a fully valued market, particularly given our recurrent investigations of earnings, PE valuations and the economic outlook. If you're in now might be a very good time to take your winnings and head for the sidelines.

Widening the Aperture

Let's stay with the same period (weekly) and widen the timeframe aperture to get a better idea of the big picture by running the weekly chart back to the beginning of 2008. We've kept the same technical indicators only now we've highlighted what we think are the major trends that went on. From Jan08 to the credit market collapse, when the fundamental structural flaws in an over-leveraged fantasy were taken beyond deniability, we had a relatively slowly emerging bear market. Offset from time-to-time by various short-term fantasies (de-coupling, China will save us, "V"-shaped recovery) all of which have no been established as false to fact. Stop us when you think any of those are being re-replicated in contradiction of the data again btw. Then we got a punctuated equilibrium in Sep/Oct after the asteroid landed and market-life as we know it was (literally) brought to the brink of extinction.  A new steady-state emerged and survived from Nov-early Feb. when a new, factually much smaller asteroid, emerged which led to another abrupt downfall. This time instead of the markets being the leading cause it was the realization of how truly weak the US and world economies were. Followed by the banks are fixed recovery...BACK to the SAME STEADY-STATE RANGE. One should also note that the banks are fixed meme that drove that culminate in a stress test that actually told us what bad shape many are truly in. While admittedly telling us which are well-run. But the vicious cycle between a week economy, debt and banking write-offs has a long way to go. All we've really done is avoid Armageddon. There's still a long way to go to get to a real recovery with organic growth.

Re-thinking Your Investing Strategy

Dave Swensen manages the endowment at Yale and has truly been a revolutionary innovator. He's written two books, one for his fellow professionals on his strategies and techniques and the other on his trying to adapt them for individuals. His primary thesis was diversifying into alternative investments but with judgement and homework. In the readings you'll find the link to the interview he just did which we really think you should listen to. The top component of the graphic gives you a sense of how truly drastically he changed investing strategy during his tenure. As he says in the interview though the private investor hasn't got access to many of the tools that endowments do (and by that he means competent, active managers for alternative investments) so the individual has the choice of either putting in the time and effort or going passive. But DON'T chase performance and listen to the talking heads. Some of his other points:

1. In a long-term perspective entering a period where equities should outperform.

2. In a crisis, which we are still in, MUST take a top-down macro approach and understand how policy, structural trends, etc. are going to influence investment performance.

3.  Diversification doesn't work in a crisis ('87, '98, now) where the only factors are risk and safety.

4. Principles are the same for institutional investors as for individuals. The difference is in access to resources and tools.

5. Can't find good active management. Quality of management in mutual funds for example is poor - they trade to much and run up transactions costs and tax exposures because they don't think about the customer. On the other hand customers chase last period's performance so one hand washes the other. Be either very active or very passive but don't compromise.

6. It's more than time to re-think your portfolio strategies - be willing to take more risk for a given timeframe (the second part of the graphic is a recommend allocation but you need to understand how and why he arrives at it). Manage risk by combining core low/no-risk positions, e.g. cash, with the edge positions as sketched.

Also in the readings, along with many other excerpts, is a recent Bloomberg interview with David Rosenberg, who just left BAC/MER who expects the Mar lows to be re-tested as the realities sink back in. As much as Swensen, listen to that interview. He has a lot to say that doesn't make it into the story. A final key reading is the one that points out that almost universally investment advisors for high net-worth investors are drastically re-considering their strategies and beginning to move away from the old shibboleths of buy-n-hold. We strongly suggest you do the same because, if our economic assessments and strategic outlooks are correct, the old free ride is dead and in the process of being buried. TANSTAFFL ! There Ain't No Such Thing As A Free Lunch .

Continue reading "What the Markets See: Yellow Weeds Thru Rosy Coke Bottles" »

Posted by dblwyo at 04:53 AM | Permalink | Comments (0)

We're in the interesting situation where the real economic data - as it was at this time last year - is different from the headlines, where the future appears murky, where fragile green shoots are mistaken for the promise of a large and healthy crop and the markets, largely on the back of banking earnings surprises and the well-conducted stress test exercises have had a spectacular runup. For the record the 40%+ run since Mar9th would have been a fair return over three normal years ! Unfortunately we didn't believe it was real until it was, in our judgment too late to jump in. Now the interesting question is where do we go from here. In the readings section we start with some short-term data, segue to the strategic economic outlook, the international, including oil. The reading on the structural causes of China's poor product quality is worth the price of admission - on of three must reads. Then we pick up the market readings where the key findings are a) Merrill's Roseberg in his swan song of "yes, it's a sucker's rally" and backs it up and b) earnings may have surprised by not being as bad as expected but it was the result of cost cuting. Revenues fell badly. Which naturally sets up the Business section readings which by and large provide empirical evidence for the topic of our last post....which on the day that GM is annoucing a 25% reduction in it's dealer network should hardly be necessary but there you are. The real must-reads are the ones on the WSJ survey where the vast majority of respondees warn we're in for a long-tough slog along with the Economist's and (especially) El-Erian's discussions of a poor longer-term outlook. We're in the midst of an inflection point in consumer behavior and economic growth that will be with us for a long time. The graphic btw is extracted from the WSJ survey both because it makes the point and because who'd have thought the Journal had a sense of humor ?! If you want to see the serious results click away.

Short-term Data: Retail Sales,Oh MY !

Short-term, so-to-speak since it was this week and should have been a wake-up call but obviously hasn't been. Judging from this composite which shows nominal and real retail sales along with auto sales the word cliff-diving is in order and this week continues the event. We find it rather odd that before this crisis short-term meant back a few years, now to get some context we have to run our monthly charts back to '92 ! For a serious long-term view where you can actually compare last week's results in a big enough picture to understand the implications try this clicking on this chart that goes back to 1960, and also looks at Consumption and GDP. This recent cliff-dive puts real and nominal sales in the biggest drops they've ever been in. In fact nominal (non inflation-adjusted) is far worse than every year except '67, when it's only much worse. So much for the "second derivative" meme, in other words that the rate of decrease has gone to zero. It does appears to be slowing but....

Snipe Hunting: Where's the Markets ?

The question then becomes where's the Markets in all this. And in an interesting place is the answer. Given that the Market is still holding up it doesn't seem like time to go poking at the big picture, long-term charts so we're going to focus on the short-term and compress way to many technical geekicators (that's technical indicators for wannabe stock market geeks like myself) to try and make a bunch of points that are important. We think the fundamental context here is a very week economy that will be weak for a long-time to come, even if we get a modest late-year upturn, and one where none of that is being priced. So notice the up-channel lines are still basically intact - or just breached but the lines of resistance from the Jan/Feb trading box are still in place about 875 and 825. Then notice the turning point indicators that worked earlier (the Slow STO and MACD) which gave off three clear signals Down (1), Down (2), Up (3) and are now a little fuzzy to warnish (4). This is a market that can't make up it's mind. Now a real technician would have the courage of his tools and, without getting into the stress test of day-trader and scalping, would have ridden this reacent rally. We couldn't believe it was real for 2-3 weeks. And in fact it wasn't - notice the "false" downturn signals around March 30th and April 15th. Other than the green shoot delusion this has been a market that rode to the sky on the backs of earnings in general and banking earnings and government actions in particular. For a chart comparing the Finance ETF (XLF) with the Sp500 and noting some of the major "surprises" that sustained this rally when it shouldn't have been based on the real data click on thru. You might be surprised to learn that the XLF channel is very much intact but also that each of the aborted failover points we mentioned was associated with things like the Pandit Put.

Alea Iacta Est: Crossing the Inflection Point

Alea Iact Est is what Julius Caeser reportedly said as he took his provincial legions across the river Rubicon and began the Civil War which turned the Republic into the Empire. Having put together the shorter-term data and the markets let's focus on our Rubicon, actually the second we consider structurally significant. A set of socionomic Rubicons. The first we discussed yesterday in taking apart the history of corporate profits and argued we'll not see those days again. Now let's focus on changes in consumer behavior and the implications for the long-term economic outlook. The top sub-chart shows the cumulative growth in GDP, Consumption, Investment and Savings from 1948 to now, about as long we care to get. Notice that they were roughly in sync until 1995 or so; in fact Savings ran ahead of (and funded) growth and investment. That cusp point where the Tech fantasy boomed Investment has now almost completely corrected but the wealth (I'm rich, I'm rich) effect of first stocks and then houses sent savings into the tank. There's actually an earlier point where cumulative growth leveled off. That's reflected in the second sub-chart which shows the trends in YoY growth of Consumer Debt (r.h.s.) and Personal Savings. The former inflected into a climb from 4 to 6% in 1974 and then shot up to 7.5% this decade. The latter crossed it's Rubicon around 1984 or so and it's 2nd derivative was definitely negative. The long-term structural and strategic consequences are shown in the third sub-chart which compares the YoY trends in GDP, Investment (r.h.s) and Savings (red line). Under the impact of the '70s the long-run economic growth rate dropped and hasn't recovered; recently of course it's gone in the tank as well. The lesson is very clear - in the long-run increased Savings fund Investment which increases productivity and growth. The question we're facing right now and for the next several decades is whether we return to being a nation of values-centered savers and investors and restore our economy to a higher potential growth path. Or settle for third best where l.t. potential growth is likely to be around 2.5%, far below the 3.3-3.5% rate that's the previous norm. One of the other l.t. measures we like to look at is cumulative job creation, for that chart click on thru, which we've looked at several times before. We're now about -10 million jobs in the hole, i.e. below what's required to breakeven on labor force and productivity growth. It's no accident whatsoever that job creation has been poor and poorer since 1980 when the growth weakness set in and we became increasingly a nation of Grasshoppers. So what're the chances for our re-crossing the Rubicon and restoring frugality, sobriety and performance ? That IS the question isn't it ?

Continue reading "The Long Dark Veil: Economy, Markets, Business" »

Posted by dblwyo at 05:57 PM | Permalink | Comments (0)

I had occasion to be chatting to my Schwab guy this last week and asked him what he was seeing, or better, what Schwab was seeing. The answer was that after getting hammered they're seeing a bunch of business flow back in. And their CIO just "called" a bottom sort of - in their typically cautious way at least and suggested it's time to start dollar-averaging back into the market. Now Schwab is a class act who runs a good show and has displayed a lot more integrity than most over the last decade. Nonetheless, despite my guy's caution hemming and hawing, it strikes me they're getting suckered along with the rest. In fact what we think is going on is that a lot of money managers are jumping back in because everybody's doing it and now retail investors are getting sucked in as well. The problem, is you buy into any of the last several posts on the real state of the economy, is that this ain't grounded in the data.

Our bottomline - now doesn't look like the time to be getting back in despite what the gurus and charts might be telling us. Let's explore why we're getting nervous and would suggest that, at minimum, now would be a very good time to be on the sidelines. Take a look at this YtD chart of the SP500. Right now we're still roaring up the up-channel, but as you may recall that's largely been on the back of all the "good" news on the banks from the Pandit Put to TimmyG's Plan to Thursday's Stress Test - which was actually a lot worse news than anybody let on. Not to mention our points in the prior post on the other tsunamis still to come.

Market Dynamics: Jan08-May09

Let's pop up a level and take a look at what's been going on in the bigger picture. In this weekly SPX chart from Jan08 to now the really important indicator is the moving average which captures the dynamics. From Jan thru Sep08 which had a nice, tidy and optimistic bear market until the fecal matter hit the impeller with Lehman's collapse and the breakdown of the credit markets (btw - TimmyG was on Rose Thur. night and admitted that they all thought Western Civilization was ending, at least in so many words). Let's call that the meteor strike of the disequilibrium event. Or the dinosaur extinction event. When you pop up to this timeframe you can see where the new equilibrium  that appeared at the beginning of this year disapeared in March and what we've been doing is repairing the damages of that panic attack. Other than this last week or so's surge all we've really done is get back inside the trading range that we were in from Oct/Nov to Feb. When you look at the Slow Stochastic you can see that it's still roaring ahead. So there's still a lot of momentum in the market. In fact a huge amount, judging from the massive runup in the SlowSto. Until it and the MACD turn over you can still try playing for the upturn and then we'll see. But depending on whether you're an investor, a trend trader or a scalper you'll want to think hard about how to play all this. Again the steer clear advice seems well grounded to us.

Linking Markets and Economy

Let's really pop up a level and re-visit an old and familiar meme here. That, to wit, the economy drives profits which drive earnings which drive the markets. We'll try and make those points off this busy little composite chart - sorry for the noisy top part. We're trying to say too many things at once. In the top the faint lines are the YoY% changes of GDP, Profits and the SP500 on an annual basis. The only really important point for now to take away is that the relationship appears to hold. The heavy lines are non-linear trends which make it clearer. Notice how closely Profits follow GDP and, in turn, that the SP500 follows both but tends to amplify the cyclic patterns. Until recently when it ran ahead. The bottom sub-chart is the cumulative change in all three from 1950 to now which, IOHO, really makes the key relationships clear. Notice that they basically cohered up until 1995 when the "this time it's different" delusion took over the markets. Interestingly about the time that bubble was being drained it re-inflated in this Housing ATM driven fantasy over the last several years. Even more fascinatingly, at least to us, Profits followed GDP until 2004 without exception or major variance. Think about that - FOR FIFTY-FOUR YEARS PROFITS MARCHED WITH GDP ! Then, in the weakest "recovery" in post-war experience they started their own bubble and carried the market back with them. Now we know that a lot of those so-called profits were a) delusions from Wall St. idiocies and b) in the real economy the lack of hiring and capital expenditures of the folks who actually ran real companies. Judging by this chart we've got a lot of bubble deflating to go. Unless of course you'd care to argue that the fifty-four years of experience, of the forty-five up until 1995, were the screwy anomaly and the last decade the real deal ?

Analysts vs Realities

Let's borrow an interesting little chart from John Mauldin and take a look at the analysts collective guesstimates on where away for earnings. It shows the estimates for 2008 and 2009. For 2008 they started at $92 and dropped to an abysmal $15. the really interesting thing is that they "only" dropped to $60 by Sept. when the floor caved in with the market collapse and all of a sudden they flopped over the cliff. We'd say went diving but that implies deliberation and skill, at least according to the guys in Acapulco. Then the estimates for 2009 started at $81 and went to $29 and again display an inverse J-curve with a lot of that re-thinking happening at the end. So much for visbility. Now if you think $28 or so is reasonable and you also accept a "conservative" PE Ratio for a seriously recessionary environment is 10-12 then we're in a pretty funny space for the SP outlook. 28 X 12 = 336 after all so let's say 400. Or better if you think Shiller's long-term estimate of 15 is accurate we get a little better. But at the end of the day it comes down to what earnings are likely and what they'll be worth. If we get an economy that may, but is unlikely, to start growing at the end of this year but stays below potential for a long time PEs certainly won't be coming back above 15 for a long time. Or at least they shouldn't.

Graham-Dodd Valuation and the Outlook

We've pounded away at the G-D formula a bunch of times as well as looked at other alternative approaches so we'll content ourselves with simply pointing to this chart which shows the relationships graphically so you can read them off from either the tables or the graph. Now if we're anticipating high-grade bond yields of, say, 6% for a long time (out investment horizon whatever that might be) and 6% growth in earnings (which on the evidence we've been presenting on the economic long-term outlook is wildly optimistic) a PE of 15 is perfectly justifiable. 6% interest rates seems reasonable to start with though if you're in the hyper-inflation camp you'll want to to you value analyis with something considerably higher of course. But 6% earnings growth would require major continued cost cutting, because it's sure not going to come from organic growth. Or, admittedly, re-leveraging the balance sheet (ahem). But let's say on the basis of all the long-term economic outlooks that 2-4% is more conservative, grounded in facts and analysis and therefore more defensible. That leaves us with PEs in the 9-12 range. Looks like we've come full-circle. Bottomline here is that a 10 PE and $20-40 earnings looks pretty defensible which puts the floor on the SP500 back at 400. Which guess what...would take out all that remaining residual market bubble over long-term growth. You have to wonder if coming to the same conclusions form five to six ways doesn't tell you something, right ?

In any case if you want to keep on readng there's a bunch of interesting columns and stories with a bunch more foor for thought, tools and suggestions that we think is worth your while in the readings after the break. Click on thru by all means.

UPDATES:

It's always gratifying when after you throw something out in the blogoether that a slew of stuff comes rolling across the transom confirming your arguments. Now either a bunch of us are smoking the same stuff and not seeing the immaculate recovery or the punditocracy is self-deluding again (conjur up images of mental masturbation to make it graphically clear). There was just a bunch of stuff over the weekend and so far today that you ought to go read that reiterates a bunch of our themes about 1) mis-reading the data, 2) a prolonged and painful recovery with low job creation, 3) continued business performance pressures and 4) an over-valued market that's a sucker's rally in drag. Take a look and if something catches your eye go read it (the Jeremy Grantham newsletter is critical reading IOHO).

Economic News Updates:

• A Return to Trend Growth in 2010?
• White House Forecasts No Job Growth Until 2010
• Private Sector Payroll Changes
• Krugman fears lost decade for US due to half-steps

Market News Updates

• Merrill's Rosenberg: Goodbye, Thank You, Yes It's Just a Sucker's Rally
• Embracing Risk, or Expensive Stocks?
• Yes earnings beat expectations -- but sales didn't
• Happy days are here again 
• Jeremy Grantham: Last Hurrah and Seven Lean Years 

Continue reading "From Economy to Markets: More Bubble Busting Due ? (Updates !)" »

Posted by dblwyo at 01:47 AM | Permalink | Comments (2)

Well "green-shoot" optimism continues to triumph among the talkerati if not among my neighbors or, according to polls, among the general population. Which has kept the markets up so far, despite a big down gap last Mon. The interesting thing is that when you de-construct the actual data there's no sign of the kinds of improvements necessary to sustain things and the markets continue to suffer from slow leaks. We want to get on with thinking about the business issues all this raises but are going to pause for another "brutal realities" interrupt to review some of the evidence but in a slightly different way. As usual there's plenty of reading for skimming but our normal more technical graphics and explanations are down there rather than here in the summary/intro section. Instead we'd like to give our warnings some more emotional oopmh and hopefully bring them home that way more convincingly. Fortunately we're not the only ones seeing what we're seeing as this week's Economist cover points out - and in one fell swoop captures the entire message IOHO ! In the readings you'll everybody from Geithner to Immelt talk about the details of the bright shiny thing followed by some tunneling down into some higher-frequency indicators like Employment, Housing and Credit. Words like "unprecedented in modern" times are being used, or "economic crisis resetting capitalism". Back down to earth the crisis continues to worsen on a worldwide basis which raises some interesting challenges for the energy industry and the folks responsible for keeping the wheels on the trade policy wagon so we don't make it worse.

[Technology Mechanics: just a note - for some reason clicking on the graphics hangs up on YouTube but you can find the actual vidclips in the blue-highlighted entries discussing them and those seem to be working. Since a major part of my message here is the vidclips please feel free !]

Employment vs Earnings

Another recurring mantra is the notion that earnings aren't as bad as expected. Well that depends on who you ask. For example as we and many others keep pointing out the Banks earnings (despite the stress test results announced today and discussed below) are bat guano with worse to come as credit deteriorates and defaults and loss rates go up. Then there's the problem the even the exemplary folks (Apple, Amazon, et.al.) who turned in decent performances still saw lower revenues (not to mention that MSFT turned in the worst performance in it's history), offered up negative outlooks where they said anything and overall weren't very encouraging. Especially the industrial firms. The other little thing that's snuck by folks is the tiny little challenge of whether or not these were improvements in conditions, improved business performance or just plain 'ol slash and burn. Judging from the real employment numbers (continuing claims are setting records) the answer is slash and burn - translation: earnings were as "good" (poor) as they were because of short-term and ill-thought cost costing not because of fundamental improvements. Fortunately one tech tool provides useful access to a clever little summary of how most companies are going about it - click and see. Pretty funny if you can stop crying long enough to laugh.

Jobs vs Spending: Then What ?

