bizzXceleration: Performance, Value and Profit

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 inclu