January 17th, 2009

The Inauguration and the Market.

When most people see into the future they usually merely extrapolate recent experience. Some, however, move to the next step in projecting the future and try to identify when and why the extrapolated trend will change (sort of like taking a contrarian view).

Most projections you see or hear today see the damage that’s already been done to the economy last year, especially during the fourth quarter (remember, the recession was said to have begun in December, 2007). They extrapolate into 2008 and see major bankruptcies in retail (Sears, Gap, Macy’s), banking, home construction and, even, in state, city and local governments. They see oil as having declined from $140 to $35 per barrel and can only see the price dropping to the $20’s (remember when oil as $140 and most saw it going to $200?).

It’s easy measuring what’s happened over the near-term past and seeing what a continuation of that trend might lead to over the near term future. For example, it’s relatively easy to see China’s pause after the Olympics and the slow-down it’s experiencing due to the global economic recession lead to continued and deeper recession there leading to social conflict and strife.

But what’s not easy to do, and quite risky I might add, is to see these trends turning and even reversing. If you’re selling something (like a financial newsletter or a political platform) it’s an easier if you appeal to people’s fears than if you appeal to their hopes. More of the same is more believable than something that doesn’t yet exist, can’t be described and can’t be experienced.

Take, for example, a recent Bloomberg article in which both John Murphy chief technical analyst of StockCharts.com and Ralph Acampora, a true guru of technical analysis say that they hope that the October lows will hold but, if they don’t, the Dow will decline further to 6000 (and the S&P 500 to 600, by inference). That’s where we are today in the market.

But I’m going to go out on the limb and say that I think we did hit a bottom and it will hold. Furthermore, I believe sometime before the end of 2009, the S&P 500 will have hit 1100 and be struggling to move solidly into a bull market, mark-up stage. On what do I base this speculation?

On a long-term market view I reported on October 11 in “The Magic Number is Actually 7.5% per Year”, [Confession time: the title actually said “8.12%” – it was either a typo or purely a calculation error to be corrected now!] In that post I included the chart I’ve updated below (please click on it to enlarge):

Back in October, I wrote:

A band of 44% above and below the regression mean bounds the Index throughout the period and contains the Bull Market of the 1950-60’s, the secular Bear Market of the 1970’s and the Bull Market of the early 1990’s (except for the tech bubble leading up to Y2K). Interestingly, all the Bull and Bear Markets prior to the Tech Bubble, grew at either the upper, lower or midpoint at the 7.5% rate.

Here’s what I all this means for us today? The good news is that after last week’s collapse, the Index came within 6% of the bottom boundary (intra-day 839 low vs. 789) boundary); we should be very near the bottom. The bad news is that projecting forward to the end of 2009, the lower boundary increases to only 858, or still below Friday’s close.

There will be bounces but, in all likelihood, it will be a long time (several years) before the Index touches 1400 again. Unfortunately, the “buy-and-holders” are going to feel extremely frustrated. Market timing will be extremely important. You’ll have to trade gingerly taking advantage of recovery moves. You’ll have to be patient and not expect a robust Bull Market to return anytime soon. Shed poor performing stocks and, as market weakness appears, become defensive to conserve your capital.

Those of you who’ve enlarged that charge can see that the lower boundary has moved up from 789 in October to 803 last Friday. Since the chart is based on month-end data, November’s intra-month low close of 752 would have been marginally below the lower boundary. But the market bounced back and Friday’s close of 850 is not more than 5.8% above the lower boundary.

Can the market decline back to that lower boundary? Perhaps. Will it break through? I think not. The only times it fell below that line were:

Granted this is a bad recession; some even call it the beginnings of a depression. It’s not only here but it’s worldwide. Has the market fully baked in the economic distress? Has the market adequately reflected the $trillions that has been created to stave off further effects? Will the market deviate from the mean more than the 9.98% of 1982 (making today’s low at least approximately 725)?

Without getting political, I thing that investor psychology (as well as that of the general populous) see’s the Inauguration as a new beginning and psychology is the other half of the market (economics being the first). Ronald Reagan took office in January 20, 1981 and the country sighed a deep sigh of relieve as Jimmy Carter left office leaving behind the high oil prices and high interest rates; the hostages were released in Iran that same afternoon. Barack Obama is being inaugurated and perhaps we’ll be as lucky.

Extrapolation is easy and safe. The risks and rewards are in seeing when and how things will be different.

September 24th, 2008

Has the Market Priced in a Bailout?