Given that everybody's hunkered down in the bunkers and reducing their spending anyway you'd expect consumer spending to be retracting. Add in the layoff and fears of same and you end up with a whole new dynamic. Like we said continuing unemployment claims are abysmal. Down in the readings you'll find the latest edition of of high-frequency indicators that look at Consumption, Investment and Future Demand. Click on thru this other little vidclip to get a better grasp of the realities (call it an intuitive look at consumer confidence and spending plans if you like) as most people see them. Then take a careful look at the charts in the next section. A few high points - New Home Sales are still down ~ 40% YoY, while consumption and retail sales aren't dropping as fast there still as bad as they've been post-WW2, harbingers of investment like Industrial Production and capital goods orders however are continuing to accelerate downward (significantly in fact) which means there's no kicker there. And in some ways the most revealing - the sum of YoY changes in real wages and employment turned down. Now that's really important and our favorite short-term, high-frequency indicator because it's so good at look aheads. Employment's been tanking of course but YoY W+E had turned up because of the drop in inflation. Well real wages growth deteriorated a bit and as the labor markets worsen that'll continue. More importantly the drop in Employment swamped, or is beginning to, Wages. Which means what for future consumption - watch the vidclip. Take Scotch and Kleenix.

Which Means What for the Markets ?

Needless to say the themes continue when we try and translate the implications into market impacts, despite all the talking heads have to say about the generational low being behind us. While the accompanying vidclip is an exaggeration we're not down with this. If you believe our arguments on the quality and outlooks for earnings recent optimism is grossly mis-placed, particularly since it was almost entirely driven by finance fantasies (about which we've ranted enough until next time). Basically the markets have come to far too fast without any substance combined with a gross mis-reading of the economic data and the underlying realities of earnings. The markets readings end with two big picture excerpts. One on how to start examining potential candidates by looking for fundamental strengths - needless to say we think the suggestions are consistent with our approach. The other is a discussion of how the major private investment advisers are beginning to re-think their entire approach to advisory services and move from a pure buy-n-hold toward a more thematic and trend driven opportunistic style. Now the old shibboleths took decades to set in so this'll be awhile. But make no mistake this was a "Road to Damascus" moment.

Who You Gonna Believe

Your really need to do some, if not all, of your own homework here instead of letting the talking heads drive you into another corner. We know - it's a little late for that or for Mea Culpas but we are where we are. By way of compare and contrast we give you Milhouse's dad from the Simpsons (around min. 3:50) or so giving us his take on Cramer...of course you can always take another look at Jimmy-boy having it out with the Stewart. Never seen him that polite, contrite or quiet. Oddly enough we'd consider that to have been the only major confessional we've heard but it's as if it never happened. Odd that, wouldn't you say ?. We will mention that this whole show from intro and the not-so-hidden puns and jibes to the storyline offers some relevant moral lessons that are ironic in the extreme. We leave interpretation and application to you however.

By way of compare and contrast we offer up this little table that compares the findings and recommendations from four of our newsletters over the last 3+ years (actually running back closer to 4+ but who's counting). If you'd like a PDF copy that's downloadable for the summary, or for any of the four newsletters here you go. There's actually quite a body of tools and findings that build up over time. Now the intention here is not to brag, or at least not much, but the results have been pretty accurate. And that's not our particular virtue but the results of some simple tools and techniques we "borrowed" here and there that provide about as simple a view of the economy, markets, valuations and business performance as we can manage. Our hope that not only will it be interesting and useful but something you can use and re-use.

1. BizzX Newsletter Summary

2. Winter09 Newsletter

3.  Spring08 Newsletter

4.  Winter07 Newsletter

5.  Spring06 Newsletter

 We would however like to suggest that that track record is just a tad better than Jimmy-boys...by a fairly large margin in fact. But you be the judge...and at least consider what we have to say here might be well-grounded as well.

UPDATES:

Continuing our standard practice of refreshing large posts we have several new additions that provide some more context and interpretation (HT Barry Ritholz of Big Picture for some of this !). Three or four key ones as a major of fact. First up is Martin Wolf of the FT (one of the world's great newspapers IOHO - ranking up there with the Economist and ahead of the WSJ and NYT as they now stand !). There are two video clips that are relatively short but trace out the roots, consequences and outlook for the crisis that are as good as anything we've read. Martin concludes by pointing out how crucial government policy and international cooperation is - raising the specter of the significant retreat of globalization as well as fundamental shifts in world trade and financial balances (Reset indeed). To that end we'll refer you to two posts on our other blog on the geo-politics of things (Re-building On A Rock: Policy, Economy & Values, G-20 Persepctives: How Well Do Bears Dance ? (Updated)). He's also got a recent column on why things are still very shaky. Finally there's a recent vidclip from the WSJ/Barron's confirming that the major investment managers see things as we see them - to wit this is a very....very shaky rally indeed. Now as you listen/read this stuff we ask you what are the implications if our dire warnings are becoming common currency ? Interesting indeed. And finally there's this chart from the NYT pointing out how bad this recession is so far - which leads to the next challenge. If we're right and it's still early days how much worse does it get ? Even if Wolf's scariest prognostications don't come true ?

Wolf of the Credit, Balance Sheet and Economic Crisis:

Part I: The Sources of the Problem

Part II: The Long Road to Recovery

Is This Bull Run for Real ? (Barron's)

Why the ‘green shoots’ of recovery could yet wither

Longer excerpt below in the readings. This is another must-read IOHO. And we'll remind you that not only are there a lot of readings but that our normal inventory of economics and market charts are in the readings section since we experimented with humorous substitutions up front :) !

Continue reading "The Reset Marches On: Economy and Market Update (Updates)" »

Posted by dblwyo at 09:38 PM | Permalink | Comments (0)

Euphoria from a five-weeks market rally combined with the sight of a few "green shoots" is dominating the news and general reactions. That optimism is badly misplaced and is substituting the noise for the signal in the available data and then misinterpreting what is there as favorably as possible. We'd rather hoped that having to spend our (yours and mine) time investing in continuing to de-bunk mythology had gone away but human nature will triumph in the end. The Hindus and Buddhists have a deity called Mara, the master of illusion. Or we should say delusion where one's simple beliefs about things distorts everything about you - when they talk about the world being an illusion they don't mean  it doesn't exist. They mean that people see it as they want to rather than as it is. Granted that's often difficult given the extremely noisy data but that means that spending time on looking for and testing reality is well spent indeed. So that's our goal.

Some years back I did a little rock climbing and took a couple of falls, which tends to distort your whole view of things naturally. One of them was coming back down a snowy ravine after a very long mountaineering route and had me rocketing down the ravine on my back dazed and bemused. Fortunately my partner was experienced and skilled and I was soon arrested. Getting up and moving on it came to me my next stop was the lip of the ravine and a 1,000' dropoff to a rocky slope far below. The end result that could have been takes very little imagination indeed. Well that experience is metaphor, analogy and almost a model for what we've been going thru - a downward climb last year, a major fall in the Fall and an arrest conducted by a skilled partner. We still have a long way down before we can start the next climb though.

Level vs Rate, Signal vs Noise: Economic Realities

The first reading is an interview with Larry Summers in which he compares our situation to having just fallen off a cliff. The fall has stopped but it doesn't still mean we're in good shape - both because we still down and because of the long-term damages ! The confusions that many are suffering are between rate and level (a point Janet Yellen made a couple of weeks ago and we used in the last econ post). Rate is the change in activity while level is the on-going amount; in other words we've slowed the huge rate of decrease - it's not getting worse faster. But it's still getting worse and will for some time to come. A point of view, btw, shared not only by Mr. Summers but in the last week by the OECD, IMF, World Bank, CBO and many others including lots of the financial houses. For example everybody was all excited about the slowdown in the drops in Retail Sales and Consumption. The latter "only" dropped -1.4% in Q1 as opposed to -1.5% in Q4 after all ! That still makes it the worst numbers in the post-war world after the disequilibriums right after the war. We won't re-discuss the accompany chart but let you inspect it for yourselves. Some of the other readings you need to pay real attention to are Alan Blinder's NYT oped as well as Summer's FT piece on policy and outlook as well as the excerpts on the longer-term outlook. We're facing a situation where a recovery will be drawn-out, below potential and be followed by a major structural shift in consumer behavior from spendthrift to saver. At the end of the day the new economy will be more grounded, resilient, innovative, productive and prosperous but the climb back to that peak will be long and difficult. Let's summarize:

4. There is no substitute for the US economy. While eventually China and India may shift to more of a domestic basis that'll take time; and in any case the relative magnitudes are too small to make up the differences.

 Mara vs Markets: Continuing Madness of Popular Delusions

If economic realities are being distorted by the rosy glasses of popular delusions - with the signal being swamped by delusional and self-created noise - the markets are even worse. A major driver, other than the green-shoot theory of course, has been the alleged "recovery" in the financials. Despite the still on-coming wave of other credit problems, the over-throw of four decades of structural characteristics and the need to fundamentally re-think the industry (all of which we've been hammering away at these last few weeks in gruesome detail) the delusions have been rampant. From the Pandit Put to the TimmyG Rescue Suite for Toxicity. The latest of which was Wells Fargo's much better than expected earnings report - not that it wasn't but good golly one positive report doesn't make for a fix to all the problems we've been discussing or reviewing. NOW is NOT the time to get back in though from the multiple market studies collapsed onto this overly complex graphic there might still be room to run, based on misplaced optimism again as well as extremely distortionate data interpretation and market misreadings. If anything it's a time to start thinking about going inverse. Again, let's summarize:

All of which you'll find discussed and reviewed in another extensive collection of excerpts in the market-related readings which look back at the similar mis-interpretations in Nov. as well as the poor earnings likely due out as well as examining lessons from past bear markets and the breakdown in normally dependable trading and investing patterns. All told this wasn't your father's downturn, it won't be his recovery and it definitely won't be his market. But the most important point - nobody appears in the aggregate to have adjusted their thinking or rules of thumb to these new realities as yet. Sadly the debate is not whether or not to change those but whether it's voluntary and deliberate or forced and painful. Not changing is NOT an option !

Continue reading "Green Shoots vs Self-Arrest: Back to Economic Realities (UPDATED)" »

Posted by dblwyo at 09:49 AM | Permalink | Comments (0)

After hammering away at the Finance Industry, the implications and the structural reforms there's several directions we ought to go. We could look at the industry specifics for Finance or shift gears to other industries (Autos come to mind for some reason but we could re-iterate and wrap-up our look at Technology as well). Or we could really pop up and look at the core causal breakdowns in business management which lie at the root of almost all of this. But with a three week runup in the markets apparently loosing steam plus the the "ray of sunshine" economic reports it's time to re-set the baseline back to reality yet again. The readings cover the US and World Outlooks (Janet Yellen' speech is a thing of professional beauty if scary and the OECD has just lowered it's worldwide outlook significantly) and the Market situation. Just to review the bidding remember it was the Pandit Put that got this whole thing rolling, followed by historically unprecedented Fed quantitative easing (Prof. Ben Addresses the Lizard-brain: Steady-hands Vs DiscomBOOBulations (Update)) and carried further by Geithner's two major proposals.(Helmet Laws vs Adult Supervision: Re-Regulation & Finance Industry Futures) But the market was already loosing it's upward momentum. The real reason we want to focus here is that the headlines and mis-interpretations remind us of this exact time last year and in the readings you'll find some older posts excerpted to remind us of how distortionate the analysis was then, as well as panglossian in an extreme. Our best judgement is that we're back to that, so be warned. And also remember that in these circumstances policies and politics are as much a key driver as anything else; this week's G-20 meeting (which ain't going well) will be a major driver. (Sounds of Angry Men, Whimpering Politicians & the Global Crisis)

Economic Outlook

Contrary to the headlines NONE of the economic data really offered up much in the way of encouragement, especially when you look at the data using our preferred YoY% change measurements. One ostensibly favorable WSJ headline was pretty optimistic but when you read the story it was anything but ! Fortunately the YoY change meme is now widespread enough that most of the reporting includes it so you can see for yourselves. The top part of this graphic shows the high-frequency indicators that got some excitement but aren't encouraging at all. Turndown points are marked in yellow while tipping points are noted in red. The thing to really notice is the cyclic structure with New Home Sales falling off the cliff, then Autos and now Capex (durable good x-aircraft). Besides Capex the other stimulating headline was about Personal Consumption where the monthly number was "o.k." but in this YoY view you can see where PCE and real sales are still terrible; as bad as they've been in the post-war period.(Previous posts here and here).What got everybody going was the apparent flattening of the rate of decrease. Which leads to a key point that Yellen makes - there's changes in rates and changes in levels. While the rate of decrease may be slowing the level of activity is still bad. That's NOT a recovery or even close you see in those charts.

Markets

Like we said everybody's bottom calling but if you look at this chart thru last Friday you can see where the markets (the whole proxied by the SPX) is really running out of steam indeed. Again, of course, IOHO. Sorry if this is confusing but it's four different "studies" of the SPX compressed on one page so you can see multiple timeframes simultaneously. The UR corner shows a 30Min 15Day chart where you can the uptrend of the last three weeks loosing momentum while the LR chart uses something called a Fibonacci Fan to look at March on a daily basis. Notice that the runup kept tipping farther and farther over; that is hitting a lower and lower fan-line. The middle chart shows YtD for the SPX and how the technical indicators are giving off ambiguous signals; notice especially the yellow-circled Slow Stochastic Indicator which has stayed in over-bought territory thru last Fri. So far this week btw it's tipped over rather abruptly (threatening GM and Chrysler with bankruptcy didn't help but not only was that long over-due but the steam was leaking out anyway). The LH chart runs back to Nov. and what you see is that the longer-run downtrend is not only perfectly intact but that the recent rally ran right up against that downtrend and is failing. So much for bottom-calling and the end of surprises. Sucker's Rally indeed. Now the markets may run sideways here for a while but, again, compare it to last year when the de-coupling meme was still around and there was lots of bottom-calling as well. We especially enjoyed all the folks telling us that the worst of the credit market breakdown was over. In actual point of fact the markets are now starting to function after heroic efforts but credit is still widely unavailable.

Two other little details we'll call attention to. One is China's call for a new international standard currency and the other is something we've pointed out before - the impact of credit constriction and an economic downturn on oilfield investment and development. Even if, as we expect, economies perform poorly for several years and energy demand doesn't pick up very much demand will still exceed supply. Now that'll be an ugly situation for sure.

UPDATES:

In case you missed it the OECD and the World Bank came out with new economic forecasts that severely reduced the outlook for the rest of the year and anticipated a very poor and extended recovery. The OECD/WB scenarios now is as bad as the worst case for the stress test. In other news Moody's anticipates unprecedented credit card defaults and corporate bond defaults/BKs as well. Below are the URL's for several key announements and in the readings section you'll find several major additions excerpted as well. There are two in particular we think are mandatory self-interest readings. One is the OECD vs Worst Case graphic from CalculatedRisk and the other is Todd Harrison's update on the investment outlook, from which we quote:

"January thought: The entire spectrum of industries, from finance to media to retail to philanthropy to academia, will be forced to reinvent themselves and the leaders coming out of this crisis won't be the same as the leaders that entered it. Update: We use the forest-fire analogy because it's so very apt, scary and dangerous, yet necessary for a fertile rebirthing. A snapshot of once-venerable icons such as General Motors (GM) , General Electric (GE) , Citigroup (C) and AIG (AIG) supports the notion that market leadership, and leadership within individual sectors, will look drastically different once this process of price discovery passes."

Here are the NEW URLs:

Despite Interventions Global Outlook Deteriorates (World outlook update survey from RGE Monitor)

Roubini: Go Ahead, Keep Dreaming of That "V-Shaped" Recovery(vidclip on Tech Ticker with Dr. Doom laying it out)

Comparison: OECD and "More Adverse" Scenarios(CR graphic comparison of new OECD outlook with stress test worst case)

Stress Test, Quarterly Forecasts for Unemployment and GDP (earlier graphic comparisons)

Asian Data Shows Severity of Slump

Has Housing Industry Hit Bottom Yet?

Credit card charge-offs hit record high -Moody's 

10 Investment Themes for 2009, Revisited

This is enough material to call for a whole major new post, or re-threading them thru this one. But there was so much startling new news that confirms our basic arguments we wanted to put them in the context we already developed. The new excerpts are in a concluding section at the bottom of the readings. BUT...if you don't think this is worth really paying attention to we urge you to look at the 2010 OECD outlook and then think thru the implications for what Harrison is saying.

Continue reading "Re-Establishing the Baseline: Econ & Mkts Ain't Look'n That Good ! (UPDATES !!)" »

Posted by dblwyo at 11:26 PM | Permalink | Comments (0)

Another tumultuous week or more in the markets, the economy, the public policy arenas and the general public (do the words, "kill all the financiers, the devil will know his own" as a paraphrase of several historical quotes ring any bells ? People are very angry and justifiably so. We're going to come back to Technology while we review the markets, economic and business situations and use that as a set up for a follow-on post on the public policy and that anger. Which, however justified, is also very dangerous. The readings reflect the agenda of course but start off with a little history review by sampling and excerpting some previous posts from Jun08 to Feb09. Partly on the "told ya so" but mostly to hold ourselves accountable AND to see how past prognostications held up. It's called back-testing and, on the whole, we under-estimated the depth of the breakdown BUT called the trends, outlooks and structural weaknesses pretty well. In other words we didn't drink our own koolaid as much as we should have. But hopefully that history review strengthens our arguments here !?

Start with the Markets

We've got a lot of ground and want to minimize space so the graphics will be a little shrunken (click to enlarge). The UR sub-chart shows a 5Day intra-day chart and the impact of the Fed's $1T quantitative easing this week....which had disappeared by COB Friday ! The biggest policy move the Fed has undertaken in generations peters out in a trading day !! Now IOHO the markets are/were in a bear market sucker's rally and had reached the end of the upward in any case. The UL corner is a 3Mo daily chart and uses some more technical indicators to map this out. Notice that the Slow Stochastic at top (the sine wave indicator) calls these turning points very well. Super-imposed over the recent down and up cycle is a natural rythm indicator, the Fibbonacci (using naturally occurring patterns in number theory and nature but widely recognized by traders so self-reinforcing) that shows the Fed uptick failing around 800 and the bear rally faded and returning around the magic 775. The question then becomes if this doesn't break back above 800 on re-testing where away from there ?

Look at Economic Realities

A friend reminded us of another famous Warren quote: "in the short-run markets vote but in the long-run they weigh". In other words Mr. Market is more a giddy adolescent going with the popular opinions but in the long-run adult sobrieties return (particularly if the mandantory 12-step programs are working right) and judgments based on best interpretations of fundamentals rules. And by fundamentals, in these circumstances in particular, we mean economic fundamentals at a cyclic, structural and policy-driven timeframe. One such deep reality is Employment, the engine that drives Consumption which in turn drives the Economy. In the RH chart the depth and duration of the Employment downturn is compared across the post-War cycles. Obviously we're exploring dangerous new ground, and extrapolating by curve-matching, are very earlier in what promises to be a steep and long downturn. The LH charts look at long-term trends back to 1980 and a key measure is net new job creation in the aggregate; that is jobs created > 150K/month. This was a weak and jobless recovery because organic growth never took off but as you can see net new jobs is as abysmal as it's been in nearly 30 years !! (NB: this means the Administration is right btw - unless we get thru this downturn AND get back on a sounder strategic foundation the economy will just continue to weaken). We won't dive into but will point you to this chart borrowed from CalculatedRisk for the Strategic Housing Outlook. Don't expect that to repair anytime soon either.

Back to Markets: LT Refresh and Review

The joint answer on Markets, both from a technicals and fundamentals basis, is that seeing a 4-handle on the market should NOT come as a surprise. A point we re-made as recently as March 1rst but have been raising for some time (cf. the history review). We consider that highly likely no matter what happens but containing and repairing the damage and then returning to growth depends on three critical factors: 1) repairing the credit markets and re-factoring the Finance Industry, 2) re-stimulating the Economy and 3) re-factoring the the foundations of the Economy onto new long-term sources of growth.(Disruption vs Innovation: Change, Response, Resilience) If you look back at the first market chart and consider the bottom half what you see is a bear-market process that worked out from Oct07 to Sep08 (not shown) that then imploded as the credit markets broke down. Then a new equilibrium was reached (the "Tradeable Box") that was broken earlier this month when the real economic realities sank in. We're not convinced that it's sunk in very deeply however...hence the 4-handle warning.

