A Small Financial Transaction Tax Could Not Sink a Reasonably Valued Stock Market

Sometimes people get a bit overwrought. In a post today, Mish asserts that a proposed 0.1% financial transactions tax would cause the stock market to crash. If he is at correct, and he speaks to many people, that would suggest that stocks are wildly overvalued. There's too much short-term trading by far.

The list of negatives mounts, ranging from the waning momentum, reversal of the rally in commercial real estate securitized debt, the near certainty that Citigroup would be insolvent were it not for all the massive government support, the certainty that Fannie Mae is essentially insolvent, the absurd attempt to reflate the housing bubble with full faith and credit loans from FHA, the fact that stocks rose all week on steadily declining volume, and the (so far) perfect trend reversal of the VIX.

Perhaps the event that will spark at least a brief bear move in the stock market will be the involvement of a big fish in the hedge fund investigation. Zero Hedge is suggesting that SAC Capital is being looked at by the authorities.

Given our post yesterday about fundamental overvaluation per "q", the weakening technicals should be respected.

Copyright (C) Long Lake LLC 2009

Government-Run Economy?

In Obama’s to Fix op-ed in today's NYT, Charles Blow says that the current President needs to fix the jobs problem.

This view is all over the media.

What I wonder is whether the American people really believe that the Federal Government really can, or more importantly, should "fix" the jobs problem.

The proximate cause of the miserable jobs market is that government and its allies in Big Finance and subsidiaries such as homebuilders did not respond to any market forces and instead created an unbalanced economy and speculative financial companies. The simple solution is for Government to fix this financial mess while at all levels of government helping to support the truly needy. Force banks to do only banking and let gamblers gamble and win or lose without any claim on the public purse. Unfortunately, the Obama administration appears to be proposing things that move in the other direction. For example, you and I are now on the hook for huge quantities of FHA loans to subprime borrowers. Why? There's nothing wrong with renting.

Even an administration that fought against Wall Street scams, FDR's, did not really make a dent in unemployment.

In this rich country, which produces more than enough food, clean water and the like for all residents, and which contains a housing stock that can already house far more than the current 300+ million residents, and where the great majority of consumer products have 90%+ gross profit margins (meaning that companies don't really need all their employees just to get the goods out the door), the question of the need for "growth" at the expense of risk and stability of the system, the external environment, fairness, etc., must be discussed. The faster you drive a car, the greater the chance of an accident AND the greater the harm from said accident.
That's exactly what happened last year when a garden-variety recession transformed almost overnight into a jobs depression. Growth is not always good.

Putting jobs in perspective, let us say that the latest jobs number show 1 in 5 workers are unemployed or underemployed. Let us also say that the average worker works 2000 hours per year, counting commuting time. Why couldn't we get to full employment and have the average worker work 1600 hours per year, have more time off, and thus enjoy life more?

Now, I'm not specifically advocating for or against this outcome, but the underlying point is that the country must think through how it wants to allocate its human and physical resources. Does government at all levels have a necessary role in this process? Obviously. In a capitalist democracy, is it government's responsibility to decide on how hard people should work, how many motor vehicles should be in existence, how many homes of what square footage there should be and whether they should be rentals or "owned"? No. Especially when nowadays "ownership" means having little or no equity in the home. Sounds like renting under another name to me.

Public-private partnership re the economy? Yes, that's the way America grew. But a cursory review of the Declaration of Independence shows that governments are instituted among men to secure individual benefits, and the Constitution begins with "We, the people". Power emanates from the people. Government should be the servant and not the master. Thus Mr. Blow's op-ed has it backwards. The Feds need to do a better job regulating and improving the mess they helped create. The private sector in conjunction with more local governmental entities will work as hard as it wants doing work that it wishes to do to serve the real needs and desires of the people.

Copyright (C) Long Lake LLC 2009

Stocks Remain Overvalued Along with Most Other Financial Assets

Please click on this graph for more detail. It shows to related measures of long-term stock market value as of 9/17/09 based on estimated replacement cost of the assets of companies comprising "the market".

Stock market veterans will automatically correlate this with the Dow or S&P 500.

The eye notes that at the so-called secular bottom of the market averages this winter, valuation was only average. The eye also cannot fail to note that descents from high valuations and rises from undervaluations have been long-term events, though of course with choppiness.

This ratio does not predict any short-term stock price movements.

However, my favorite unloved metric is dividend yield of the average stock--which is said to be below 2% for the S&P 500 average stock (?market cap weighted) vs. that of the 5-10 year Treasury note.

Stocks currently provide inadequate current income and are overvalued. That suggests that risk is high. This is so in my view especially with the attempt of stocks today to rally despite another dismal unemployment report out of BLS.

Unfortunately, gold and silver are momentum plays now; bond yields are "low" (whatever that really means); cash is trash; and Big Finance rules the roost for the nonce along with Big Government. Business is playing defense.