For stock traders and investors, one of the most important aspects of the discussion about “TARP”, the Troubled Assets Relief Plan, is what the impact of passage will be on the market. Of course, there are the questions of how we’ll pay for all this? What is happening to our competitiveness in the world economy? Will we have rampant inflation or suffer a serious and unfamiliar case of deflation?

These questions are all equally unfathomable and beyond the ability of the average investor to influence, let alone understand, the outcome. But the stock market is like to a real-time “voting machine”; participants continually making their opinions, assessments, evaluations known through their buying and selling decisions.

To navigate these rough waters, each of us must attempt to anticipate what the market’s reaction might be. To do that, we have to answer three questions:

  • Does the market expect passage?
  • Have the majority of investors accurately priced in what they believe the outcome will be?
  • What might be the effect if the outcome is different from these expectations?

In short, will the most likely outcome be a “relief rally” or a continuation of the decline as the market then shifts to incorporating the “full economic impact?”

My wife (an excellent trader in her own right) and I debate the impact of passage on the market. She believes the Dow 30 Index will bounce 500 points as it did after earlier recent bailouts on passage of the legislation and then hover at that level for a few weeks before falling again.

My feeling is that the answer to the first two questions is affirmative. The market now assumes passage, passage is priced into current market levels and actual passage will be anti-climatic. The principal outcome, in my opinion, will be continued downward trend because the economic reality will be viewed negatively rather than positively. The focus will shifting away from “we’re going to do this but only discuss how” to “we’re going to do this but with what disruptions and at what cost”.

Could you help us solve this “marital dispute”. What do you think is going to happen?

September 12th, 2008

When Will Market Predictability Return

The market these days looks much like a rushing river making eddies and whirlpools as it streams over the rocks and boulders hidden beneath the surface. You know that the current flows downstream but the river just doesn’t seem to be moving through those rough waters. Many branches and leaves flowing with the current get caught in the whirlpools; some finally break out and others vanish beneath the surface only to reemerge further downstream.

My stepson, a kayak enthusiast, talks of the challenge in “surfing” these whirpools, of being able to stay on top of one of these eddies and not move for extended periods … if you know what you’re doing. If you don’t, there’s a good chance you’ll flip over.

There are so many moving pieces buffeting today’s market: credit and financial crises, increasing unemployment, threat of inflation, ballooning budget deficit, rollercoaster $US, threat of worldwide recession, relatively high oil and commodity prices and, finally, “change, change, change” in the domestic political landscape. Consider these rocks and boulders beneath the surface. No wonder the market river is roiling. The best you can do is to protect yourself (unless you’re a daredevil) and avoid getting flipped or capsized.

When will this end? I even more firmly convinced its not going to be until a couple of months after the election and innauguration. Putting politics aside, everyone must admit that the past 12 years (especially from the Lewinski incident through tech bubble burst and 9/11 to housing bust and credit crises) has been difficult. We don’t necessarily need “change” but instead we need some calmer waters. The inauguration will give us some of that regardless of who wins the election.

The stock market uses fundamentals and economics for fuel but its course is driven by investor psychology. And to some extent, the market is on the verge of having a breakdown. What it needs is some rest, some quiet and some therapy. A new administration, whichever the winner, may be just what the market’s doctor ordered.

July 26th, 2008

Is it 2000-03, 1987, 1972-74, 1930-34 or 1920-23 Weimar Republic?

Which of the above economic and market calamities most resembles today’s experience? I first thought the 1972-74 crash what with spiraling gas prices, dollar devaluation, burgeoning deficits, weak President, unpopular war’s end, recession (ours is coming).

As readers here know, I’ve been writing about silver and gold as one way to play this soft market for several months (see May 21, June 6, July 11) and started reading opinions from others about precious metals. It’s not so much what these newsletters and blogs say about the current economic climate or the merits of gold and silver as a hedge worries me but the way they say it, the associations keep and the agenda they follow that’s most bothersome. So here’s a mea culpa for my unwitting endorsement and reinforcement of these fascists, bigots and racists.

Lately, with the Fed and the Government flooding dollars in an effort to salvage what almost daily appears to be turning into a collapsing financial system, the situation is actually beginning to look more like 1920-23 with the collapsing German currency and hyperinflation caused by the pressure for them to pay WW I Reparations. Here’s how Wikipedia describes that period (emphasis added):

“Many of the dramatic and unusual economic behaviors now associated with hyperinflation were first documented systematically in Germany: order-of-magnitude increases in prices and interest rates, redenomination of the currency, consumer flight from cash to hard assets, and the rapid expansion of industries that produced those assets….An attempt was made by Germany to buy foreign exchange, but that was paid in treasury bills and commercial debts for Marks which only increased the speed of devaluation….international reparations conferences including one organized by U.S. banker J. P. Morgan. When these meetings produced no workable solution, the inflation changed to hyperinflation…reparations accounted for about one third of the German deficit….Other scapegoats included bankers and speculators (particularly foreign), both of which groups had, in fact, exacerbated the hyperinflation through the normal course of their profit-seeking .…. inflation did, however, raise doubts about the competence of liberal institutions, especially amongst a middle class who had held cash savings and bonds. It also produced resentment of bankers and speculators, many of them Jewish, whom the government and press blamed for the inflation.”