Naked Swimgers: Business Principles vs. Performance

We left the Freudian typo in the header because our fingers led us from the intended "naked-swimmers" to "naked-swingers"; as in people who substitute immediate gratification for long-term value-creation based on principle. In the final two readings section we have a few excerpts on basic principles of business management and leadership that have been left in the closet, so-to-speak, for years. Now we're going to find out who the good companies are who've been following them or those who're good enough to self-repair. The two key blog posts are from our e-friends Seth Godin and Bob Sutton. Seth sketches the critical concept of 1) focus on value-creation and 2) the execution plan to make it happen while Bob adds 3) make sure the company is the kind of place people want to work for where people are treated with respect and held accountable for their performance in a fair and just environment. That's how you get high-performance in bad times ! (Aholes, Shirkers and Performance: a Draft People Principles Policy)The sad and really....really dangerous parts of this are that many executives were caught flat-footed and ill-prepared and are now shell-shocked and slow to respond. They're scrambling to catch up to a dangerous situation, still don't get it and the "enemies" decision-curve is faster and tighter than theirs. (Good Boats, Good Captains: Applying the Investment Mantra for Profit, WMT as Performance Exemplar: Re-Think, Re-Factor, Re-Energize)

The two most critically important readings are the excerpts from Paul Kasriel of Northern Trust in recent Econtrarian essays. The first tells us what really went on with economic growth and public policy in 1929-39 while the latter debunks (destroys) the mythologies of savings, thrift and long-term economic performance. Your take-aways should be 1) stimulative fiscal policy is a survival necessity but 2) if we can lay the foundations of long-term growth properly then, as Consumers shift from Spenders (Swingers) to Savers we'll fund a healthy growth path like we haven't seen since the 1950s !!!

Continue reading "History Review to Look Ahead: Markets, Economy & Business Trifecta" »

Posted by dblwyo at 08:10 AM | Permalink | Comments (0)

We're going to kick-start this week's postings by picking up on the markets, which turned in another dismal performance. We had a couple of interesting conversations this week. One friend said that he was a fundamental investor but wanted to know when the market would bottom as he was getting killed in his Healthcare stocks which looked technically low. We think he needs to decide which, or figure out how to integrate both ala our and Jubak's preferred approach. Another friend quoted Warren to us: "in the short-run the market is a voting mechanism and in the long-run it is a weighing mechanism". In other words, as we've long argued eventually Mr. Market goes with the economic fundamentals but in the short-run he indulges a perverse sense of humor by running a popularity contest. When the fundamentals are unfortunately all too clear (as we'll re-visit when we take up the economic situation) and everybody's arguing stocks are cheap be careful of voting with the popular group ! By and large we think our assessments in our last market-related post (Market Meditations: the Busted Box and Tradeable Opporuinities ?) were dead on; in fact the s.t. "rally" that our favorite traders were expecting didn't appear. The box continues to be busted. But just for fun take a look at this chart where we've pushed back the long-run to 1980 from 1994. The good news is that all the downside resistance ain't busted yet. The bad that the region of resistance still lies in 600-400 range, consistent as you may recall with both economic fundamentals and excessive earnings. Take a look at the readings which conclude with Bernstein's FT oped and John Mauldin's commentary therein. As John points out current trailing 12 month PEs are pushing nosebleed territory; and Bernstein points out that trends are driven by events not the other way around. In other words you HAVE to judge fundamentals - Buy and Hope won't cut it.

Short-term Market Performance

 Looking at the chart the SP500 has been in a clear downtrend channel since the beginning of the year (blue lines) but since the beginning of February it tipped over to a steeper downtrend which is headed for the resistance of the bigger trend. If you look at the Slow Stochastic indicator it looked like it was definitely over-sold and headed up until Friday's GDP revisions came out; OUCH !. A -6.5% annual rate for the quarterly numbers. So much for the market discounting future economic performance. It apparently hadn't even correctly discounted past performance but had to wait to be surprised. So much for prescience. Now the SlowSto looks to be tipping back over. Nonetheless we may get a short-term rally from here after some further drops. My trading friends envision going as far as 825 which looks wildly optimistic to us. On the bottom sub-chart we've highlighted two, actually three, very clear trading signals, each of which could have made you some significant money if you'd be willing to "invest" (trend trade) that way. If you're not then don't fantasize that stocks are cheap - in fact what was a largely financial disruption is metastasizing into a general economic earning shambles. Stay on the side and in cash until the economic indicators clearly indicate that the economy is beginning to recover. Or be prepared to endure some pain. We still think that once-in-a-lifetime buying opportunities will present themselves but NOT YET. And when they do you need to have a pool of pre-screened, high-quality companies that are investment candidates. We're facing a low and slow, sub-part economy for at least the next five years where growth is likely to be below potential and the Fed has reset the speed limit at 2.5% instead of 3+%.

Opportunities ? Maybe

But let's talk about some of the opportunities that have presented themselves. If you'd gone in on inverse ETFs for the SP500 and just stayed there since Jan. you'd be up about 15% or better. However as this next chart combination shows if you'd followed along with fairly clear trading signals and gone into leveraged inverse ETFs you could have done much better. SDS (the 2X Ultra-short on the SPX/SPY) is up about 30% YtD. In fact it's up about 30% twice - again clearly signaled. In other words you stood to make 60% on whatever funds you were willing to risk on trend trading. Take that the next step - we're experiencing the implosion of the Finance Industry after three decades of structural shift, climaxed in this decade with huge but poor quality profits. Now that's all reversing. Speaking of which the ETF for the Finance Industry (XLF) has really gotten hurt. Well as a result the inverse leveraged ETF for the industry (SKF) has gone up 60% since Jan. Again twice. Need we repeat ourselves ? If you'd gone in just once and after the trend was clearly established and protected yourself with a stop-loss order your chances of making at least 15% (a darn good gain for the year at any time in the last three decades in anybody's book) were pretty good IOHO. And if you'd really been on top of it you could have done it twice. And if you wanted to really have a little "fun" there's been a huge panic-stricken flight to Gold. Which you could have played with the GLD ETF or really gone for broke if you'd been looking for aberrational behavior by playing Credit Suisse's odd little gold instrument (which we admittedly don't understand very well but who's counting :) ), which was up at it's peak over 500%. Now that's an opportunity that's disappearing IOHO but if you look for the next aberration, AND realize when it's time to get out of sick situations, again there was a lot of money to be made.

Take at least a careful skim of the readings, please (and as usual the highlighted blue titles are clickable URL's which'll take you to the original article !). But our bottomlines are that a) BuyNHold is dead for now and BuyNHope will get you killed, b) stay away from the market unless you're either a truly value-oriented investor and are watching the key external events (bank rescue plans, etc.) and the economic data like a hawk or c) stay on the sidelines until the dust settle and the blood dries !!!

Market Snapshot Update (2Mar09): We Rest Our Case

Ain't it grand when when a plan comes together ? Or more accurately when you get lucky. As Napoleon once said when selecting generals to promote to Marshall of France, "but is he lucky ?!" In this case while we stand by our general economic and market analysis today's outcome makes us look unusually prescient indeed ! That we ascribe entirely to luck, however. That said take a close and careful look at this market snapshot of today's results. The Dow close below 7,000 at 6763 for a 4.2% drop, the SP500 was down about 4.5% and ditto for the key sector funds and inverse ETFs we highlighted last night. Sorry for the eye test but SPY was down 4.5% and SDS was up 9.3%, XLF was down 7.1% and SKF up12.4% while GOE was up almost 22% today; and close to 50% in two days. The inverse ETFs had proportionate performances. We may be smoking something (actually being a pipe smoker we are but it's strictly legal something) but the technical indicators were providing tradable signals. They're also telling us this very short-term fun may be over, barring more surprises. Nonetheless in 1-2 days you could have made your nut for the year if any of us had been watching, positioned and prepared. Any lessons anyone would care to draw ?

Continue reading "Round & Round She Goes...Paying the Market Piper (UPDATE)" »

Posted by dblwyo at 08:43 PM | Permalink | Comments (0)

With Friday and the last several weeks of markets behavior it seemed like time to take deeper gander into their pathologies and performances. Our last market-focused dive (Markets Manias: Thinking About the Year Ahead) argued that the main US markets were "trapped" in a rectangle. Now we have to raise the question of whether or not that box is busted ? Irrevocably ? And what it might mean. To those ends we're going to focus strictly on markets charts, sans clippings, with one exception. That exception is John Mauldin's latest newsletter (While Rome Burns), half of which is devoted to discussing the sub-prime-like crisis in Eastern Europe that's metastasizing and threatening a rapidly devolving European economy. The other half of which is focused on long-term valuations and a very strong recommendation that we're in for a long-term valuation compression and BuyNHold is dead (Economy vs Earnings Cage Match: Outlook, Business Performance & Realities ???). We're going to start by de-constructing the SP500 and then, after the break, walking thru foreign markets, interest and exchange rates and oil/commodities. All that below the break. On the BnH is DEAD theme we're also going to point out several tradable opportunities that are probably done with for now, and semi-escaped us at the time, but nonetheless are worth thinking about.

SP500 Punctured Disequilibria

 First, let's start with a simple thesis by looking at the SP500 from Jan08 to now. If you'll recall the expectations were for a shallow V-shaped recovery that hadn't yet really appeared, despite all the evidence and arguments to the contrary, for a recession that hadn't yet appeared, and from which a de-coupled world economy would save us. It's not just that all those theses (ryhmes with ?) turned out to be pure do-do but they couldn't have been more wrong. What you see here is what now appears like a gradual downtrend in the markets which abrumptly fell off a cliff in Sep. as Lehman's demise brought home the fragilies of the financial system (which we of course have been arguing for many months :) ). After the apparant equilibrium was de-stabilized and we gyrated thru several wild weeks a new one made it's appearance in theory. We we earlier referred to as the box.

The Busted Box

 In this chart you get the SP500 from Oct08 to now with the two trading/tradeable boxes outlined in blue and green. The first box we built setting aside the C and BAC temporary instabilities to look at the more core behaviors (though admittedly either could have broken the system again - a sign of some returning confidence and self-repair in the credit markets [=> TARP worked in other words] that side-stepped that risk). At the beginning of the New Year nascent optimism rolled over into a mini-downturn that was, btw, ver.....ry tradable if you were prepared. What we were beginning to see was the emergence of a new box with a much lower ceiling, and for which the daytraders were happy, though not the trend-traders. Once the jury came in on Geithner's Plan (which is actually pretty good but in not promising to save the banks at any price and instead insisting on discipline was correctly interpreted as the imposition of adult discipline on juvenile deliquents; i.e. the props, such as they were, were kicked out from under the markets in general and the Finance sectors specifically. At the bottom of the chart is a technical indicator you could have used called a "Slow Stochastic" (click thru for a definition) that is both a momentum and over-bought/sold indicator. There were three inverse and one pro-market opportunities, two of which we consider legitimate. The first red line was during the near-terminal disquilibrium while the green uptick more reflects the post-Citi recovery. BUT the last two were clear trading opportunities and if you'd been ready in Inverse SPX ETFs (SDS for example) you could have made 30% returns, TWICE !. Half of either would beat a decent normal year in the markets !! Think about it !!

Where Away: Strategic Outlook for the Markets

Now that the box looks to be broken (shatterred comes to mind) the next serious question is what happens now. The best outcome is if the pre-existing box defines the new floor (take the vertical distance of the old box and use it to infer the floor of the new). The other alternative, which we went into in the two posts linked in above is that earnings declines and PE compressions will put us in the 400-600 range on the S&P ! A simple calculation - Earnings = $45. PE = 10. Voila' ! SPX = 450. The more detailed discussions go into economically driven look aheads using the Graham-Dodd formula as well as historical PE and market charts and arrive at a similar place. There's another argument that can be made as well using a Technical Indicator based on the Fibonacci series. Here we look at the SPX from 92 to now and use a charting tool to create the Fib lines. 92 being selected because it was both the last nadir AND before the Tech Bubble took us all to perdition. Normally the lines indicate areas of either resistence or support. We were rather hoping that the 800-850 region would be an area of support but, alas and alack, that's been busted big time. Which doesn't leave much technical support before we end up in that 400-600 region we were led to for other reasons. Given we're early days in a major recession AND the impacts of what must be characterized as an imploding world economy there's no visible fundamental reason to suppose we won't explore those regions !

We guess though we can admit that if the trend becomes clear and predictable then there's a giant inverse trend-investing opportunity (that's sarcasm in case you were wondering).

Continue reading "Market Meditations: the Busted Box and Tradeable Opporuinities ?" »

Posted by dblwyo at 04:54 PM | Permalink | Comments (0)

The alternative title for this post might have been "Still Inside the Box" since recent market action could be taken, as we are tending to do, as being still trapped into a sideways trading range. In fact one could make a pretty good case that our last two market-related posts (The 1,000 Yard Stare: Beyond Terminal PTSD in the Markets, Time for Triage: What Bear Rally ?) - despite some of the most tumultuous markets in six decades - have held up amazingly well. Just for the record you might want to skim back to check up on us. We think we're "in the box" because the markets are wrestling with a) the continuing credit crisis and it's implications, b) the earnings outlook and c) valuations, i.e. PE ratios. While the V-shaped recovery is has gone the way of the dodo as our last two econ posts discuss, there's still a more sanguine outlook than there should be IOHO. In that case the questions become where away - which in turn means what are the earnings outlooks based on economic realities, what are valuations appropriate to this brave new world and now what do we do ? We say inside the box because when you look at the Sept collapse, the Lehman bankruptcy, we see the sudden grasping of the truth of how bad it is. The mid-Nov collapse when Citi almost bought the big one was apparantly worse but when you change the scale from days to weeks (and note that the timelines changed as well please - read carefully) you can see the LEH cliff was much bigger and never recovered from while the Citi bump was just that. Which also tells us that the markets have a lot of confidence in systemic risks being better under control. Which is also reflected, BtW, in the credit markets. A detailed discussion for another time and place however.

On that latter question two observations/suggestions. After the break you'll find a collection of reading excerpts wrestling with those same questions that we've carefully culled over the last several weeks. We recommend diligent attention to them all. And we draw your attention to the accompanying chart on investment returns from the AAII. Back around '01 we suggested that buy-n-hold wasn't going to be viable and instead careful strategic picking plus cycle-based trading was going to be the new "black". We think the case is now well established.

Speaking of Earnings

Analysts have frantically been pulling down their earnings estimates for '08 and '09 but we're still not sure they've entirely got it right. The composite graphic at right puts two charts from John Mauldin's newsletter together to show how this has been working plus a table built from S&P's running on-line earnings updates. Note Mauldin is drawing from S&P but getting the reported (after-tax) estimates while the other table is operating earnings, so they aren't directly compareable. Directionally however it's very...very revealing. Based on our assessments the earnings estimates have further to drop. The other interesting thing to note is what's the implicit PE Valuation ? At $42/share and Friday's close of 950 that's a PE of 22+. Now tell me the market is still over-valued !!!

Speaking of Valuations

We've spent quite a bit of time before on relating earnings to the economy and that outlook to appropriate PE measures so we won't repeat all the arguments and machinery. Feel encouraged to skim the archives for more details and explanations. We do want to repeat a key chart from those discussions and link them to the last couple of posts on the domestic and worldwide economic outlook however. The composite graphic at right provides two tables built around the Grahm-Dodd valuation formaula so you can zoom in as you like while the chart translates it into earnings growth. Pick your area and check the details in the tables. For example at a 5% interest rate and a 22+ PE we'd need to see earnings growing at 10%. That's not next year btw, that's sustainably for at least the next five and preferably 10. Now what in either of the last two posts (pointing at Roubini, the Fed or the IMF) suggests economic growth consistent with 10% earnings growth ? In the long-run earnings and economies have to and do grow together -except for this last abberational period when profits were historically high because of under-investment and very weak hiring.

One More Nail: Shiller's LT PE Estimates

Prof. Robert Shiller of Yale (he of "Irrational Exuberance" and other prescient punditry fame) has put together some long-run estimates of financial data since the 1870s, including PE ratios. And he makes his results, papers and data available on-line in case you want to check up on either of us. Which we've taken the libery of re-producing here and adding two PE averages to - one with and the other without the Tech Bubble influences. With the average is 16.3 and without it's 14.9, so let's say 15 all around. Rather a far cry from 22, wouldn't you say ? That would suggest quite a bit of correction to go (btw - Shiller gets his estimates from looking at trailing 10 year data). His chart would also seem to indicate that long-term secular bear markets are accompanied by drops in PE far below the mean as well.

So put all the pieces together. At a 15 PE ratio and earnings of $42 we get an appropriate SP500 target of around 650. But is a 15 PE still optimistic according to the G-D analysis ? IF interest rates stay around 5.5% and profit growth is in the range consistent with the economic outlook of 2-4% then a PE in the 10-12 range would be more appropriate. Sadly and scarily that would put the appropriate SP500 reading in the 400-500 range. Which is not at all out of the question as we've shown in the earlier posts taking long-term looks at the technicals.

Continue reading "Markets Manias: Thinking About the Year Ahead" »

Posted by dblwyo at 07:51 AM | Permalink | Comments (0)

We'd say it was time for reality to be even more fully reflected in the markets but there seems to be some major difficulty in finding it recently. IOHO, while stocks are indeed at historic low prices as are valuations (PE's), the full extent of the downturn and the duration of credit market un-raveling has yet  to be fully reflected in stock prices. Bottomline if indeed you're cash-heavy and have a Buffett-like horizon this might be a time to start getting back into the market. On the other hand if you got caught flat-footed we hope you seized the opportunities of these last several aborted rallies to get into cash and re-position yourself. The time to start doing that of course was much earlier in the year but the number of folks who took that advice is vanishingly small. The number who find themselves in heart-rending positions as the result of trying to ride out a traditional buy-n-hold strategy seems to be the vast majority. It's time for Triage. But by and large we stand by our last posts on the market situation and strategic outlook (The 1,000 Yard Stare: Beyond Terminal PTSD in the Markets,Whistling Past the Graveyard: Market Assessment and Outlook).

Current Situation:  Trapped in the Box

At the right is a chart from the weekend showing what we think is the trading range we're in while we have the bear rally vs economic realities, whatever they might be, debates. Sorry for the smaller size but we wanted to add one from yesterday and needed some room. In any case notice that the bottom of the box got busted pretty bad before Thanksgiving (black irony indeed) saw us crawl back into the bottom area. The question is are we still likely to get a "real" bear rally ? Our answer is we don't think so though anything's possible. But as the economy becomes percievably weaker and weaker so nobody can miss it or ignore the liklihood goes down.

Current Situation: Down the Downchannel

Instead we'd like to point out that we seem to have established a pretty stepp downtrend channel where we're getting mini-bear rallies that fade away at lower highs and lower lows. Like we said we may still get a bear rally but at best it'll be trapped in the box, the bottom portion. Seeing 1000 on the SP500 seems problematic at best to us. More likely we'll continue to trash around with this descending pattern until we get a real breakdown.

Triage and LT Perspectives

If you take nothing else away from this post watch this interview with Jeremy Grantham of GMO. It is apparantly the only one he's ever given, at least so far. He's a well-known value investor who's been negative for years because of over-leveraged markets built on poor foundations. Now he's finding that for the first time there are "incredibly" cheap opportunities. He also admits that the chances of the markets going down another 20-30% are still significant. As you can tell from the accompany chart that's a view we agree with. But his other major point is also correct - we're being presented or are going to be presented with once in a lifetime buying opportunities. Just not yet.

So skim the readings and bear that in mind and start triaging if you haven't already done so. What needs to be sedated and abanoned because in the brave new world there's no hope of recovery, what needs to be done to save those savable and worth saving.What can be left on it's own and ridden thru the crisis. And most importantly what should you start looking at. The answer to that is good companies who are well positioned to gain strategic advantages in the long-run. Finding them will be the challenge. 