So should most investors.

Copyright (C) Long Lake LLC 2009

Jobs Friday

No, not Steve Jobs. Jobs jobs. BLS reports on October jobs tomorrow. Gallup.com has already given me the real answer. Hiring has not picked up. And banks are by all accounts not yet lending, so businesses continue to consolidate.

Nonetheless, data is (are) data. Last month, what was truly disturbing was the massive job loss in the household survey. If there had no been numerous total drop-outs from the labor force, the unemployment rate would have been reported as 10+% in that October report. While the so-called establishment survey is also of interest, it is highly likely that that result will be better than reality, as it is skewed to the larger companies that, well, are established. The household survey is based on phone surveys.

Also please check out the so-called birth-death adjustment. It has greatly minimized the weakness in the employment situation ever since the economic banana began. Click HERE for a link to the site. It is not part of the BLS news release. "They" don't want people getting to it easily, one might suspect.

Interesting that as more insider trading charges are brought and several important companies stocks' crash on high volume, stocks rally. We are finally seeing stocks bought and Treasuries and gold sold (or at least not bought). A nice day at least in that regard.

Copyright (C) Long Lake LLC 2009

Echoes of 1987

Yours truly began self-managing his and his wife's IRA stock portfolios with a discount broker in January, 1987, moving funds from Dreyfus Mutual Funds. That year was like a final exam for a young investor with 7 years of experience in the financial markets. This period now reminds me of pre-crash 1987.

What was happening as the year wore on is that more and more stocks, or stock groups, ran up and then collapsed hard. The averages kept moving up, but the underpinnings just kept looking weaker. Then of course there was an accelerating down-move that simply brought the averages back to their multi-year uptrend line, and the bull market resumed. Shortly before the crash of 1987, Barron's featured an article about a new trend, which was of the sudden riches that young people in Wall Street were enjoying. Sound familiar, with financial companies paying out huge bonuses again?

We are now experiencing what looks like pre-crash 1987-type action. Just as the skeptics have been pointing out, the move off the March 2009 lows has been a low-volume affair. Just today, ARO (Aeropostale) and CVS have had gap openings sharply down on huge volume. Other stocks have done the same recently, and others that would appear to be of high quality such as Northern Trust and FPL have just both collapsed/eroded into bear configurations. And, the chart of Treasuries has just turned bearish. Just as are the financials that led the averages up, these and other gapping-down companies of late have little or no dividend yields. So the longer-term holder of these stocks is left sucking air. CVS was a high-30s stock. What does its owner do when CVS, with little or no dividend yield and selling at over 100 times tangible book value, is suddenly a high-20s stock?

The salesmen, touts and the like for the stock market tell you--correctly--that Treasuries are a risky investment. Their solution: buy CVS and the like because of this and that reason. What they don't tell you is that CVS usually reports a negative tangible book value. This is allegedly because of purchase accounting. But maybe their modus operandus is to overpay for acquisitions to create the illusion of growth in what is not an especially profitable business? If investors don't see a sustainable dividend flow, or a Microsoft-type build-up of cash on the balance sheet, they are at the mercy of being left wondering whether to buy, sell or hold on a 21% down day for the stock when the averages are soaring.

At least if you hold a 10-year Treasury yielding 3.5% for 2 years, you get back 7% and then only have to hold for 8 more years to get a do-over. A stock is forever. Paradoxically, that "foreverness" makes people trade it, because for all they know, CVS will go down every year for the next 20 years.

I recently read an online article about how many bears of 1-2 years ago have switched to the bull camp. On the other hand, I haven't heard of a bull of 1-2 years ago who is now bearish. Yet the energy is to the downside as in 1987.

Plus you may have noticed that unlike in 1987, the path of least resistance as per trendlines is down for the stock averages, especially adjusted as they really should be for the general price level.

I still like McDonald's for the long haul, but I liked it better at $56 than at $61.

With today's soaring productivity numbers, it is looking increasingly likely that the headline news will become "less good". The structure of the stock market makes it look to me increasingly as though a more general "correction" will follow the volume of leaders such as CVS to the downside.

One also wonders if the profit-taking in gold today is a warning for stocks, given that gold has been the leader; or is it the beginning of a welcome turn toward real rather than monetary wealth creation via human ingenuity and effort.

Copyright (C) Long Lake LLC 2009

Same Old Washington as Malaise Continues

The media report that new unemployment claims continue their gradual descent from their highs of this winter. Of course, if you are one of the army of unemployed young people, you may never have gotten your first job. Almost certainly, real unemployment is thereby underestimated by looking at new claims. What are the current data showing about today's economy?

First, businesses have downsized and fought for profitability. This is proper capitalist behavior. It's not the fault of any individual company that a lot of large new industries are not ready to suck up lots of job-seekers.