In short, the goldbug and silverbug sites are essentially describing the events over the past several months as if the economic situation was increasing reflecting German 1920-23 hyperinflation — and perhaps (yes, I confess I’m reading between the lines) even longing a return to that bygone, fascist era. I was going to insert some quotes as evidence but thought better of doing so for fear of further spreading their poison.

I, too, am terribly worried about the US economy and the stock market but I’m even more anxious about the extreme-right picking up ever more uninformed, gullible converts that could possibly lead to increasingly more radical rhetoric and actions. You might say that “it can’t happen here” but it won’t only if we are alert and attuned to its potentiality and stamp it out before it even has a chance to take hold.

June 18th, 2008

Deleveraging = Selling Boardwalk and Park Place?

Remember playing Monopoly as a kid? Many of today’s traders and investors got their first exposure to business, economics, trading and, yes, real estate from that wonderful Depression Era board game. Much of what I hear and read today reminds me of the days when I had some unlucky throws of the dice, landed on somebody else’s fully developed properties, having to pay high rents, running out of money and needing to either buy or improve my properties … just like today’s banks, hedge funds and corporations “deleveraging” (finding new capital, selling off investments, deleveraging, reducing risk).

Do you remember anyone who was able to come back and win a game of Monopoly after having to mortgage or sell off their properties? I never did. There’s little anyone can do once you start depleting your income producing assets (probably the highest valued properties first, likr Boardwalk and Park Place) in order to generate sufficient cash to pay rent to other players.

You can’t survive long doing that in Monopoly and the U.S. can’t survive doing that very same thing in the real world today. In order to heat and light our homes, fuel our cars and planes, energize whatever manufacturing plants we still have in this country and, finally, run our tractors and fertilize our farmland, we’re selling off our income producing assets. Perhaps not whole businesses or infrastructure (like the failed Dubai Ports transaction) but often significant ownership shares at distressed values (like major stakes in Citigroup, Merrill Lynch, Chrysler Building).

Other than “accidentally” flipping the board over when it was clear we were going to lose, what can we do today to save our country, economy and, in turn, the stock market. The clearest answer is to wipe the slate clean, start a new game with a different strategy, under different rules. What’s required is an apolitical objective view and commitment (as traders, we eternally remain optimistic, even when it comes to politics). I’m in the camp that believes 9/11 did change everything, a wake up call that I’m not sure either party or candidate has yet addressed with a sense of urgency and creativity.

Our National priorities are defined by our founding fathers and the Constitution they crafted. They include: national defense, international relations and trade, trade among the states and the protection of our individual liberties. Anything else is a distraction and diversion.

If you watched any of the primary debates for more than 15 minutes you would have seen what all these distractions and diversions are since that’s what most of the questions and debates focused on. I blame our media and press to a large extent because instead of raising the level of economic and political discourse, they usually take it down to the lowest common denominator. Rather than educating and raising our citizens, along with the politicians they pander to splinter interests.

Please excuse this diversion from the usual discussion about things of interest to investors. But this game of Monopoly is nearing its end since most of the money on the board has gone to those who’s ownership is nearing a monopoly (the oil producers). I have to rant. I’m ready to forfeit the old game so I can start a new one. I understand the rules, know the questions, listen to the discussion and hope to hear some new answers. Anyone else ready to start over again?

June 4th, 2008

Obama Bear Market

I think I figured out why, as I wrote earlier, the market is waffling and, after watching the candidate speeches yesterday, which in direction it will decide to go. Some of you aren’t going to like what I’m about to say, it is only my humble opinion, but I feel the market’s going to come out of this range moving down and moving down big.

Politics have little place in a blog intended to enlighten, educate and prognosticate about the stock market … unless, of course, politics becomes one of the driving forces behind the collective decisions of investors, current and prospective, domestic and foreign. Listening to Obama’s stirring “victory” speech last night was the sort of politics that, I believe, will weigh on the market.