Continue reading "Time for Triage: What Bear Rally ?" »

Posted by dblwyo at 06:55 AM | Permalink | Comments (0)

The graphic is from a WW2 combat artist and was painted in the immediate, we mean immediate, aftermath of a major German shelling of the beachhead when the survivors crawled up out of their holes and were staring dazedly at the few scrawny trees that survived in the devastated landscape. You can't quite look into their eyes but for many people that's not necessary - they just need to look into the mirror. After a few e-mail and other exchanges my take would be that there are a lot of Market PTSD (that's post-traumatic stress disorder, shell-shock, battle-fatigue, etc.) sufferers out there who are still wondering what hit them. And where about to pull the plug on their 401Ks last Mon. when they got the biggest surge in DJ history....and almost panicked several times during the week. Yet for the week the markets had one of their best weeks ever. The question is, now what ?

Intermediate Market Appreciation

 Well take a look at the accompanying composite chart for an intermediate-term appreciation. Appreciation is a pun since we're using it in the military intelligence sense of assessment as well as the normal psychological one - in this case ironically. The top shows a 1YR daily and shows how a continued downtrend metastasized into a completely unexpected collapse. A collapse compressed into basically a week when what normally takes months and years happened in a few days. Anybody who's feeling a little PTSD'd comes by it fairly and honestly.

The second sub-chart looks at the last six months so you can see some more of the detail. First off notice how abrupt the collapse was. But not, and more importantly and hopefully, notice that it appears to be arrested. If the credit markets continue to unfreeze so that they begin operating normally then we're likely to get some sort of bear market rally here. Which'll pick up some momentum if the indices breaks back above the blue downtrend line. Whether that happens depends on no more black swans and the dawning grasp of the painful economic futures not overwhelming the "theoretical" under-valued present. Yeah, right !

Long-term Appreciation

If we get a rally it's strength and duration will be driven by fundamentals - that is what are the expectations for the worsening economic and earning situations and how well is that yet factored into the marekts ? We suspect that the grasp is enormously improved but still hasn't sunk in as yet. In fact for a downturn that's been clearly visible for months and has recently accelerated the deeply surprising, one might almost say appalling, thing is the apparant lack of grasp of most business managements about the situation. And as a result the surreal earnings outlooks we're still seeing. In this longer-term chart the SP500 is shown since 1980. The recent downturn has busted the long-term trend pretty badly (the diagonal blue line) so the question becomes where does it stop ? Well the horizontal blue lines show two areas of resistance - the '02 lows and the pre-'95 high before we got so much bubblicious over-optimism. It certainly wouldn't be surprising to retest those lows in the 800 region nor eve, given the likely severities of the economic downturn, those of the 500 region. Reinforcing that is the natural speed limits shown in the green (the Fibonacci limits). If we get a bear rally with some legs it might run thru the rest of the year but early in '09 the depth of the downturn will be clearer and then we should tip back over and more than likely at least head for the area of resistance around 650 +/- 50.

Depending on what you want to do in terms of risk acceptance and work you can play the rally up and down or look for re-positioning and re-structuring. If you're a long-term investor who doesn't want to spend several hours a week working on this - not necessarily a wise choice IOHO in a market described as all too likely to rip your face off - use the rally to head for cash, s.t. bond funds and dividend paying stocks, preferably preferred shares which have amazing yields right now.

But here's something to keep in mind - some of the best companies in the world are at multi-generational low prices. And if our prognostications are anywhere near accurate, are likely to go quite a bit lower. As Warren Buffett has pointed out you're not going to see bargains like these again in your lifetimes. Start preparing to take advantage. That and other very good advice is presented in the readings excerpts. We strongly recommend - if you have any interest whatsoever in your own retirement situation - clicking on thru and reading most of these excerpts in full. Especially Jim Jubak's ! 

Continue reading "The 1,000 Yard Stare: Beyond Terminal PTSD in the Markets" »

Posted by dblwyo at 09:34 AM | Permalink | Comments (0)

Whew - 10% + bounce in the SP500 ! I'll take it - the best thing on offer and it began on Friday. But what just happened ? At least three things, which lead to some key questions about what's next. But let's start with what just happened. As you can see from the chart not only did the markets self-arrest but we got a major bounce (the largest since the GD ?) in the equity markets.

1) Coordinated Global Intervention: After the feckless recklessness and ignorant ideology of the US House of Representatives triggered a loss of confidence and a genuine market crash on a worldwide basis coordinated worldwide intervention by all the major developed countries has restored some confidence.

2) Action Under Pressure: That intervention is not some dry academic affair, obviously. It was the actions under enormous pressures by key groups of leaders. Somewhere in Churchill's writings are his biographical sketches of Sir John Jellicoe, Grand Admiral of the British Fleet in WW1. Jellicoe was widely criticized after Jutland for not winning a decisive victory which misses a key point. As Winston pointed out he was the only man on either side who could have lost the war in an afternoon, literally. And he lived under that incredible pressure of having to be prepared to act decisively and correctly for years until he managed to win a strategic victory by not losing. Adm. James Stockdale in his book, "Reflections of a Philosophical Fighter Pilot" talks about his experiences of seven years in a prison camp in solitary confinement, torture and horrible conditions as a laboratory of human performance. Several of his writings focus on the ability of key players, e.g. the American commanders at Midway, to have functioned well and at the top of their game in the afternoon that really mattered. We've just seen, and will hopefully continue to see, that kind of improvisation in crisis when no clear answers are provided yet decisive action is required. The ability to function under that kind of remorseless pressure is the product of years of preparation and be very glad the people in the hot seats were prepared. The consequences bear thinking about.

3) Wheels on the Wagon: as part of that intervention, and thru the leadership of the Prime Minister of Great Britain, the Rescue Package has morphed from using the acquisition of bad assets to get the credit markets unfrozen to direct re-capitalization of the banks, the guarantee of accounts and direct lending. While these actions are well within the authorities of the Bill they represent fundamental changes in emphasis. All the pretty packaging wrapped around the Bill to get it past the idiots and self-servers didn't affect the core content as much as the last few days. The vidclip will take you to the CSpan video of Kashkari's discussion and outlook.

4) Next Steps: the key test will be whether or not the banks start lending to one other again and thereby free up the credit markets from their lockdown. One wants to carefully monitor the LIBOR and TED spreads. But it looks like it's going to work.

• We're likely to get a serious bounce which may even turn into a bear rally. But it will be a bear rally since the fundamental weaknesses of the economy are still waiting to greet us. If you look back to the last recession the hunt for the bottom was a process that went on for almost three years with rallies interspersed thruout.
• You very much need to consider how to best re-structure your portfolio - which the readings in the last post started to lay out btw. (Whistling Past the Graveyard: Market Assessment and Outlook)
  

 Strategic Outlook

On a strategic policy level we're still faced with a more severe economic downturn than anything we've seen since the '80s or the mid-'70s. The accompanying chart lays out some alternative scenarios which we'll discuss more fully in a follow-up post. Two major economic policy initiatives are required at minimum.

1. Fiscal Stimulus - to mitigate the unavoidable downturn serious stimulus is required. During this last "recovery" consumption was sustained largely thru borrowing against home equity - the Housing ATM - and it was pumping $700-800B/year into the economy at the peak. The stimulus needs to be of that order of magnitude.

2. Housing - the biggest drag on the beginnings of a recovery is still. What we need is for all the bad mortgages to be re-structured. Which means that both banks and homeowners need to take some serious haircuts, write it down and move on. Fortunately that seems to be more widely recognized.

We are and will get thru this not an economic collapse has been averted but we want to minimize the damage as much as possible. Interestingly this means that political considerations are now major economic and investment considerations. For the foreseeable future we're going to continue to be in an event-driven, macro environment. At the same time micro-performance on the individual firm level will have a level of criticality we haven't seen in decades. In addition to the rest of the readings which'll read you into the sequence of things as we've summarized it pay really close attention to Nouriel Roubini's outlook: Our Choice: Recession or Depression !!!

We truly are finding out who's been swimming naked. And we're going to find out who the good leaders are. Your lesson here is that not paying attention to the economy and the markets is truly dangerous.

Continue reading "WHEW ! Glad That's Over: Global Intervention and Market Recovery" »

Posted by dblwyo at 05:26 AM | Permalink | Comments (0)

Well what an astonishing and astounding week - the single worst one, as a whole, we've had in post-war America and it seems since the Great Depression. Now when we use the words contagion and metastasis perhaps we'll all have a reference point, and hopefully not too many more. To be honest seeing a decade's worth of market change compressed into 5-10 days exceeded any of our prognostications. Even though we've been using the words for months, if not years, seeing and experiencing it in action is a lot different than just intellectualizing about systemic risk and market collapse. Our shock, awe and puzzlement is rather widely shared - which is scary and comforting. Comforting in that it's company, scary in that we'd like somebody to know what's going on.

And we see some glimmers of that beginning to emerge - that the light is not just another freight train with the throttle rammed wide open. Which must sound more than a little odd given our normal "bearish" stance and outlook. Let me explain. And discount all you like - part of our outlook is more than likely built on straw-grasping but we hope more is built on solider grounds.

Market Perspectives

Let's start with a longer term market perspective and reach back to 1994, which given the depth of the collapse we need to do. Rather like a climber sliding down an icy ravine who needs to self-arrest before slipping over the edge of the cliff onto the rockfield below the markets needed to halt their freefall. That's very much not an invented metaphor btw - been there, did that, here to tell it. As you can see looking at the charts the level of drop has taken us back to the nadir of '02, or just about. And the VIX index, which measures volatility = fear, uncertainty, doubt and panic, reached un-precedented levels. HOWEVER, if you go back to '04 when we began all this and apply some natural speed limits, or recurring patterns (technically called Fibonacci limits) we arrested just short of the cliff edge. Whew. Which is not to say that there's more possibly in store, just that we're not going to go sailing off the edge to our (figurative) deaths but have an opportunity to pick our way to the bottom carefully !

Market Details

 Let's tunnel down a bit and de-construct the recent market behavior to see what we can see. The accompanying chart shows the SP500 for three time periods:2002-08, three months and the last five days with each more detailed chart a blowup of the higher-level one. Again the market crash was unprecedented and destroyed almost all the last six years of "progress." Quotes because it was ill-grounded as we're learning. Breaking it down the ~20% drop this month was actually concentrated in the last few days. In fact looking at the three month chart you can see where those of us anticipating a bounce had some grounds. On the five day chart the fractalism continues with the bulk of the crash happening just this week. For those of you withe the courage of our "convictions" who were short/inverted this was a great week. For those of us in cash - o.k., not bad. For those of you who were blindly following standard practices we're sorry to see that. Here's the ray of hope in the carnage. Late Friday afternoon which started by looking like another slide toward the cliff the markets self-arrested and almost broke even before last minute, and sensibly risk-averse profit-taking. The keys to whether or not that turns into a bear market bounce lie in the credit markets. And if we get such a bounce make sure you re-construct your portfolios, please ! There's still a lot more Main St. downturn to go once we get the crisis on Wall St. contained. Which means btw that this weekend's G-7 meetings are the keys to all our collective futures.

Credit Crisis

It's always easier to follow and understand the equity markets but the heart of this crisis is in the credit markets, which froze, locked up and spread to the equity markets. This chart looks at 3Mo Treasuries for four years and YtD (divide by 10 to get interest rates). Normally this is a stable market that follows along with the Fed rates. But you can see the BSC disruption in March and the huge flight to safety in the last few weeks as investors rushed out of all other investments and into the safest things they knew. And in the process almost drove interest rates to 0% ! The YtD chart shows that these markets are still severely discombobulated but nowhere near where they were when Sec. Paulson hit the panic button. But it ain't over 'til it's over - that is until these markets return to something resembling normalcy. Which they haven't.

Credit Discombobulation

Which you can see in this next chart which shows the TED spread, or difference between 3Mo rates and the LIBOR - the rates fixed in London for banks to lend to each other. Normally that spread is as near zero as possible but once the crisis started last summer it began widening rapidly. Yet the piecemeal approach being followed to address the crisis was actually working. While the spread was still swinging wildly it the general trend was downward. Until suddenly it wasn't ! In fact it literally metastasized nearly instantaneously. If Paulson hadn't spoken up about a rescue package this would be much..much worse. Be glad our understandings of markets and policies is vastly improved over the wrong-headed policies that brought us the Great Depression. Now you're going to hear all the same people who were whining about the moral hazard problem now complaining that the proximate trigger was allowing LEH to collapse. What we think happened is that when the House Rips put ideology and partisan advantage over the good of the country that the markets suddenly realize the fragility of the ecology and the depths of the problem. Perhaps a necessary wakeup call but surely there were and are better ways to more gradually bleed off the poisons than sudden amputation.

Again, we repeat, developing a coordinated set of policies will dictate where we go from here. This weekend could be one of the most important in your life.

After the break you'll find our usual collection of readings that back all this up but please read Jim Jubak's column on re-structuring your portfolio:  Everything's changed now -- for the worse.

Continue reading "Whistling Past the Graveyard: Market Assessment and Outlook" »

Posted by dblwyo at 12:37 PM | Permalink | Comments (0)

In case you haven't noticed the markets are giving new meaning to the word volatile - as in wild, wacky and woolly indeed. We haven't posted on the markets though because our analysis in several prior posts has held up reasonably well; and truth be told because we've been too distracted. (Managing the Lizard Brain: Beyond Crisis and Kabukit to Realities,The People's Choices: Rescue vs Revenge)In fact as a not-so-small confession, the last several days down moves compress several months into a few days and were weigh/way beyond our expectations. As a result of which while we were looking for a short-term bounce the markets were in the process of grasping the same economic and fundamental realities and taking them to heart we've been nattering on about for months. The long- and short of it is, literally, we were in cash when we should have been riding the crash down.

After the break you'll find two sets of readings. One on the market per se and the other on the extraordinary measures being taken by the Fed and the world's central banks to re-liquefy the credit markets and get the wheels turning. In the long-run we still stand by our overall analysis. In the short-run, despite the amazing downdrafts of the last three days, we're still looking for a bounce. Which however long it might be we still view as an opportunity to beat on the downside or get out of any positions you've still got. And please note - the important thing here is the credit markets which are still deep in the doodoo indeed. But since everybody looks at and can follow the markets that's where we'll concentrate.

Equity Markets Breakdowns

 Let's start with three complementary views of the same stock chart so we can get an idea of just how bad it got and what the implications might be. The first sub-chart shows downtrend lines drawn to filter the excesses of some of the wild swings out. The second shows what happens when they're included. In the latter case the markets were like a high-power engine so over-revved it was shaking itself to pieces. Fortunately various policy actions managed to reduce the fuel flow enough to keep that from happening. Which leads to the third sub-chart with some filtering but showing the bottom resistance still being almost broached last week (these charts are all thru  Oct 3rd  btw). The question then becomes where do we go from here ? Which dynamic is in control ? That question got answered this week and, unlike all the prior bear rallies we railed against, the economic realities combined with the credit implosion seem to have completely changed market sentiment. Now everybody's running in fear. As they should be - this'll get worse long before it gets better.

Market Outlook

To try and answer those questions we take a look at a 1 year and 10 year chart combination. In the first chart which looks at the SP500 since Oct07 you can see the downtrend metastasizing into a crash. Which if we'd posted this as intended on Sa. would have made us look very prescient on Mo/Tu and today so far. Do good (bad) intentions count ? To some extent perhaps because the long-turn trends downward are more than intact. What we'd hope for is less panic, a more orderly process and not having six months of change compressed into three days. Then on the other hand we've just seen a decade's worth of Financial Industry re-structuring compressed into three weeks so why not ? The bottom 10Yr chart puts this in some perspective. Looking back to 1998 we set up something called Fibonacci lines which show the natural, internal limits that markets tend to follow. The line around 1055 should have been major resistance but was blown right thru. The next stop down would be to give up the last five years and retreat to around 850. But there is an area of resistance in the 950-1000 region. Which in fact seems to be holding, however weakly. If we get a rally off this - yeah, right ! - it'll likely be weak, short and deceptive. It will be however your last clear alternative for cleaning up your investments and re-positioning yourself prior to the return of the Housing and Business Cycle problems. It's also possible that we'll blow on thru it and then we'll be having a different discussion indeed. One where then we'd be back to trimming off the excesses left over from the late '90s. Which, note for the record and from much earlier posts, we never did do. The rally in '03 bottomed before we drained those poisons off; and as we now know there were a lot of poisons indeed that needed draining. Which we're now being forced to deal with willy-nilly, like it or not !

UPDATE: Very interesting BNN interview that's a welcome dosage of reality, calmness and informed assessment vs. the typical CNBC yadda yadda. Recommended - 5 min !

Market Morning : October 8, 2008 : Market Lookahead [10-08-08 9:15 AM] BNN sets you up for your trading day with Chyanne Fickes, VP investments, Stone Funds.

Continue reading "Coming Down the Mountain (Update): the Wild and Wacky Markets" »

Posted by dblwyo at 12:08 PM | Permalink | Comments (0)

Well sorry we skipped a day but things got a little distracting. Feeling sorry for myself running without more than three hours/night monitoring Armageddon - my portfolio, not the markets, I mean. Now imagine how the guys doing the real work feel - they've been running that way for months and the last two weeks have taken up the intensity levels to where they must feel like Stalingrad would be a better alternative. Speaking of which we'll take back our comparison - we're not on our way to Kursk, though that'll come. The enemy got new supplies and staged a major counter-attack, broke thru our lines and threatened to devastate our rear-area and throw us back instead. We'll illustrate what we mean by that but let's start with a little dark humor, in the context of things. Don't know if you can make it out so click on the picture and watch the bear get shot out of the tree and bounce off the trampoline. Pretty funny but maybe not entirely accurate. Here's an alternate version with soundtrack and replays and a complementary version of the drunken bear out for a walk. More accurate we'd say and even funnier.

At this point if you're reading this your probably aware that we've had a second "interesting" week in a row but you may not know how interesting. We'd like to read you into the picture, address some of the badly mistaken memes floating around, especially in the blogosphere, and talk a bit about both emergency policy choices & politics and the outlook. We'll save a deeper dive on that for the future though. Unfortunately to tell you why the memes are wrong we need to scare you to death first which will also help you understand the policies and politics as well.

Market Breakdown

The market chart is a composite showing the Dow over two 5-day periods, F-Th and M-F. Up until Th around 3pm the decline in the markets appeared to be accelerating. Good for those of us with bear bets though we ended the week where we'd started, dead on breakeven. If you were just getting here from Mars or farther you'd think nothing had happened last week. Instead of the biggest changes in the US and world financial system since the 1930s. The Dow broke thru 10,500, or -8%, and was accelerating lower. Armageddon indeed until the 3pm news/rumors of a major systemic bailout got out and saved the day and created a gap up on Fri. Notice that after the gap the markets went nowhere. The real problem wasn't in equities though - it was in the credit markets.

 This next composite chart shows you what happened AFTER the world's central banks coordinated a major injection of fund after the takeover of AIG. The 3Mo Treasuries, normally running along with the other short-term rates around ~2%, dropped to ~0%. That's a market collapse rate and came about as funds were pulled from everything and put into the shortest term Treasuries. The good news is that at least everybody thought they'd still work - consider the alternatives to that ! Now these charts may be a little dry, abstract and academic. Let's try and bring it home with a more evocative and emotionally convincing comparison. This next picture is taken from the 1995 movie Outbreak and convey exactly what happens when a case-by-case approach (LEH, MER, AIG, ...) suddenly breaks down into metastasis and turns into a contagion.

 Any questions - 24 hrs, 36 hrs, 48 hrs, kaboom ! Well the lockdown of the credit markets was freezing about that fast and the stakes were, and are, are about as serious as it gets. Are you scared yet ? You should be ? There's a huge outpouring of teeth-gnashing in the blogosphere about socialism for the rich and nothing for the normal folks. Let me tell you - we were all going to be starving in dark and soon if this had spread. This wasn't socialism this was courageous and imaginative performance to the highest standards of public service under enormous pressures and terrible conditions. Be glad these people are smart, skilled and have big brass ones. This is what we mean when we say systemic risk ! Get it now ?