However, let us say that this post-tech innovation era is in an interregnum phase until the next New Thing appears. Until New Thing's appearance, the watchword is "Houston we have a (jobs) problem".

So, a pair of chief executives named Bush and Obama struggle on playing weak hands, printing money/debt at paces exceeding the growth in their "company's" revenues.

And so jobless benefits are extended over and over again, as the economy can meet the real needs of its people and foreigners who wish to buy our products with fewer people working.

The easy answer for Mr. Obama's company to do, since it is a non-profit entity, is to invest and invest some more on accelerating research and development efforts on new products. There are obvious candidates in medical, energy and other fields that can benefit the country and the world if successful. Not all will succeed, but at least people will learn things, more people will be employed trying to create a brighter future, and the sense of national malaise will tend to lift simply by a President doing the vision thing.

Rather than continuing to borrow money to pay oldsters a cost-of-living benefit in 2010 without any regard to need, I believe that that money would be better spent putting people back to work on R&D.

It's about the future.

But politics is about buying votes.

So the malaise and money-printing continue. Eventually a next New Thing will occur. We are reduced to hoping that the change will be a Good Thing rather than a Bad Thing.

Copyright (C) Long Lake LLC 2009

Discover(R)-ing More Bad News, and Gold Buyers Don't Care

The monthly Rasmussen-conducted survey for the Discover(R) card people is out today. Click HERE to access it. This young survey does cover all of the current (or, recently-ended) economic downturn. This is no evidence that the economic banana/recession/depression is over in the world of real, living people rather than of corporations. A record low 44% have money left over after paying monthly bills. Fewer people plan to save or invest in November than planned to save or invest in October in the prior month's survey. Holiday spending plans are poor.

There is little to no good news in this survey.

This finding is corroborated by similarly gloomy, highly recessionary readings in Gallup.com's poll published daily.

There is no price inflation anywhere except that created by government money-printing. "They" are inflating before any real deflation.

The financial markets are divorced from the real world precisely because times are so bad. Cheap money is being used for speculation. This never ends well, but it makes predictions impossible. If you met me, you would probably not mistake me for a broken record, but once again, gold outperformed stocks in trading today. This was despite gold having massively outperformed stocks yesterday and spending most of the day finally lagging a strong advance in stocks. By the closing bell, however, stocks had faded but gold had not.

The trend is your friend, until it is not. A former CEO of Goldman Sachs lost his re-election bid for N. J. Governor last night, and GS (the stock) set a new 3-week low today for the first time since March.

Short-term, the rally in commodities has the look of money chasing performance. That usually does not mean that it's time for investors to sell, but it does mean that new money is "too late" to come in, and that sharp corrections can occur at any time even if the intermediate- or long-term trend is one of outperformance.

Sophisticated and patient money could, for example, sell naked puts on gold here, or buy and sell covered calls. At times of economic stress, it is important to take the long view. Economic activity goes up and down, and while gold endures, its relative value versus other assets is unpredictable. As a long-term store of wealth, gold is looking 'OK' but at a certain point could become solely a trading vehicle.

Copyright (C) Long Lake LLC 2009

Despite the President's Confidence, Talk About a Bad News Cycle!

Increasing evidence is that Barack Obama has suffered two body blows within a week-- and the stock market is rallying on the news. First is of course the off-year election defeats in states in which he campaigned--especially New Jersey, where he personally campaigned often. Nonetheless, despite his pre-election weekend personal appearance, the ending trend went against him.

More important from a policy standpoint is this report dated today from ABC News, Top Dems: No Health Care Bill in 2009 which begins:

Senior Congressional Democrats say reform before end of year is highly unlikely.

Senior Congressional Democrats told ABC News today it is highly unlikely that a health care reform bill will be completed this year, just a week after President Barack Obama declared he was "absolutely confident" he'll be able to sign one by then.

"Getting this done by the by the end of the year is a no-go," a senior Democratic leadership aide told ABC News. Two other key Congressional Democrats also told ABC News the same thing.

This may come as an unwelcome surprise for the White House, where officials from the president on down have repeatedly said the health care bill would be signed into law by the end of the year.

"I am absolutely confident that we are going to get health care done by the end of this year, and Nancy Pelosi is just as confident," Obama said Oct. 27 at a fundraiser for the Democratic Congressional Campaign Committee.

Along with what Republicans call "dithering" on Afghan policy, there is an increasing perception that Mr. Obama is a weak leader. This blog has criticized him for not proposing a specific healthcare bill. If no bill emerges this year, the idea of having various committees write different drafts of healthcare reform may go down as a major strategic blunder, on par with President Clinton claiming that Hillary was the functional equivalent of a government employee and putting her in charge of his reform effort. The result was a White House healthcare proposal that could not even get a vote on the floor of a House controlled strongly by Democrats.