First, let me put on the record, that I admire Obama as an unbelievable orator, especially after the seven years of Presidential incoherence we’ve been subjected to. I was almost brought to tears during Obama’s “Race Speech“; it was a combination of Franklin Roosevelt’s Fireside Chats and Martin Luther King’s call for racial justice. Last night’s speech was nearly equally moving and this time sounded somewhere between a preacher’s sermon (perhaps learned through 20 years of listening to Rev. Wright’s sermons) and John F. Kennedy. Perhaps Obama’s rhetoric is always first rate but these two are the only one’s heard in their entirety; I expect there’ll be others in the future. The one I’ll stay tuned to will be his August 28th acceptance speech at the Democratic convention since it will be delivered on the 55th anniversary of Martin Luther King’s immortal “I Have A Dream” speech at the Lincoln Memorial.

When I listen with my heart, Obama’s words that move me but when I listen with my head, I don’t think they’re what the market wants to hear. [If you want to really hear his words, you have to read them; just click on the links above.]

Last night, I heard words that I think many stock market investors feel uncomfortable with, sufficiently so that they will conclude that if elected, Obama’s leadership will be inhospitable to economic and stock market stability and profitability. Here are some of the words in his speech leading to that conclusion:

  • “Change is building an economy that rewards not just wealth, but the work and the workers who created it. It’s understanding that the struggles facing working families can’t be solved by spending billions of dollars on more tax breaks for big corporations and wealthy CEOs, but by giving a middle-class tax break to those who need it, and investing in our crumbling infrastructure, and transforming how we use energy, and improving our schools, and renewing our commitment to science and innovation.
  • [Change is] understanding that fiscal responsibility and shared prosperity can go hand-in-hand, as they did when Bill Clinton was president.
  • if he [McCain] spent some time taking trips to the cities and towns that have been hardest hit by this economy — cities in Michigan, and Ohio, and right here in Minnesota — he’d understand the kind of change that people are looking for.
  • if he [McCain] went to Iowa and met the student who works the night shift after a full day of class and still can’t pay the medical bills for a sister who’s ill, he’d understand she can’t afford four more years of a health care plan that only takes care of the healthy and the wealthy.
  • to pass health care right now, a plan that guarantees insurance to every American who wants it and brings down premiums for every family who needs it. That’s the change we need
  • needs us to pass an energy policy that works with automakers to raise fuel standards, and makes corporations pay for their pollution, and oil companies invest their record profits in a clean energy future, an energy policy that will create millions of new jobs that pay well and can’t be outsourced.
  • we can’t afford to leave the money behind for No Child Left Behind; that we owe it to our children to invest in early-childhood education; and recruit an army of new teachers and give them better pay and more support; and finally decide that, in this global economy, the chance to get a college education should not be a privilege for the few, but a birthright of every American.”

Last night, Obama declared “war”; his rallying call is “Change” and you frequently heard the word in his speech last night. His call to wage war, however, is not the war against terrorism but a domestic war to change the status quo. As he said, “every so often, there are moments which call on that fundamental goodness to make this country great again….America, this is our moment. This is our time, our time to turn the page on the policies of the past, our time to bring new energy and new ideas to the challenges we face, our time to offer a new direction for this country that we love.”

No mention of the number role of the Federal government — defence and security. What happened, did we win our fight against fundamentalist terrorism? If it’s over, I missed the celebration. Is 9/11 so far behind us that it’s no longer our present but now part of our history? Does the fact that there hasn’t been a terrorist attack (either domestically or overseas) in a couple of years mean there never was a risk or that this administrations efforts and the efforts of other governments born fruit and made us safer?

Now that makes for wonderful oratory but it isn’t, I don’t believe, what investors will want to hear. To them, “change” means “uncertainty” and the fallout of the “change” envisioned is a more hostile environment for the stock market. Until investors hear otherwise from Obama, the market will translate everything he says into higher taxes and lower profits, restrictions and mandates. It will only hear a less competitive position in global trade.

No one can predict the market but, until I see evidence to the contrary, I think this struggle between market supply and demand will be won by the sellers. The more investors see from and learn about Obama, the less they will want to put their money at risk. Actions speak louder than words and the word right now, “Change”, isn’t one that will instill confidence, at least not in stock market investors. The market momentum will swing to the downside resulting in a slide of significant proportions.

It may gain solid footing as we get closer to the election but that rests on 1) how Obama puts meat on the bare bones of his vision of change and 2) McCain’s ability to muster energy and clarity sufficient for presenting a more favorable outlook to market participants.

For the time being, therefore, the safe course of action would be to move to the sideline as the battle begins being waged.