 Burn the Witch, Burn the Witch

One of the other memes making the rounds is that this is somebody's fault and the witch hunters are out in force looking for the guilty to hang. Now don't get me wrong, there's plenty of blame to go around and some very senior and responsible people made some really stupid decisions in the name of greed and hubris. And are paying the penalties. The evil Greenberg, he of the founding of AIG who laid the groundwork for that company's devolution and implosion lost $14B in 24 hrs. Lots of folks suffered and are suffering similar levels of impact. Nor are these bailouts. The proposals on the table will be buying up bad assets to be sure but for mils (= $.00001) on the dollar; even if they're only re-sold eventually for pennies and our return as taxpayers is pennies, our returns will be in the orders of magnitude. Not to mention we get to keep a functioning economy. Everybody's criticizing the dancing bear for how badly it's dancing instead of appreciating the miracle of it being able to dance at all. Nor are anybody's hands particularly clean. Yeah there were regulatory breakdowns but at every link in the chain nobody held a gun to anyone's head and forced them into making greedy and stupid decisions. There's a legal doctrine called last clear chance - who had the last clear opportunity to prevent a disaster. Lots of folks. And you can't regulate away greed, stupidity or humanity. Bear that in mind.

What we need at this point is to keep the wheels on the little red wagon and keep them turning so we have a shot at slowly and painfully working our way out of this mess. The way to judge the politicians and other commentators is not by their finger-pointing and witch-hunting fervor but by their constructive contributions. So far the track record is poor to worse. 

On the other hand the single worst track record and most directly responsible parties are "we, the people". First off those directly involved who made stupid and greedy decisions at every step in the chain of co-dependents. And second all of us who indirectly benefited by consumtion being articially propped up by the Housing ATM so we could all buy more than we could afford. If you'd really like to see real socialism run with this decision that this is all somebody else's fault, nobody is self-responsible and we should burn the witches instead of fixing the problem.

We got ourselves into this mess by tolerating these behaviors, encouraing the systemic leveraging of greed and now are about to repeat the same mistakes in reverse by going with the loudest and easiest to grasp but mistaken correctives. Congratulations - if you keep doing the same things you get the same outcomes as they say. 

Continue reading "Back to Stalingrad: Containing the Contagion, Moving Forward ?" »

Posted by dblwyo at 01:50 PM | Permalink | Comments (0)

What a week, actually what a two weeks. There's so much going on it's hard to pull it together and wrap some common threads and themes around it all. But the bottom line is that the Credit Contagion Metastasis (Cramer's Anniversary: Continuing Credit Metastasis and Economic Outlook) we've been talking about for months (and it seems months and months...usw.) is about to collect the scalps of some more victims. In actual point of fact the size and magnitude of what's going on now is tremendous and scary but this is NOT AS BAD as things were in Mar. when BSC imploded and it looked like markets were going to collapse until the Fed found the magic tools and the right way to use them. Which is not to say that these aren't dire situations and you could see some very unpleasant surprises come Monday morning that are about as serious as it gets.

UPDATE: here's how serious this is in case you didn't get it:

• Masters of the Univers Meeting to Save Us: Lehman Deal Could Come Tonight As High-Level Talks Continue
• $5T in Exposures:How big are Lehman, Merrill, and AIG?

Update 2:

No Deal Reached Yet for Lehman The outlines of plans to determine the fate of Lehman Brothers Holdings Inc. emerged today even as it became increasingly clear that a clean sale of the entire firm to a big bank would be too difficult to execute. A sense of optimism that a rescue could be arranged today dimmed as a growing sense of gloom descended on Wall Street.

BUT, and seriously here's the good news in bad situations, this is the working out of the confluence of all the breakages we've been talking about: risk re-pricing, de-leveraging and broken Finance Industry business models. And that's not a light at the end of the tunnel it's the headlamps of the next crisis and breakdown coming down the tunnel. With last weekend's take outs of the world's largest financial institutions on whom the health of US and world economies was utterly dependent one would hope we'd get some breathing room. But beyond Frannie, Lehman (LEH), Washington Mutual (WaMu or WM), Merrill (MER) and AIG appear to be lined up right behind. And then who knows - though we'll find out. There was a small irony in all this - in reviewing my AIG problems clipping files they start with the '05 criminal charges that were partly the aftermaths of the last bubble bursting and associated shady dealings and led on to two years of write-downs, management changes, etc. etc. Nobody can catch a break. If you stop to think about it these guys had barely sobered up and hadn't repaired the damages from the last party when they starting drinking the koolaid again. This time we seem to be more prepared to face realities. Take a look a the chart which shows the Finance ETF (XLF), LEH, WM, MER, and Citi (C). Notice how extraordinary it is. The XLF was down over the last three months but the walking dead men were down 30-40%, which is outrageous though accurate. JUST in the last week they've all essentially collapsed, much the way Frannie (FNM, FRE) did last week and BSC did in March. In other circles when your market value goes to zero they call
that bankruptcy ! :)

Markets Reactions: Jaded But Not Faded

Let's start by taking a look at this very simple but very meaningful 10-day chart of the SPX and see what it can tell us. In case you forgot week before last began with a holiday which for market and economy watchers faded into a horror show - except for those of us who've been anticipating the onset of realities for some time. Confirmed with last Fri's unemployment numbers but subject so far this year to Kubler-Ross stage 1 Denial. Now this week was about as wild and woolly as it gets for going nowhere. All the daytraders were looking for a bump up Mon post rescue and didn't get it, unlike all priors. Instead we got some very odd days with huge opening gaps down that recovered by the end of the week. Yet at the same time we didn't get the kind of rallies we got earlier in the year. Reality check ? WTF ? What's going on here ?

Reality Setting In ?

Consider that last point because it gets to the heart of things and will define how they evolve from here. When the first metastatic crisis set in around January and we were all about to be taken out by BSC's collapse the Fed a) stepped in for a rescue but b) created a whole raft of innovative new intervention instruments that got the completely frozen markets working again. Like we said at the time that cleared the pipes but didn't mean there wasn't a lot of sewage to keep draining. (Credit Meltdown, Economy and Consequences: Putting the Pieces Together) But if you look at the yellow circle the markets thought it did. And again in mid-July when Frannie was going under for the 2nd time, the Treasury stepped in, and don't forget MER said it was all.....l right now (thank you Dave Mason) and we were back to the races. Notice each time that the recovery before the next binge is shorter and shallower though. And then we reach this very week. And there's hardly any recovery at all. Though if reality were truly at K-R Stage 2, Acceptance, we'd be moving on to figure out how to cope. So don't be surprised if there are some more Koolaid consumption episodes. The stuff is really addictive. But we think we're seeing some serious attempts by Mr. Market to go cold turkey and detox. One step at a time.

Speaking of De-Tox

Let's take a slightly shorter timeframe and see whether or not that detoxification program is beginning to set in. Like we said the bear market rally was pretty short and shallow in comparison to March's. If you take a look at this chart you can see where the rally was decisively busted apart, initially on the economic news. Yet in the intervening two weeks we've had huge swings for what amounts to a sideways market. So don't be surprised at some bounces while the toxins are sweated out. But what we think we're seeing is a fundamental shift in mental outlook here. Dr. Pangloss is in the process of being booted out of the building...at long last and at least 18 months over-due.

Beyond the Veils of Delusion 

The Buddhists have it right though - the world is filled with pain and it is inescapable. Whether it turns into suffering depends on your head - if all you can do is see the pain then you'll be consumed by the suffering. If you accept the pain for what it really is, don't deny and don't get hooked by the perverse pleasures of the suffering or looking for the "drugs" to offset you can keep your balance and figure out a way to cope.

And to our great delight we think that process of seeing the world as it really is and what needs to be done to cope with it is getting wider recognition and acceptence. First of the 12 Steps, eh ? Our reference points are the several articels we've made a point of drawing your attnention to recently that, for the first time in months, perhaps years, see the world the way we're seeing it. And this evening's WSJ had another which is as good a summary of the various feedback cycles that are feeding on one another. Heavens - soon we'll all be systems analysts together. (News Alert: Vicious Credit, Economy, Market Cycle Spotted) This one was so important we excerpted big chunks but it's as good an encapsulation as anything we've read. Also in the readings you'll find running softclips on LEH, WM, and AIG. Who as we speak are in the process of following BSC, FRE and FNM off the cliffs. Sadly that's not the Acapulco waterline below but rocks. The tide's out. 

Continue reading "The End is Nigh ? (Update2): Frannie, Leh, WamU, AIG and Wild, Wild Markets" »

Posted by dblwyo at 07:44 PM | Permalink | Comments (0)

We left the Frannie implosion and failout posting up for the weekend on the hope that you'd pay careful attention to it, though we updated it a while ago with some recent news and analysis summaries worth your time to go look at. They are really good, useful and comprehensive. However, playing to strengths, we haven't found anybody else who wrapped this disaster in the bigger picture of the credit market, economic consequences and regulatory implications. But, judging from their statements, those are the things that Paulson, Bernanke, Franks, et.al. have at the forefront of their thinking....so it might behoove you keep them in mind. Nor linked all that to the continuing triumph of fantasy over rationality in thinking about the Finance Industry as a whole.

In any case next week is going to be as wild and woolly as last week was but for "slightly" different reasons. In fact as we write the futures markets are up almost 3%, ~ 250 bps on the Dow (YahooFinance Futures); and many of the major Asian markets are up 3-4% on the rescue news. Imagine that. It may take a while for that to all settle out and we'll have to see how things trade Monday and thruout the week. But that said this'll be a perfect, perhaps, last-ditch opportunity to unload anything you wnat to unload. Or learn to be a trader and experiment with the short game. As good a summary of what's been going on and the trader's outlook is Matt Trivisonno's blog post:The Fan-Fred Short-Squeeze Rally . Be sure to read the comments...in fact if you want the straight skinny on the market action for a day that's the goto guys. For the big picture review of last week though there's no better place to turn than Prieur du Pleiss'sWords from the (investment) wise for the week that was (September 1 – 7, 2008).

After the break you'll find the normal readings grouped into the onset of a new reality in terms of performance and outlook, the situation with respect to valuations and PEs and some very good stuff from Jim Jubak on investment strategies to start thinking about. We were particularly enchanted with many major MSM (WSJ, NYT, FT,...) stories on the increasingly bleak outlook for stocks for reasons we've largely been analyzing since at least Jan. And even more enchanted with equally mainstream discussions of the huge continuing disconnects between very high PE Ratios, the economic and market outlook and forward earnings estimates that give new meaning to fantasies and a good experience in the '60s (remember...live better chemically). Around here all we can say is "wow, deja vu'...all over again". But just for fun we listed the pointers to some key prior posts on some machinery that helps out here. 

 UPDATE: Fannie, Freddie rescue to offer just a quick fix Many investors applauded the government's decision to rescue mortgage-investment giants Fannie Mae and Freddie Mac and some predicted at least a short-term stock-market rally. But analysts questioned whether this will provide more than a temporary fix for the ailing economy and for financial markets.

A rather startling WSJ story that mirrors our arguments so closely we started wondering what we've missed. A MUCH longer excerpt after the break. In any case it reinforces every single point we made below and was apparantly written over the weekend !

Update2: Foreign Markets Russian Stocks Fall on Fears of a Slowdown, Woes Hit Once-Spared Mideast Stocks, Hong Kong among 5 indexes declining to 52-week lows

Market Review

 The composite chart shows the SP500 above and the NDX below with each having a technical overbought/oversold indicator above it and a momenturm indicator below it. We all "knew" the SP was getting tired as the Merrill fantasies that kicked off the July bear rally faded but we didn't expect last week's collapse. What we think happened is that, despite the amazing and badly interpreted GDP number that payroll and unemployment numbers confirmed the pronounced and accelerating weakening of the economy. Which puts to bed to whole 2nd half rally notion as reality started to sink in. We'll pick up the whole economic thing but wanted to start your week with Markets building on the Frantic rescue package. Similarly reality has snuck..oops we mean sunk...in on the Tech outlook. But boy did it sunk....after ignoring everything while the SP deteriorated Dell's announcement that worldwide IT spending was tanking took all the air out of those sails. If our assessment of the economy is correct (remember YoY GDP growth of 2.5% and 2.2% and x-trade of 1.1% and 0.4% for Q1/Q2 !) we're just really crossing the tipping point and you ain't seen nuttin yet !

Dangerous Memes, the Dollar and Oil

 Interestingly though US markets have been the best relative performers on the return of re-coupling with a vengeance. Which means on the one hand that the dollar has leaped not on fundamentals or technicals but on a short-term attitudinal shift (btw - this means the tanking of US foreign earnings !) based on the continuing worldwide slowdown vs a US that "might" recover first. If you look at the top chart you can see the impact of demand destruction on oil prices. Unfortunately it looks like that downtrend is approaching a limit now. What that really tells us is that yes, there was demand destruction but that on a $150 price maybe $30 was speculative excess and $20 a perceived scarcity premium. It also tells us that a new bottom on oil might get put in technically in the $100-105 range. Even if the bottom turns out to be $80-90 that's still above last years high price. We're looking at a new long-term low in a trading range where oil demand  >> supply for a long-time. Similarly while the Dollar may keep rising once the realities of a more serious US slowdown sink that'll reverse as well. Though not likely to as severe a downdraft as we've had over the last several years. So much for foreign earnings and currency conversion benefits. See this vidclip from Jubak: Has oil bottomed out?

Relative Sector Performances

Speaking of fantasies, irrationality, earnings, outlooks and PEs you need to take a look at the differences between the different sectors and understand how they've performed. And what a real downturn might do to them. Here we've created a 3-part chart comparing Finance (XLF), Con.Disc. (XLY), Industrials (XLI), Energy (XLE) and Technology (XLK) over three months, YTD and since the Oct07 top. The one thing that stands out for us to start with is that most of the market downturn has in effect been a major bear market in financials, not in any other sector per se. The second thing is that all the bear market rallies have been when somebody somewhere believes it's all kissed and made better and Financials rally and take the markets up with them. In fact if you look at the last three months the big jump in the whole thing was around Jul14, which just coincidently is when MER told us it fixed its' problems, again. Of course a week later they told us they were just kidding and they had to raise more capital. So believe what you will but a) if the economy turns down earnings estimates are weigh....weigh too high, b) PEs are running in the 25 range which is a real bull market figure...not the historical average nor the 6-10 justified by the outlook and a real correction in the markets would be 30% down not 10-15% we've got so far. Hmmm....now just suppose that all we've seen is the fallout from credit and finance problems. Then suppose that the economic data says we're crossing a real tipping point into a real economic downturn. Then ask yourself what that might mean for the markets.

The Last "Downturn"

Just for fun let's take a look back at the last busted bubble. You'll notice on first blush that the cases are similar except that burst bubble led to only a real downturn in Technology. Which might argue for more of the same except for a couple of minor details. First, there hasn't been an equivalent bubble in any sector this time that needs to be popped - it's over in Housing and well disguised. Secondly because of Housing (and leverage) we had a very mild downturn where GDP fell slightly and not for long and Consumption barely fell at all. So there was no pain and not much gain in the other sectors.

We consider it much more likely that we'll see a repeat, at least, of the '90 downturn or worse. Say the '80 downturn. In other words, something where we get GDP growth in the -2 to 0% range for a couple of quarters. Followed by low growth in the 1% +/- range for a long time. What'll that world look like in the markets ?

If that comes to pass then you can expect to see something more serious in the markets in general and the so-far immune markets in particular. On the other hand we could be wrong about the economy but we'll take that up with our next post. If we aren't wrong then the relative sector performances that we've seen so far make no sense on the fundamentals.

Just to review the bidding then we started the weekend wrapping Frannie with a set of big picture consequences to set the stage for this review of the markets. Which will then lead us to the Economic situation. However if you'd like to review the prior bidding a bit try these: Markets vs Economy: Dangerous Memes vs Realities, GDP, Jobless Claims, Markets, Oh My: Still Tipping Over !.

Continue reading "Market Review (Update2): Another Wild & Woolly...Last and This" »

Posted by dblwyo at 09:01 PM | Permalink | Comments (0)

We want to focus on the state of the markets, their outlooks and the relationship to the state of the economy. And then say a little about positioning. But let's start with a re-look at the "controversy" swirling in the blogosphere, the MSM and the commentariat about GDP having been grossly over-estimated because inflation was badly under-estimated. This is something we've already beaten to death we thought, but nobody's either giving in or actually trying to dig thru the data to see what reality is. The heart of the matter is the the estimate of inflation was around 1.5% while the CPI was around 3.5% so obviously when you adjust for inflation GDP growth was over-estimated. First off we reply that one should look at YoY changes instead of QtQ and then a great deal of clarity ensues. Done that way real GDP growth was 2.5% Q1 and 2.2% Q2 - the economy is indeed slowing but not in a recession. The heart of the heart goes to accounting for trade-related inflation, that is are we importing inflation. You see GDP measures only what's made domestically,not a great surprise since that's its' name ! But forturnately the BEA has anticipated us and publishes Gross Domestic Purchases which adds back in the effects of trade. When you take a look at that, which we did and posted (Conspiracy Theory vs Real Data: Another Sidetrip to Realities), you get very different results, with GDPurchase growing 1.1% and 0.4%; much more importantly it began diverging from GDP late in '07. Strangely enough just about the time that oil prices shot the moon and oil imports got to be so painful; and also strangely enough just about when the domestic economy started depending on exports for growth as we've previously dissected in component-level detail. (GDP, Jobless Claims, Markets, Oh My: Still Tipping Over !)

This may all seem arcane and a bunch of wonks amusing themselves but it's important because lots of folks will be making their evaluations and decisions on the conspiracy/malfeasance memes instead of on the facts as they are. And that will influence businesses, the markets, your job and the rest of everything else. In yet another attempt to put things to bed, or at least provide you with a clearer understanding, we attempt to sidestep the whole issue with a primitive, bruteforce algebra fix by simply netting out the trade (imports, exports) from the basic GDP numbers. The results are at first startling and then a V8 moment - you know, head slip and "oh, of course". Guess what GDPxTrade grew 1.1% in Q1 and 0.5% in Q2 - so close to the official GDPurchase data as to make us think in divine control or that the BEA actually knows what it's doing. More importantly is the divergence issue which you can see clearly - the domestic economy is clearly headed into the tank. In fact given our views on the outlook for consumer spending the tipping point has clearly been crossed (discussed in the Conspiracy Theory post). Now that's what you should be paying attention to.

Market Outlook 

As are many of the commentators in the readings excerpts after the break, including 3.5 of the four horsemen of the market apocalypse (Grantham, Rodriquez,Hussman and Leuthold). Only Luethold, the 1/2, sees any basis for market optimism and he sees it on the basis that we're in a recession with recovery beginning nine months out and the markets bottoming soon. We think, and just finished documenting to a fair-thee-well, why that's an overly optimistic view. In fact we think the two central facts you should be looking at are this: 1) the real economy is tipping over into a more severe downturn than so far experienced and 2) none of the valuations, PEs, or earnings estimates under-pinning current market levels have factored that in. As the other three horsemen all argue, each for different reasons. It's nice to share a perspective with guys with such track records and respect. Also in the readings is a very good, thoughtful and in-depth article from Dave Merkel providing the most detailed diagnostic for judging a bottom we've ever seen. And his conclusions are in line with ours and the Horsemen's. When you take a careful look at the market chart for the SPX and NDX, notice that each chart puts the other index in the background, you'll find the points we've been making, here and in early postings (especially on the Tech outlook) reinforced. Tech didn't follow the mainstream down but it's beginning to; AND it was down recently more than the mainstream - indicating a major....major shift in perspectives on the Tech outlook to which you ought to pay serious attention.

Dollar and Oil

Central to all this sturm und drang are what's going to happen to the dollar and to oil. Right now there's another huge meme driving a lot of the common thinking which can best be put as follows: the world's not de-coupled at all, the developed countries are headed for recession much faster than anyone anticipated but the US is going to escape lightly. And the developing world is also slowing. As a result of this the downward pressures on the dollar suddenly abated and world demand for oil and commodities all dropped significantly. All of that is true. HOWEVER....while the dollar has suddenly leaped for either no apparant reasons discernible in the data or charts but likely to represent this startling shift in mental outlook it's not likely to keep shooting up. As you can see in the chart. While it  probably won't  re-start its' precipitous fall  again either we wouldn't count on a future export demand boosts or currency conversion boosts to foreign earnings like we've  seen. HINT:  back to tech earnings !

Similarly the developing Asian countries are de-emphasizing the anti-inflation fight, which is much more serious for them on two fronts. First off, inflation is higher and they have a much more serious problem calling for tighter central bank controls. Second off - they face much more serious domestic stability problems if growth falls to far. As a result they're shifting back to allowing growth and not fighting inflation as hard. The net result of that will be continued inflation, renewed demand for oil and commodities emerging later this year and the likelihood that we've seen what we've seen in oil price drops and in dollar increases. (Hurtin Worldwide:Outlook, Countries, Commodities & Geo-politics). It's rather enormously amusing as the drop in oil prices appears to flatten out that it's doing so well above where this surge started. And, if you back at the cited post, the price boundaries we guestimated are turning to be all too accurate

The final section of the readings has a couple of articles on positioning. One pointing to the Kresge Foundation that illustrates a theme we've been striking for a long...long time (This One's for Jay: Investing Strategies for a Dicey Market)- this not a buy-n-hold market and will never be again for a long time if ever. And you need to follow more complex strategy or find someone to do it for you. And another great Jubak column on using Buffet-like business principles to pick long-term winners which gets to the heart of our argument that ultimately one should focus on well-run businesses with major competitive advantages. (Masterclass: Buffett on Investing and Business Analysis)

Continue reading "Markets vs Economy: Dangerous Memes vs Realities" »

Posted by dblwyo at 12:02 AM | Permalink | Comments (0)

If they really are out to get you are you paranoid, or security conscious or both ? Well those of us who have had a general bearish tenor to our thinking might be excused for viewing a week with a couple of 300 point or so days as "out to get us". Especially when the last one was triggered by a huge drop in oil prices and a rise in the dollar. And both in turn resulted from a rapidly slowing world economy, demand destruction and weakening of foreign currencies. In other words because the last prop that was holding up the economy got kicked out from under the Markets rallied ? Sheesh ! The saving grace in all this (H/T Big Pic btw) is that 300-pt days occur during Bear Markets, not bull ones.

Since markets can demonstratively stay irrational longer then we can manage solvency we can at least have the pride and consolation of knowing they're NUTs. That is, they are paranoid and don't know which way the fundamentals are going and trust none of them. And schizophrenic since this week also saw 200 pt. drops - all on rather weak volume relatively speaking. After the break you'll find the usual collection of relevant readings for reflection - which we urge. And you should also consider this post as part of series, almost a hat trick or better (News Alert: Vicious Credit, Economy, Market Cycle Spotted,It's a Long Way to Tipperary: the Foreign Economic News,Take No Prisoners: Real Econ Data vs MSM Reporting) of prior posts. Not that repeating ourselves appears to be influencing the madmen in power to any extent. Nonetheless let's go into the breach another time with the following Chart sets.

UPDATE (tomorrow's WSJ): Signs Suggest Recovery  For U.S. Hasn't Arrived  (WSJ) Dead-end rallies often pervade bear markets, and while some negatives for stocks have turned positive, a laundry list of challenges still needs to be overcome. {well, well, welll...extened excerpt after the break...amazing !}

Basic Market Charts

Below are the basic comparison charts between the SP500 and the NDX showing daily back to Oct07 and weekly back three years. As you can see both are "rallying" in what we think is a bear market rally, somewhat milder than March's. Also notice that while the SPX has given up most of its' gains since '06 the tech index is clinging to everything almost thru last Fall. On the presumption of course that tech earnings will not experience any down pressures from a slowing economy and declining capex spending - despite the fact that the letter has already started tipping over ! 

 Inter-Market Comparisons

Speaking of widespread schizophrenia and paranoia how 'bout those foreign markets ? The chart set below shows daily back a year and weekly back three for selected ETFs: EEM (emerging markets), EWJ (Japan), IEV (Europe), EEB (BRICs), FNI (Chindia), GXC (China), EWZ (Brazil) and EPI (India). Didn't find a Russian specific one but in addition to their minor domestic political corruptions problems they've just started a war with Georgia. Be interesting to see how that plays out if you're not there. Meanwhile we'd say the bloom is definitely off the foreign, emerging and BRIC markets, a point we've been "chicken-littling" about for some time. With the possible exception of Brazil, which looks like a great speculative trading opportunity though, not an investment opp. At least until/if it joins its' breathen.

 Inter-Sector Comparisons

Even more interesting by our lights is how the different sectors have been doing since it appears that the runup in this little BM Rally is concentrated in Financials ! [You're kidding me, right ? (Riding the Storm - NOT: Breakdowns, Culture & Malfeasance in Finance, Cramer's Anniversary: Continuing Credit Metastasis and Economic Outlook)]. And Consumer related stocks - ditto, cf. the prior posts on the economy. Below you'll find another composite chart using ETFs again to compare the sector performances. With six-month daily charts on top and 1-year weeklies on bottom. Where the sectors are Finance(XLF), Consumers: Discretionary (XLY) and Staples (XLP), Healthcare (XLV) and Industrials (XLI) are the left. And Energy (XLE), Materials (XLB), Tech (XLK) and Telecom (IXP) on the right. Which neatly divides them - Links vs Rechts - into better and worse than the SP500. The worst of course being Finance but Discretionary not too far behind. And both doing nicely in the BM Rally. Interestingly Industrials are weakening. Energy has really taken a hit as the global slowdown advances which has also impacted Materials. But unless our assessment of the economy is completely off base those gyrations are not well-grounded. In fact, a striking point we want to re-emphasize (Bad Times, Bad Companies, Bad Markets), is that except for Finance and perhaps XLY none of these have shown a serious decline. Somethings not right here....which may make us the paranoid but not the schizoid.

Continue reading "Schizophrenic Paranoia Gone Wild(Update): Which Way Do the Markets GO ?" »

Posted by dblwyo at 05:45 PM | Permalink | Comments (0)

We interrupt our regularly scheduled posting to warn you that our early storm warning system has detected more early signs of bad credit weather. Over the weekend our alert news monitors found a new wave of back-on-balance sheet adjustments, Fannie Mae issued worse than expected news, both GSE's (FNM, FRE) announced that they would be restricting new mortgage loans and guarantees. And (H/T CalculatedRisk) Fannie's conference call tells us that the books closed in June but there were significant deteriorations in July MORE THAN THEY ANTICIPATED when putting together their books. As you can see from the early warning reserve dashboard Fannie has both upped its' reserves and doesn't begin to cover its' risks. Making a huge Treasury equity investment increasingly likely, indeed mandatory to keep them from sliding into major default (dare one say the BK-word ?) and at least threatening to follow Merrill in throwing existing stockholders to the wolves of insolvency.

What's It All Mean: the Vicious Circle Grinds On 

 

Continue reading "News Alert: Vicious Credit, Economy, Market Cycle Spotted" »

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

It'll be interesting to see how the markets begin to process the economic data. Not so long ago a 1.9% bump in GDP growth and only -51K jobs lost instead of -72K would have seen the markets jump, especially when oil is "down" so far. Instead the S&P was essentially neutral for the week though the last two days saw significant drops, including in the Tech stocks. On the other hand the whispers were for 2.3% growth and the continued jump in the unemployment rate to 5.7% was a great surprise. But in a way that was the last of the big surprises for a while until the next round of big ticket economic news. Which might appear to leave everyone in limbo without clear directions. Hopefully our opinion is pretty clear at this point, since we put so much work into presenting the machinery, our reasons and conclusions. But just to summarize and set the table for this discussion: 1) the US economy looks to be crossing the tipping point from slowdown to something more serious, though it'll take a while to be visible, 2) the international economy is weakening rapidly both from "re-coupling" and the consequences of oil/food inflation plus mis-guided domestic policy problems and 3) none of this is yet properly priced into the markets. But we are beginning to see the mythology of a "V-shaped" recovery disappear though the implications of that have yet to be reflected in earnings estimates and valuations. Nor, based on past experience, would we guess that business executives have de-coded and integrated the notion of a slowing world economy and flattening dollar into the impacts on their revenues and bottomlines. After all they were largely sanguine as we began this journey into darkness, insofar as their public assessments were rearview mirror ones. After the break you'll find several interesting readings worth your time. One that's telling is the "time for a rally" meme flag that's being waved. The two very most interesting are a) the best compilation of the "week that was" by Prieur du Pleiss - comprehensive, thorough and educational. And the saddest as well as very most interesting was the reporting on Bill Miller's most recent annual investor's letter.

In case you don't recognize the name Miller had, until recently, an unbroken 17-year record of beating the market with a rigorous value-investing discipline. He's gotten creamed in the last year or so by value the standard wisdom of that discipline, particularly by investing in Financials (another area where we hope our opinion is crystal clear, having been hammered home enough we hope). Rather than schadenfreude our biggest response to the Mr. Miller's troubles are profound sadness and the conclusion that it stands as a critical lesson to us all. You see, and this is a point we return to often, the Financials got hammered because their business models are broken. They further got hammered, and will get more so, because we've a long way to go on the consequences of the credit crisis. Yet Miller got into severe trouble, we think, because he applied his old valuation approach and performance evaluation methods without thinking thru the consequences of these deep changes. Even sadder he apparantly had nothing much to say about how he was going to fix it. Before enlightenment chop wood, grow food, draw water. After enlightenment the same. But what do you do when your enlightenment fails you ? Well what we try to do around here...RETHINK THINGS. 

We looked at the emerging markets when we looked at the International Economic situation so let's take a deeper dive on the US markets starting with the following composite chart which compares the SPX and NDX daily since Oct and weekly for three years.

The first chart shows Finance (XLF), Con. Discretionary (XLY), Con. Staples (XLP) and Healthcare (XLV). Staples are holding up pretty well, which looking back at the time trends of non-durable consumption is not surprising. XLF got really hammered of course but bounced. The great irony in all of this was the proximate cause for the rally's beginning was MER's earnings not being as bad as expected followed by a surprise, dare we say malfeasant, announcement of more writeoffs and capital raising a week later. Sure, they know what they're doing ? Yeah, right. And Healthcare is somewhat akin to Staples. 

The second composite charts looks at Utilities (XLU), Industrials (XLI), Materials (XLB), Energy (XLE), Technology (XLK) and Telecomm (IXP). All of which had been doing better thant the S&P though with distinct differences. Utilities of course are both defensive, more so than Staples, and a bit of an inflation-hedge. If anything holds up they'll probably be it. Industrials have sufferred slightly lately and as the world economy plays out the "foreign earnings will save us" theme will get stress tested. Materials and Energy have enjoyed significant strength due to worldwide demand for commodities and energy but have also sufferred recently. Looked at this way instead of via the NDX index Technology is fascinating - it's essentially back to where it was in early '07. What lies ahead we wonder ? 

BUT...none of these indicators would seem to match up to our economic assessment so far. With that in mind AND the RETHINK THINGS THRU as well we highly recommend the following (via BigPicture):

Seven Forehead-Slapping Stock Blunders 

Nassim Nicholas Taleb: the prophet of boom and doom

Continue reading "The Toughest Market ?: Bill Miller's Problems for the Rest of Us" »

Posted by dblwyo at 02:11 AM | Permalink | Comments (0)

Sometimes you work to a plan and sometimes you get interrupted by events. If you can put the events into the context of the plan we call that interrupt-driven event-managed, the sine qua non of aglity and resilience :). In this case the plan was to take forward the prior economic discussions and apply the implications to various business sectors. The last two days of market gyrations, Merrill's stunning announcements and some serendipitous inside scoop from Big Picture cause us to change course...a little. Consider the following excerpt from a recent post:

 Merrill's $5.7B Write-Down, $8.5B Share Issuance My (naive) question: "Wait a second -- didn't Merrill just report last week? How did they not disclose a $5.7 billion dollar whackage?"Merrill guy's by-the-book-answer: "Earnings were the 17th; The decision had not yet been made to sell the ABS CDOs, or take the writedown, or issue more stock. That was done this week." I think:  "yeah, sure it was."  Frickin weasels. 

Other Merrill guy says: "Geez, the stock is gonna get hit tomorrow" (ya think?) The stock closed Monday at $24.33, down 55% year-to-date. Merrill woman: "When do we buy this?" CDO guy: "When it hits $15" Me: Ouch!

Only that wasn't quite how it played out. The markets nose-dived yesterday and got another nosebleed today from re-climbing back to their previous altitudes. As Barry occasionally puts it ...WTF !!! Take a look at the accompany 10-Day composite chart of the SPX and NDX and tell me it all makes sense you. Particularly in light of the last two posts on the domestic and international economic situation (Note: trade talks have collapse - NOW that's really bad news as we discussed). No way that all makes sense. The commentary yesterday was that the IMF report on Housing troubles was the trigger and the running unsinn today that better confidence was the re-trigger. BS ! But let's put those arguments to bed.

WTF 1: Real Data on Confidence and Housing Prices 

The first composite chart shows U of Mich. consumer sentiment on a YoY% and absolute basis. Notice that YoY changes are as bad or worse as the Volcker-Reagan surprise short-stop of the economy that broke inflation. But on an absolute basis they're as bad as we've seen in nearly 30 years. Headlines may talk about MtM improvements but in actual fact these haven't been worse in a long...long time.

Now, courtesy of Calculated Risk consider the composite of Housing prices based on this morning's SP Case-Shiller reports. Ditto...they also are about as bad on both an absolute and YoY basis as we've seen in a very long time. Much worse if you think thru the absolute numbers we'd think that there's a long way to go before a semblance of normalcy returns to the housing markets....years of future pain. Now everybody may be getting jaded.

WTF 2: What Really Happened ?

On the basis of those charts plus Merrill's stunning anouncement, which follows right on the heels (that's deliberate - heels as in slimebxxx not heals as in fixes or even heels as in bringing up the rear) of MER's recent earnings announcements which said "we're under control, don't need more capital and no more write-offs. Sheesh.... Several reactions.

1. If they didn't know this was coming a few days ago their grasp of their own situation is sadly deficient and the company is completely out of control (which should also make you wonder about the rest of the industry).

2. If they did know it was coming and weren't ready or refused to couple the two together that's borderline malfeasance. If the deception was deliberate it's beyond borderline and on a murderous cattle raid that should start a war.

But wait, there's more.

3. Yesterday's news should have been insufficient to trigger the major drops we saw, especially since it was triggered and driven by financials. If it was/is true then today's more credible news on the economy PLUS MER's announcements should have seen an even bigger drop.

4. It looks like the details of the announcement got leaked out all over the place without being formally and publicly announced yesterday. That, I believe, satisfies the technical definition of criminal. Now we're beyond bad companies and into bad judgement and bad behavior - can you spell integrity.

5. Oh BtW, as long as we're having several WTF moments - the recent fantasy rally was based on the Financials having seen reality, admitted it and cleaned it up. So much for that notion.

Who do you think can trust to tell anything resembling the truth at this point ? Now there's a question you should never have to ask. It's one thing - not a good one IOHO - to spin-doctor to keep the patrons from stampeding in the fire. It's entirely another to tell them there was no fire, there is no fire and anyway it's out. And leave the building while leaving them there watching the movie.

After the break are some readings you might want to consider on this business picture designed to survey the depth and breadth of the breakage as well as provide some guidances for finding candidate truth-tellers. 

Update: BNN comes thru again with the best, substantive and human discussions that'll actually do you some good instead of being more tainment than info

 Scott Peterson reports on Merrill Lynch & Co.'s plans to raise $8.5B by selling stock.

 BNN speaks to Janet Tavakoli, president, Tavakoli Structured Finance Inc.

Continue reading "Bad Times, Bad Behavior: Merrill, Malfeasance, Markdowns, Markets" »

Posted by dblwyo at 11:21 AM | Permalink | Comments (0)

Our normal chain of postings to present the week's news is Economy - Markets - Companies. We reversed that somewhat because of this last week+ bear rally largely driven by financials. Instead we started early with a review and re-discussion of what constitutes a good company and then dove into the financials (Bad Times, Bad Companies: More Finance Industry). Judging from the popularity of that post it was the right way to go about it. But we'd like to shift to looking at the consequences and implications - largely because the Financials were so hugely import. An argument that will be our primary focus here, along with some discussion of the hidden implications.

However, after the break, you'll find our usual collection of readings excerpts for your skimming pleasure. In four sections: Realities - largely a discussion of the earnings situation and outlook which we expect to continue to deteriorate. A view now more in line with the mainstream as more and more are conceding that a sharp V-shaped recovery is increasingly unlikely. Then more on Financials - particularly PIMCO's estimate that we're facing a total of $1T in losses !! And another huge shift in outlook is the rapidly growing recognition that the emerging/foreign markets are actually worse off than the US - as expected and predicted here since around Oct. Finally one of the better discussions of Bear Market Strategies we've found.So what about the Market(s) and Financials ? 

Market Sector Comparisons 

The composite charts at right lay it out pretty well in our mind by showing the major S&P sectors (proxied by the sector ETFs) with Six months by day on the left and 10-day by hour on the right. Note - XLF is Finance,XLY Con. Discretionary, XLP Con. Staples, XLV Healthcare, XLI Industrials, XLK Technology, IXP Telecom, XLB Materials and XLE Energy. Over six months you can see what held up and what didn't with the SP500 and its' 50-day MA as the baseline. The top charts are those sectors which tended to be worse and the bottom better than the benchmark. Notice that over the last 10-days the running pattern almost completely reversed with Energy taking a dive and Discretionary and Financials bubbling up. The latter on fantasies we've just finished discussing. And almost all of which do NOT, IOHO, reflect the state of the economy our outlook (Readfest (Business): Back to the Future, Revisiting Old Themes).

Finance vs The Rest

You could look at those charts and pretty well buy-in to the argument we've been making about financial fantasies. But when we looked into a tad deeper there were several hidden implications. Triggered by one key quote we've kept hearing repeated many...many times. "If you take out the financials the rest of the market, and earnings, are doing well." That turns out to be true but the conclusions aren't what the Pollyannas - Goldie's sister who escaped a drug rehab program - might think. We took the monthly ETF data back to '98 and used the S&P market cap weightings to reconstruct a slightly different view of things. The top sub-chart shows a total market virtual ETF built from the weighted sum of them all (SPWta), the same synthetic without the Finance sector (SPWtxFa) and Finance alone, XLFa. You'll notice the two composites run along together until mid '07 and Finance runs with both until early '07. The lower sub-chart, built by taking the running % change since Dec98 in each, highlights these differences on the same scale and makes them very easy to see. The overall index has been slightly pulled down by Finance so that, when you extract it, the rest of the market is only slightly down. Financials meanwhile have taken it in the shorts - as the should given our analysis. So heres' the two things that aren't getting discussed, recognized or factored in.

Scary Implications

Since Oct07 the overall market is down only 16% by our metrics while the x-Finance market is down only 11% and Financials are down about 37% ! Here's the two thoughts we'd like to leave you with - and bearing in mind the other meme running around is that we've already "corrected" 20%. And either have no more to go...or worst case bears average -30% so not much more to go.

1. If Financials are a) thru the crisis and into the crunch but b) won't bottom until Housing turns around circa 2010/11/12 and c) are facing other ripples from consumer and business loan losses how much further can they go ? Especially if/when the broken business model problem sinks in.
2. If a) the rest of the market is really only down only 10% or so is that all there is ? Or b) will a continued slowing economy with an extended low growth rate further damage earnings and carry it further ? Or c) will employment damage consumer demand and a slowing int'l economy damage industrials, tech, et.al. and we'll see  a real bear market - ala 20-30% in SWtxFa ?
   

Sleep well :) !

BtW - via a Ritholz interview on BNN, the Canadian Business News Network, we've taken to watching it over the last few days and discovered it's wonderful. Try this:

Friday : Market Call Part 1/3: Jaime Carrasco, investment advisor, Blackmont Capital.

Continue reading "Bad Times, Bad Companies, Bad Markets" »

Posted by dblwyo at 10:13 PM | Permalink | Comments (0)

A question that all of a sudden is beginning to re-occupy a lot of folks attention. Rather humorously in our humble opinion. Up until the last couple of days though what you were hearing was the revival of the worst is over chatter, and from such serious and respected people like Byron Wien. In a sense he and other have a point but also illustrate some of our main themes. Take a look at this busy little chart which compares the SPX to the NDX daily back to Dec and weekly back three years. All the charts also show the VIX volatility indicator, the RSI relative strength indicator and the MA Convergence-Divergence (MACD) momentum indicator. The Technical argument is that the RSI for the SPX was getting into over-sold territory which would argue a short-term bounce was being set up. While technically valid it also represents, IOHO again, continued dysfunctional delusions about the state, nature and timing of the economy. Barry Ritholz over at BigPicture has a great diagnosis which boils down to sell into any rally that appears we wholeheartedly agree with. Unlike our suggestions in March that one was facing a bear market rally to trade watch this one. More interesting on the longer-term sub-charts notice that the SPX is now back to where it was circa mid-'06 but the NDX has held on to a lot of it's fluffup run. Just to repeat - if the economy is slowing so will capex and tech spending...eventually. And guess what - all those techcos getting more than 50% of their revenue abroad - well if you've been reading along the rest-of-the-world is facing a slowdown, very serious inflation beyond ours and the threat of major socio-political disruptions here and there. Hmm....not promising we'd think.

You might consider this second little chart, kaleidoscopic as it is as interesting map to what's been going on.  It's a set of "Market Carpets" of the SP500 sector indexes that can be read clockwise starting in the upper left and working around. The UL shows five days in early May, the UR shows 20 days from May to June, the LR 20 days from June to now and the LL the last five days. At the top of the rally everything was largely hunky-dory in every sector, then things started deteriorating in Finance and Con Discretionary again (wow deja vu') and in the last 20 days almost everybody hoped into the hellbound handbasket together. It might pay you to check back in the GDP components dissections for some strong indicators as to whether or not green-tinged sectors are likely to hold up or not :).

After the break are an extended set of readings excerpts on the Market, including the occasional one predicting a market resurgence we recommend for compare & contrast and to indulge our terrible sense of humor. The more serious readings might be summarized as WTF ! The opening excerpt starts the game off by looking back at previous long-running bear markets since everybody's just noticed that inflation-adjusted returns are negative for almost the last ten years. There's even a meme emerging that the whole '03-'07 runup was merely an abberational interlude in a longer secular bear. For which topic we really recommend the two prior posts now that everybody's talking about the subject (Bears of the Apocalypse I: Long-term Market Performance Perspectives,Bears of the Apocalypse II (LT Econ): Who's Fault is this Mess ?).

Bon Appetit' ! 

Continue reading "So, What Kind of a Market Is This Anyway ?" »

Posted by dblwyo at 04:27 PM | Permalink | Comments (0)

We hope you've been having a great holiday weekend. Here in the Northeast the weather's been a tad cloudy, rainy and cool with intervals of rain and sun to break it up. Nonetheless it's a major holiday weekend and the midpoint of the summer for many. And the midpoint of the year for many investors who've been prompted to take stock - along with various media mavens. Particularly now that it's clear that the worst isn't over, the word bear is being freely bandied about and the "Lost Decade" of zero returns has been re-discovered. This isn't just about angst, agita and schadenfreude however because the real underlying economics, beyond the market gyrations, mean a whole lot to a lot of people: as in jobs, livlihoods, prospects for their children and outlook for the country. So, it being our 232nd birthday, it seemed like a good time to step back and reflect a bit. Although the Economist with its' typical flair and sense of humor does well at setting the stage with the "Four Bears of the Apocalypse".

However Jon Markman's recent column in MSN Money does one of the better jobs IOHO of summarizing things:

Bad times for good companies Even household names such as Coca-Cola are getting drubbed in this ugly market. Many careful savers and investors are vulnerable, and the trouble isn't close to being over. The collapse of market value since autumn has actually wiped out years of progress, putting all but a few big companies' returns for the decade below zero -- an extraordinary development that has jeopardized thousands of families' financial plans and possibly soured an entire generation on the stock market. Indeed, it's fair to conclude now that the bear market of 2000-02 never really ended and that the 2003-07 period of modestly higher returns will look from a historical perspective like a twitch of life in a moribund carcass. Although the story of what's gone wrong in this Lost Decade has been well documented, by myself and others, fresh evidence suggests the last pages of this sad history have not yet been penned -- not even close. For after months of denial that anything was seriously wrong, a few leading government, banking and industrial executives have decided in recent weeks that it's time to come clean and acknowledge that the collapse of the greatest credit bubble of all time will leave profits and price-to-earnings multiples impaired for years.

• Profits & Profit Margins, That Was The Week That Was, Profits drop by record amount

• Barron's: The Bear's Back, Back in the Pool, Bearish battalions  , Lost Decade

 The URL pointer sets are to a) a very nice set of longer-term perspectives on the market and corporate profits by BeYourOwnEconomist that are worth reviewing and b) a selection of recent articles/postings on the return of the Bear (Barron's, Economist, WSJ) for the most recent re-discovery of potential long-running flaws. We propose to dig into this rather thoroughly, having touched on it before (Long-term Market Performance: It Sure Ain't What You Thought !) and noticed that in the last couple of weeks, as the markets went traveling in a handbasket, that our posts on the markets and economy were fairly popular. (Quite a Day: Prescience, Schadenfreude, Luck or Toolkit ?,Boys, Wolves, Broken Records III: Market Schizonphrenia Runs Amok ?) Given the scope of the issues we're going to shoot for a 3-parter. Part I - long-term market perspectives, Part II- long-term economic perspectives and Part III - Next Big Thing and Boiled Frog syndromes. (Our equivalent to a House episode :) ).

After the break this Part will take a pretty deep look at four different sets of market and market vs economy performance chart sets that we think are worth a tad of contemplation. What you'll find if you read on is four things: 1) a look at long-term real market performance, 2) a comparison between market and economic performance, 3) the critical importance of long-term economic performance on both the cyclical and secular performance of the markets and 4) some surprising and scary implications for the future. Which'll be discussed more fully in Part II.

Continue reading "Bears of the Apocalypse I: Long-term Market Performance Perspectives" »

Posted by dblwyo at 03:23 PM | Permalink | Comments (0)

Well if this post had gone up last night or early this morning as originally intended we'd have been prescient again until the PMI gave one side of Mr. Market's schizoid personality an excuse to shake off what was looking like a very bad day. However, the day is still young and there's plenty of opportunity to match Europe's 2.5% declines left. Unlikely of course but the question really becomes wherein lies reality ? And who's going to see what when ? In the prior two, and multiple other posts, we've outlined our versions of reality. After the break you'll find our usual collection of readings roughly divided into three groups. Big picture reality checks (Fleck and Ritholz), Key Markets (bonds, profits/earnings, debt and debt rescues, commodities) and Other. There's an emerging consensus that Oil in particular and Commodities in general are over-speculated and due for a bust some time later on this year as worldwide slowdowns lead to worldwide demand destruction. But....the same analysts also see a L.T. secular uptrend. The IEA just released its' Medium-term Oil Markets outlook which anticipates a continued dicey balance between S/D with Demand picking up after a while and Supply continuing to struggle to keep up. We've have to say a de-bubbling is possible and something to keep an eye on but, if it comes to pass, we'd view it as more of a buying opportunity than not. Meanwhile let's take a look at this busy little chart comparing the SPX to the Nasdaq:

Rather a complicated little bugger for which we apologize but it makes several key points, even if it doesn't quite speak for itself. The left is the SPX, the right the Nasdaq with the top chart being price and the bottom a Point and Figure chart. At the very top you see the VIX options volatility index which shows panic hasn't truly set in as yet. And comparing the two you can also see that the Techs are still not surrendaring their advantage over the mainstream stocks just yet. Perhaps the most interesting thing about the P&F chart, other than the steady stream in both cases of downticks, is (when you blow it up) the new Price Objectives. The word that best captures the import is scary. At the very bottom of the exerpts you'll find a bunch of CNBC vidclips that might be worth your viewing time, particularly the multipl technical analysts who use very different approaches to come to these same conclusions. Are we allowed to say look out below yet or is a firm grasp on reality still in the distance.

Perhaps the most interesting excerpt below is the one where the Goldman analysts say, in effect, "Oops, we were wrong about the Financials. Sorry, our bad. We we really meant to say was there's a lot of trouble ahead. Sorry about that". Or words to that effect. Well they're a pretty sharp bunch of guys but given we've been seeing and saying the same things for months now based on looking at our simple little tools the real question is how many other sectors will somebody be going, "oops, our bad" on in the months ahead ? With that in mind consider this fun little composite of some BellWeather charts we started tracking and take a careful look at the day changes, vs. the 50-day MA comparisons and the 1Yr High/Low comparisons. Here's your take home question: does the distance from the H/L boundaries and the distance from the 50-day make sense to you in light of our previous economic discussions ? What happens next ?

Seriously - it's an interesting mental excercise for each stock for its' own sake as well as for its' representation of the sector it's in. Pick another set if you don't like ours but however you do it, a worthwhile exercise IOHO. 

UPDATE (7/1;1740): We can't resist either this headline nor the accompanying charts. Actually headlines. Consider U.S. Stocks Climb After GM Sales Exceed Forecasts; American Express Rises and the accompanying chart. We're implicitly picking on Bloomberg here but the WSJ, AP, et.al. ALL had the same thesis. Compare and contrast that with this other headline: GM, Ford, Toyota U.S. Sales Slump on Falling Truck Demand; VW, Honda Rise. Now it may be just our perverse sense of humor but after a truly roller-coaster ride in what promised to be such a wonderfully down and bearish day to find salvation in a company who's sales were down only -18% after emergency 0% financing was announced seems rather like the Faithful praying for salvation as the hostiles came over the walls. And supports our basic question - does this make sense ? And oh yeah, just for the record the first big upmove on the roller coaster was when the ISM Manufacturing "jumped" this morning to 50.2, far exceeding the 50 cutoff level for expansions AND the expected reading of of 48.3. SHEESH...we rest our case about cognitive dissonances and schizoid markets.

Now, that's funny, that is ! Bonus points for recognizing which comic's signature line that is :). 

Continue reading "Boys, Wolves, Broken Records III: Market Schizonphrenia Runs Amok ?" »

Posted by dblwyo at 09:39 AM | Permalink | Comments (0)

Just in case you hadn't noticed the markets got slammed pretty badly today - look up the states anywhere you look. In a spirit of Schadenfreude we could of course try variations on "told 'em so, told 'em so" but that might be a working definition of hubris and brings back memories of old Greek sayings (whom the Gods wouldst destroy...and so forth) so we won't. On the other hand given several of the immediate prior posts (Technology Industry: HPQ/EDS, PCs and Prospects,Markets: Fear, Loathing, Schadenfreude and Cusps on Wall St.,Crime, Punishment, (Profits) and Outlooks: High Noon at the Street ?) which reflected long-running themes of ours a certain level of Prescience might be claimed. That's vulnerable to the same hubris charge though. And to tell the truth we were actually very surprised - probably as much as anyone. While we expected the bear rally to fade we didn't expect it this soon or this much - and who knows what happens tomorrow or next week, after all ? BtW the accompanying graphic is drawn from a composite of two different time periods using StockCharts.com's "Market Carpet" tool. It captures 10-days from early May to the most recent two weeks. Kinda speaks for itself.

So, if we're surprised, was it all luck ? The next graphic is a chart of the SP500 that was one of our amateurish efforts at Technical analysis. The color coded price levels id'd various barriers that had to be reached/breached for the market, which we argued was in a bear rally and was going to top out, had to go thru to settle the issue one way or another. And discussed in this post. So we might be forgiven the argument that it wasn't entirely a matter of luck, though today's surprises certainly are.

What we think is going on are three important things. First off there was widespread mis-readings of the states of the credit markets and of the economy, as well as the consequences that would be working themselves out. Second - our primary point from the "Fear and Loathing" post - is that a major (and we do mean major) re-thinking of the outlook is going on by Mr. Market and all his assorted minions. Bob Pisani captured it perfectly this morning commenting from the trading floors rather early in the day - "the Traders aren't waiting for the analysts or economists to call a recession....they've decided the whole second half outlook is wrong". And the Lord spaketh and the scales fell from mine eyes and lo, I could SEE !

Setting aside the extent of our surprise, and that nobody should be pontificating about a short-term random process where the Gods can here you, after we net all that out there's the matter of a little work. Specifically building and exercising a collection of tools, toolkits and habits of thought for trying to look beneath the headlines. After the break we go a little more in history and review a few of them. The primary goal is to provide a shopping list for you to explore and possibly use. Our real goal here is to present this stuff in such a way that you can go out and independently verify it and apply it yourselves. So we're always happy to be learning and refreshing the tools.

But it might behoove you to read on thru and check it out for yourself. You'll find four things: 1) our Market key factors summary from late April (btw again - just to peak your interest one of the conclusions there was to sell into the rally and position for a downturn, circa Apr29 or so. Somebody might have made some money that way), 2) the most current version of the Market Factors summary from last Sa. which all of a sudden seems to hold up reasonably well, 3) a Macro Risk Factors chart which summaries the major economic barriers we see/saw which is also holding up reasonably too. And 4) a bit of a review on the current Business Cycle and its' major components with particular attention to Capex vs Consumer Spending. The reason being that the two primary triggers of today's catastrophe were the sudden change in perspective on the Financials and on Technology. Now frankly we think the latter is overdone and ahead of itself given the lags between consumer slowdowns and capex declines but we'll take it. And the former is over-due now that everybody's downgrading everybody else because, guess what, a slowing economy means trouble in Financial City and more write-downs, etc. etc. The table kinda bookends the day starting and ending with the AP, "OMG" stories intersperced with the key headlines plus the URL for the CNBC vidclip with Pisani. After all the cheerleading we especially love the "short stocks" notion from CNBC of all people !

Continue reading "Quite a Day: Prescience, Schadenfreude, Luck or Toolkit ?" »

Posted by dblwyo at 05:55 PM | Permalink | Comments (0)

With all due apologies to Tom Wolfe ( Tom Wolfe's 'Bonfire' Returns as Heartburn) the last few days have seen, IOHO, the beginnings of a major sentiment shift in Wall St.'s grasp on economic realities as the notion that the worst isn't over but rather just beginning. We're not entirely there yet but the actions of several key indices indicate a major attitude adjustment is likely beginning. The Schadenfreude part comes because there's nothing, from GDP & business cycles, to accelerating Housing problems, to unemployment, to credit contagion metastasis to deterioration in the performance of the financials that we haven't discussed here, often extensively and for weeks or months. Beyond the S-factors (puns implied intended) the important thing is that this is thru no special merit of ours. Rather, just a repeated, careful, systematic and systemic look at how things were playing out. In other words anybody with a little work, a smidegeon of discipline and a decent toolkit - which we've tried to demonstrate - could do this for themselves and reach their own interpretations. C'est la guerre.

Just to put a point on it though here are some very recent headlines: Tech Stocks: Apple, Yahoo tumble with sector, Goldman Cuts Financials and Discretionaries, Citi Halfway Through Cutting 6,500 in I-Bank: Source, Goldman Cuts Financials, Admits Upgrade a Goof, Sentiment Shifts: Credit Crunch Isn't Over, March Wasn't 'The' Low Questions ? :)

After the break you'll find a, again IOHO, decent collection of excerpts including the most recent Barron's Roundtable and some fun stuff from Jubak and on the analyst wars; as well as a dissection of the smart money. Overall these commentators seem to come to similar conclusions which means that there is a SEE change, a crossing of the cusp point, potentially in the offing. One of the most interesting "tells" for how Mr. Market is feeling is the Tech stocks which have been running ahead of the rest of the pack until the last few days when they've been leading to the downside. BtW - in case you missed it, as most seem to have ,we did a deeper dive on the major factors why the Tech outlook is likely poor (Technology Industry: HPQ/EDS, PCs and Prospects) which might be well worth re-reviewing.

All together then it seemed like time to update our overall Strategic Market Assessment based on our four factor model but we're going to start with a little chart just to set the mood. The central chart is the NDX which you'll notice is settling on a sideways move (the 200/50-Day MAs are converging) until very recently. At the top is the VIX index of volatility options - the fear and loathing part - which you'll notice has an interesting correspondence of rising as the NDX tanks and conversely. The bottom shows the SP500 and the SP500:NDX ratio. As the SPX has faded the NDX hasn't and the resulting "outperform" ratio has risen significantly. If we're right in our assessments of the economic, capex and tech outlooks that's really ripe for a major cusp point shift...along with what appears to be an accelerating down drift in the markets.

So...the major bottom line we see is things have been going on much as we've been discussing but there's been a major sentiment shift in the last week or so; which leads us to this updated assessment. BtW - the before and after are contrasted from our last update so you can where we've shifted our views (old= higher row). You can find the previous Assessment Table and post (WRFest 27Apr08(Market): Three Steps to Two Views) by clicking thru.

Continue reading "Markets: Fear, Loathing, Schadenfreude and Cusps on Wall St." »

Posted by dblwyo at 08:48 AM | Permalink | Comments (0)

In this collection of readings excerpts we combine Markets and Financials because the underlying issues are so inter-twined. As usual the same talking head debate continues - is the worst over ? And what would trigger an uptick in the market ? But the game has changed on several fronts and two of the critical things we've talking about for months are now common currency memes and being reflected in almost every discussion we read or hear. The two ?

Credit  Crisis to Broken BizzMod

1) The Credit Crisis has morphed into an on-going credit crunch where key players are now talking about seeing things take the next 2-4 years to work out. We refer you to the accompanying graphic charting the propagation of the contagion that we've used before. (Finance Ind(Readings): Barbarians, Fixes and Outlooks) Interestingly one of the chief new naysayers is Bob Doll, CIO of Blackrock, who's earlier assessments that the worst was over has changed to the most pessimistic 2-4 estimate. It turns out that what he meant to say was that the breakdown was over and now we're into the longer-running de-leveraging and risk re-pricing. Oh...now you tell me. :)

2) Which leads to the new key issue/meme - the broken business model of the financial industry.(Finance Ind II(Readings): Fundamental Breakage in the BM) In the excerpts we've collected a bunch of key CNBC vidclips that talk about Investment Banks, Private Equity, the re-structuring of the LBO business, a bursting Hedge Fund bubble and some of the consequences.(Finance Ind III (Readings): Private Equity Futures - from Golden(Gilt) to Iron Age) The interview with James Stewart on long-term business model breakage is especially worth listening to IOHO. But the one you should/must listen to is Meredith Whitney's - who's assessment, based as it is on deep industry analysis, wide familiarities with the key companies and players and very deep analysis still, strangely enough, sounds a lot like ours.

Market Assessment 

How this is playing out in the markets is fascinating. The "will we go, will we stay, Jimmy Durante" theme remains with us...all based around an apparent lack of clarity with regard to the economic outlook. A surge in Unemployment took out the market week before last and good news on Retail Sales brought it back this last Fri. Good news which, when you parse it out, is anything but.(HF Indicators (Sales, Rates, Money, Inflation, Oil, Dollar): Unscheduled Interruption) We've highlighted four key technical indicators in the chart and you'll notice that despite Fri's surge that we didn't recover all that much ground.

Just for fun here's the 1-year weekly and 5-year monthly charts presented as simply as possible with a little trading trend stuff thrown in. Continuing our usual interpretation we don't see any signs in either of these that the markets are pricing in anything serious in our economic future. If you do please let us know. A point, btw, made in several of the excerpts. Notice on both that we got back essentially to the 200-day MA after correcting a mild 10% correction and that we're still barely busting the long-term lower bound on the trend.

Sector Comparisons

When you de-compose the overall market into sectors (having covered the int'l situation and emerging economies jointly in the prior post) an interesting picture emerges in the short/intermediate-terms and the longer-run. Here we've divided the SP sector ETFs into the worse and better performers. As you can see the only real pain is in Financials (XLF) - what a surprise - with Con. Discretionary (XLY) doing poorly and Healthcare (XLV) not feeling the love while Con. Staple (XLP) is holding up reasonably well considering what the economic numbers are telling us. On the other hand the vaunted strong performers aren't, over a year, doing that well either whether it's Technology (XLK), Industrials (XLI) or Materials (XLB). Only Energy (XLE) is still going gang-busters. If any theme emerges it's that Energy still has a good story and nobody else does but nobody's admitting it as yet.

Then when you shift your perspectives to the longer-term it gets even more interesting. Over the long-term the story's consistent but still not "pronounced" - that is we haven't seen the clear emergence of a strong direction, let alone one that matches up with our views on the economic outlook. Over five years Finance has essentially given up all it's gains - and if you belive the BM discussion (puns intended) there's a lot worse to come. Of the Weak group nobody's done particularly well. Of the Strong group only Energy has truly been an outstanding performer while the rest have done decently well. In the last five years we had, perhaps, three-five dominant investing themes. Real Estate that went bust but made money. Emerging Markets which are shifting rapidly. Energy and Commodities - still rolling along. The New World Economy - while true that would appear to be shifting somewhat as well. And then what ?

Continue reading "Markets and Financials:4 Year Crunch, Broken BizzMods" »

Posted by dblwyo at 08:38 AM | Permalink | Comments (1)

Well the markets seem to be experiencing some adjita...which way do we go, which way do we go ? In the long-run that answer tends to follow EPS which follows real profits which, in turn, follow the business cycle. Contrary to most popular opinion and talking head discussion. You know if the markets really were a future cash flow discounting mechanism we wouldn't see much uncertainty..except that today's news is extrapolated to "infinity and beyond". At least until the next round of infinity shows up. So we're going to focus on those long-term relationships this post and let the markets gyrate as they may from hour to day to week and so forth. The last post had some key sections on corporate profits and their outlook - which wasn't very sanguine to say the least. Or it was in the old sense of bloody :) !

To build a little machinery let's start by looking at the l.t. relationship between GDP, Profits and the SP500. The top chart here shows annual changes in the three since 1950 and the bottom shows quarterly changes since 1980. Perhaps the most prominent conclusion we'd offer is that they're synchronous. At least until the late 1950s when the SP bubbled up over the economic trends. Which in our book means two things - GDP => Markets for one. And then we wonder can the S&P stay where it is or grow even if we get 1% economic growth for the next several years ?

Or put that another way can profits be sustained at their current levels ? Which in turn makes one ask what are those levels and how do they compare to historical norms ? These two charts start in 1947 with the top chart showing profits, capex and dividends from the national income accounts. Notice that capex and dividends followed profits up until the '90s when profits flattened off a bit before just booming since '00. More interestingly capex flattened off while dividends skyrocketed. If you look at the bottom chart, which shows profits, capex and wages as % of GDP, that profits are at historically very very high levels while again capex has flattened. And after jumping during the tech boom wages have continued a long-term downtrend. Bottomlines here are that companies are neither hiring nor investing. Instead they appear to be being extraordinarily tight-fisted and putting those fund flows into dividends (& buybacks). Good in the short-run for investors but one has to wonder about both sustainability in the long-run. AND the organic nature of economic growth - with below par hiring and investing clearly no executive suite sees much opportunity to grow; at least in the US. One also has to ask what about mean reversions ?

Which then leads to asking how is all this reflected in the markets ? Judging from this 4-year chart of the SP500 EPS has kept growing significantly, as you'd expect. But PE ratios have undergone enormous compressions relative to the implied growth rates. Moreover after the 10% decline from Jan to mid-March and the subsequent recovery they markets are still basically in their long-run uptrend. In other words as far as the markets are concerned all the prior postings assessments on the economic outlook are so much unsinn. We're soon going to return to earnings growth.

So what earnings growth ? And more importantly what's it worth ? We happen to like an ancient Graham-Dodd valuation formula for at least putting in a floor on valuations vs. growth estimates. That formula is PE = [8.5 + 2*G] X 4.4/Y where G = earnings growth rates and Y = AAA bond rates. In other words earnings are worth a basal growth of 8.5% plus/minus a growth adjustment adjusted for the real interest rate for risky investments. Or something like that. Well according to the previous chart PE has been in the range of (16,18). What's the implicit growth rate required to make that accurate according to these very conservative valuation rules ?

 We ran the formula in reverse and looked at it two different ways in this chart. In the first it's EPS growth verses PE's and in the second it's observable PE ratios vs. implicit growth. Two ways of saying the same thing. The different lines represent different interest rates. Now if 10YR Treasuries approach, say, 5% for the next several years as we might expect does 6% for AAA corporates make a lot of sense ? What about inflation and economy/market/industry/company risk factors ? For which one might want a bit of premium. So the question then becomes how much premium, i.e. what risk factors impact your decision-making. With PEs in the 16-18 range that implies earnings growth in the 7-8% range and an interest rate of no more than 5%. If you start bumping up that interest rate you start looking at growth rates in the 10-20% range. Whee....and historically that would require Profits to maintain their seriously anomalous character for a long time in the future. AND that somehow we get outstanding earnings growth where even the Fed sees years of ~2% GDP growth.

Even if you believe a) that we've seen the last of the "so-called recession" and b) that GDP will get some growth and c) that corporations will keep not hiring and not investing you've still got a very...very aggressive valuation built into the markets. 

Continue reading "Markets(1Jun08): It Ain't Over til...EPS, Profits and What Next" »

Posted by dblwyo at 09:13 PM | Permalink | Comments (0)

We're going to jump the gun on our normal schedule and put up the economic and market news posts early this week instead of toward the weekend. Sorry but there's more than enough for one thing and for another it sets the stage and frees up processing power for more interesting stuff IOHOs. On the other hand, as Whitney Tilson pointed out today on CNBC, this is a bad time to be a stockpicker because everything's being driven by macro-events (Tilson is a pretty well known value investor and Buffett acolyte). So, just in case you haven't noticed, the markets really tanked ~2:30 this afternoon after the Fed's last set of minutes were released with a weaker GDP outlook, higher unemployment and worse inflation; also the strongest statement to date that they're done lowering rates. What surprises us is that anybody was really surprised since those have pretty much been our themes for some time. What we think we're seeing is the underlying realities of the economy and the credit markets beginning to come home.

Start by considering the stock chart at right which shows the SP500 since last Oct. We've drawn in a couple of trend lines as well as indicates various possible limits. Exciting as the last couple of days have been, especially for us realists (popularly known as bearish). Until you look at the chart and realize that all we might be doing is setting up a sideways move around the 50-day MA. Now if more "real" economic news rolls in and it is listened to instead of blown off, we might find out whether we'll go back to pricing the real downturn or continue with this bear rally fantasy. You can judge the likelihood of that over the next days/week+ by which of those little numbers at the side represent a stopping point.

Speaking of reality there's this great meme going around. Actually several and they're all equally dangerous. One is that the credit crisis is over. The other is that this will be a short and shallow recession that was already beginning to be over. We've been trying to poke some holes in those as well. Briefly - yes the market breakdown has been survived but now we work out the real crunch where credit is tightened in a downturning economy. Which means more writeoffs and losses. And yes the econ data hasn't been that scary so far 'cause it's early days in the cycle. We refer you to the category archives for any further backup if you'd care to.

Now 'bout that "the market is forward-looking, is looking thru the downturn and pricing in the upturn" meme. Well if that's true then over a considerable period of time you'd expect stock cycles to precede economic cycles. Now we ask you, looking at this chart, which shows YoY% changes in both GDP vs SP500 whether you'd come to that conclusions. In our judgment it'd be hard to make as they look like there's good correlation but more coincidence than anything, though that appears to shift in different periods. More than anything the stock market is quite a bit noiser and we'd argue you have to understand the economy.

After the break you'll find a rather largish collection of readings discussing some of the issues. Market rally realities vs these points...a lot on other major outbursts of credit troubles (including an interesting chart on a shrinking monetary base that indicates that credit and the money supply continue to decline with all that implies), some interesting stuff on inflation and the dollar. And a concluding excerpt on just who the analysts were who did well this year. We'll give you a hint - it wasn't generally the herd followers nor those who ignored either macro-trends nor business analysis (remember the Mantra: Economy/Industry/Company). 

Continue reading "Markets (Readings): Real Deal vs 1-Shoe Dropping ?" »

Posted by dblwyo at 03:53 PM | Permalink | Comments (0)

Well basically we're in the 2nd month of a rally....whee. And for those of us who prefer our data fresh and self-analyzed rather than pre-digested, spum and soundbit, a painful one. In fact the sense of things is reminiscent of last year's Panglossian outlooks. Right now we're in a situation where good news is good and bad news doesn't exist. Especially when the bad news, as it has been, is well disguised under sanguine headlines. From AIG to Fedex to Birth/Death adjustments to Real Final Sales in GDP to negative Real Retail Sales there's no good fundamental or structural data. For a thorough review/debunking of reported reality try Northern Trust's Weekly Review. Lull before the storm pretty well captures it though Kasriel's "Eye of the Hurricane" is also accurate.

But we have passed thru the worst of the credit crisis where total breakdown of the worldwide credit markets threatened. Which means we're headed into the credit crunch, ala a normal cyclic downturn, where banks, et.al. tighten credit standards because deteriorating economic conditions lead to more loan losses. Fri. afternoon Sheila Bair of the FDIC made a guest appearance on CNBC to make just that point. Not to mention Jaime Dimon's speech earlier in the week, the implications of which have been widely ignored.

All of which is born out by the accompanying chart. Notice that we've got a sharp short-term rally after the Fed saved civilization where the index is moving up along it's Bollinger band, cycling around resistance at the 200Da MA with the 50Da converging; i.e. a sideways consolidation while we make up our collective minds ? Also notice that the MACD is moving sideways which means the upthrust momentum is petering out. Right now with no themes and a lack of clarity NOT, IOHO, a good time to put money in the market. And possibly a good shot at re-positioning for a downturn, especially if the prior two posts on the general economic situation appeal to you.

Yet all of the underlying structural and fundamental challenges remain. All cleaning up the terminally sclerotic credit markets has done is allow the normal mechanisms to begin working in our view. After the break you'll find a rather wide selection of excerpts on the Strategic Outlook, the morphing of the credit crisis to a credit crunch and some interesting observations and suggestions about the dollar, oil and especially commodities. Speaking of fundamentals this ain't, as so much else, your father's markets. We're facing long-term structural shortfalls in oil and other commodities due to lagging development combined with rising demand. In those where this imbalance is likely to persist lies continued opportunities. On the other hand from Mohamed El-Arrian to Harrison of Marketwatch to Societe Generale' lots of astute observers are flying warning flags while still recognizing the short-term technicals and sentiment are trumping the news. By and large we think our earlier comprehensive survey (WRFest 27Apr08(Market): Three Steps to Two Views) of the factors holds, and holds strongly, in case you'd like to review it. 

The real question is what makes sense to you ? As usual we offer up tools and ways to think about the problem and suggest the conclusions but leave it up to you to do your own assessment and final decisions. Just to put the various excerpts and that argument in further context consider the longer-term chart of the SP500. For all practical purposes all the emergency of the credit crisis did was briefly take us out of the long-term up-trend. If you look at the charts we're only down ~ 10% from the Oct. high, which in turn was a frothiness OVER that trend, despite the crisis being in full swing.

So we're back to the fundamental decision dilemma and the fundamental economic dichotomy. Is all the economic data, and associated earnings outlooks, benign ? Has a real recession been averted ? Obviously we don't think so, nor do many others. In any case does a continuation of the uptrend since '03 in the markets make sense in its' own right ? And is that continuation or even the current position of the markets consistent with the economic data ? Again we obviously don't think so. In fact we'd argue that at minimum we get rational alignment only when the markets correct off the non-fluffed high of ~ 1450. Given that a correction is 20% then .8*1450 = 1160. Returning us to the levels of '03. Oddly btw notice that long-term earnings are very good but PE's have been enormously compressed - which makes you wonder on the implicit consensus on outlook and earnings quality.(Dr. Pangloss Treating Goldie: Markets, Profits & Earnings). While you're wrestling with your views, my views and the market you might benchmark against he survey excerpted below from Prieur du Pleiss of Capetown and the immediately following one on analyst's excess optimism. (The relevant prior post is listed).

Continue reading "WRFest 17May(Markets):Optimistic Sentiment Trumps All" »

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

Well time to review the last week's market news. Not surprisingly the range of news reflects the uncertainties between the optimists who think "the worst is over" and those of us who think, as Warren says, this recession will be longer and deeper than anybody thinks (of course excepting our lists of usual suspects which we won't repeat). All of this is reflected in the charts and the readings. Take a look at the busy little chart to the right. We've been talking about the staircase down (remember pennants ?) which got a decisive up-break with this little rally. Is this a sucker's rally ? Well that'll depend...mostly on whether or not the worst is indeed over. We've also highlighted in color codes what might be four key levels (based on the limits in Fibonacci analysis which borrows from nature to argue that movements tend to follow certain natural patterns; e.g. the fall from the Oct. highs to the Mar. lows have been "recovered" by about 50%. The other "limit" numbers are used to generate the key numbers.). If we keep going above 1400 the next interesting technical barrier is 1480. If we rally to that then we are indeed in a new regime. Contrawise the first number down is 1340 or so, followed by 1320. Right now it looks like we're entering a sideways market while we wait to see how the uncertainties resolve.

Another interesting little tidbit to bear in mind is that there's a lot of folks sitting around with a lot of money burning holes in their pockets who make more if this is a rally, mostly all the Street guys talking their books. As we should all know by this time this has been a very liquidity-driven market, not one based on sound fundamentals or structural outlooks. Being awash in liquidity is really what held things up last year when the economy was already showing significant signs of slowing down. So much for the "Market is forward-looking" meme ! A key driver, aside from leverage and bad business practices, has been the int'l carry trade, that is Japan's extremely low interest rates which causes a lot of the huge pools of excess savings to head offshore to find higher returns. That results in a lot of Yen heading abroad which in turn leads to a key, critical but round-about link between the carry trade, as it's called, and the US domestic markets. Which is reflected in the incredibly close correlation between the ratio of the Euro:Yen. Notice that that's not only true historically but the recent rally, surprise..surprise, is again highly dependent on the carry trade. So any time you're thinking this is all about fundamentals keep that in mind.

All those issues from repair of the credit markets to int'l money flows to Finance Industry futures. Our bottomline is that indeed the collapse crisis of the credit markets is indeed over - the Fed has managed to a self-arrest and keep from us all tumbling over the cliff. ALL that does though is free up the credit markets to re-price risk and de-leverage. And in fact, as prior posts have shown, what we're now facing is a slowing economy which will likely cause real economic feedbacks to lead to increased loan losses, more write-offs, and on and on. But take a look for yourself and decide.

The one single excerpt though that we think you ought to think about above all others is the shortes....the Fed just reported today that credit standards continue to be tightened. Think about it. We've covered the issue a few times before but when no money is available to loan the real economy starts freezing up which makes more bad loans and so on...

BtW...just found this great CNBC vidclip which perfectly captures the Yin/Yang of things. Notice the guy worried about a downdrop is talking fundamentals while the guy talking uprun is talking technicals, i.e. months and quarters vs days and weeks. Both are right IOHO you just have to put in the right context:

A Suckers Rally? : Debating whether the current market really is real, with Ryan Detrick, of Schaeffers Investment Research, and Jean-Marie Eveillard, of First Eagle Global Fund

Continue reading "WRFest 4Apr08(Markets): Do We Stay, Do We Go..Jimmy" »

Posted by dblwyo at 10:23 AM | Permalink | Comments (0)

Here's our update for the market outlook and situation with the readings (after the break) divided into three sections. One on the nature of the recent rally, then on whether or not the "crisis is over and the third on analysts outlooks. Each of these touch on topics we've explore in depth before so each section has prior posts also included for your review and refresh. The bottomline, IOHO, is that the "Market" appears to think the worst is over and the upcoming/current mild recession is already fully priced into valuations and outlooks. On whether that's true or not rests the largest gap we can remember between the Street and the rest of the world of informed observers we've ever seen. On the state of the Finance Industry and whether it's over please see the prior post listed below. On whether or not we've seen the worst of the economy please...please recall the prior post WRFest 26Apr(Economy): Between the Gust Front and the Storm. To the extraordinarily distinguished list of economists and observers who think that a) we're just headed into the real beginnings of the down cycle as of this monring you can add Warren Buffett. The key point here is the one El-Arrian made....now we're just seeing the real economy turn over and it'll take the financial economy with it. Think about it.

 For how that's playing out, the debate between the two diametrically opposed views, consider the chart which shows the SP500 on two views. One is the 2 Steps and Jump view we've been exploring for some time where each time the market looked like it was "bottoming" some other unanticipated surprise popped up to take it down. Until this last time when the April Fool's surprise of a massive UBS write-down and re-capitalization led insiders to conclude that things were hunky dory. Our minds our boggled (in the prior post you might want to look at the excerpts on UBS's internal report - gross incompetence is the best summary of their own words. One has to think they aren't alone). The second sub-chart shows how the debate is playing out with what we've argued is the lull before the real storm with the emergence of a sideways trading range. With this week's momentus economic data upcoming this'll get really interesting indeed.

To complement that we've update our Key Factors Table which looks at the Structural, Fundamental, Technical and Sentiment Outlook situation. Since it's been a while from the last update the prior observations are included for comparison as well as the current ones. The delay was from more than laziness since until recently most of our assessments were holding up well. Now the only real change is further deterioration in the real world drivers combined with an improvment in Sentiment. Go figure ! :) But feel free to violently disagree with all of these observations - but we suggest doing it systematically (and disagreeing with, for example, Jim Jubak, et.al.).

Also please note that for each major Factor we show last month's entry above this month's update, with key changes and/or issues highlighted in BOLD. But what we see is hidden risk factors mounting, being ignored and short-term optimism triumphing yet again over underlying deep factors.

Continue reading "WRFest 27Apr08(Market): Three Steps to Two Views" »

Posted by dblwyo at 02:55 PM | Permalink | Comments (0)

Well what a day in the markets, and not a bad week either, if you were long. Since a bunch of folks have been calling the bottom for a while with the credit pipes unclogging a tad, everybody having priced into the Big R all we needed was for positive earnings surprises. That Citi announced another huge writeoff after the kitchen sink quarter and 9,000 layoffs to go with ATT's 4,000 or so should make no never mind. Like we said in the immediate prior posts there was NO good economic news. And we're early days in the downturn. Also bear in mind that earnings are a laggin variable and backward looking as well. For example one of the recent drivers was INTC's excellent earnings - we won't mention that last month they managed to reset expectations significantly lower thereby leadping over the lumbago...oops I mean limbo...bar instead of at least a low hurdle.

Let's take a look a the SP500 chart and see what we think is going on. But before doing that let me mention this week's market-related reading excerpts. Not your usual run of the mill pure market news. It starts with Goldman's take on the earnings outlook (poor and not priced in, wow deja vu'), goes to JPM's view that it will take the markets a decade to re-establish equilibrium from all these screwups, then to comparisons with 1998 and finally Michael Sesit's advice that you consider selling this rally if you're long. Advice we concur with. In fact as it runs we think you watch it carefully and there'll be an opportunity to get into inverse (short) bets again. But at least skim these - they're all good. Our only regret is where were they in the last couple of years when a little more prescience would have been desirable as opposed to analtic insight now. Or maybe they're are prescient about what's still to come ? Hmmm...have to think about that :).

Continue reading "WRFest 18Apr08(Markets): Whee....What a Rush ! Sucker's Rally ?!" »

Posted by dblwyo at 05:37 PM | Permalink | Comments (0)