Health care policy should not be a partisan effort. There should be changes to policy that appeal to the great majority of the people. This should not be a wedge or partisan issue.

Strangely, drug stocks are up sharply today on the above pieces of news, even though Big Pharma was treated well by the administration. I am not sure that this is an appropriate reaction by the market in the short term.
Longer term, they are decent value.

Perhaps 2010 will be a year for bipartisanship on Capitol Hill. You never know.

Copyright (C) Long Lake LLC 2009

ISM Reports Non-Manufacturing Sector Results as Precious Metals Sizzle

The Institute for Supply Management (ISM) has reported on its October survey results for the non-manufacturing sector. The results are mixed.

Business is rebounding, but imports are way down and exports are way up. In other words, the dollar has been devalued, and the U. S. is not increasingly working away making things for people in other countries.

However, almost no businesses yet feel that they need to increase inventories, and hiring took a nosedive.

Without wage pressure, there will be no real increase in the general price level worth worrying about.
Thus one underpinning of gold's price may be illusory in the short term. Longer term, matters will be very different; but that's life.

Meanwhile, precious metals are soaring. Gold is looking a bit too much like a momentum play short-term to make me happy now. I have been constructive on gold since the blog began late December last year. It has soared even as prices have moved in reverse and healing has occurred in the economy. It cannot be shorted here by ordinary investors. Patient investors who want to accumulate it are in the trap that it may soar non-stop. My guess is that it will have a short-term sell-off to scare the bulls, but that if it rushes straight to the $1200 target that some prominent technicians have, significant profit-taking will then ensue.

Copyright (C) Long Lake LLC 2009

VIX and Gold have Gap Days: Implications

The above charts show GLD and the Chicago Board Options Exchange Volatility Index = VIX. Note that Monday morning, both had a gap opening and stayed above the prior day's trading range all day. The VIX petered out after a huge run from under 20 to over 30 in a week or so on little news. Gold surged dramatically today, along with silver. Treasuries sold off.

More likely than not, the VIX and gold will settle back, though gold has so much momentum, who knows? I did take a modest sum off the table in gold today at the close.

Not shown re the VIX is the sudden turning of the 50 day moving average at a fairly elevated level near 25. If, as I now suspect is more likely than not, this moving average turns up, that would correlate with a correction of stock prices downward.

Furthermore, Treasury prices have trended down and now look to be in a definitive downtrend. With the economic cycle pointing upward (though in a ragged manner), Treasury prices down (yields up), gold and silver surging, a correction in stocks would be more likely than not a buying opportunity for traders.

Longer term, the belief here is that most financial assets are too high-priced relative to the most important price, which is wages. They're just stocks and bonds, after all; they're not gold!

Copyright (C) Long Lake LLC 2009

Kitco Metals PR Head Is Bearish on Gold While Switzerland Is Running Out of Vault Space

Courtesy of a post by Mish today, I became aware of a Seeking Alpha interview with the head of PR for Kitco Metals, Inc., John Nadler. The intro to the interview says:

But don't be fooled, says Jon Nadler, metals market analyst and PR head for Kitco Metals, Inc. The precious metals expert says the current bull market in gold is all an illusion—one that the fundamentals can't support for long.

Mr. Nadler goes on to list 4 unpersuasive reasons why the conditions for a gold bull market are not present.

Meanwhile, Mish presents a persuasive chart that shows gold rising against multiple currencies on a multi-year time frame, with support trend lines intact.

Meanwhile, in real time, I have just clicked on Kitco's Gold Index web page. This shows that the price for an ounce of gold is down $2.20 (0.2%), but a strengthening dollar accounts for a drop of $7.20, while intrinsic buying is raising the price by $5.00. In other words, global demand has pushed the price up by 1/2%, which is offset by the strengthening dollar.

I believe that the gold bull market in essence if not to the day began September 11, 2001. Since then, gold has about quadrupled in dollar price. The Euro has less than doubled, as has the yen. Thus gold has outperformed fiat currencies in general this decade and is NOT solely a weak dollar story.

Early in the decade, gold was reverting to the mean. It is now in a bull market of undetermined duration. Gold is not cheap in relation to the average wage. It has a more or less average value relative to oil and stocks. The credit-driven Fake Recovery from the 2001 recession appear to be repeating itself, though various economic dynamics and cycles mean that the sector leaders and other factors will be different.

If you look at the charts on this page, which are from Kitco's website, you will see that gold is in a strong bull market. On a 2-year basis, the new high we saw recently is but a blip.

To put it all in context, gold briefly hit $700+ per ounce in Jan. 1980. (A couple of trades occurred around $850, but let's call $700 the real high.) Gold averaged $615 per ounce in 1980.

Gold is up 40% in nominal price from an amazingly high average price in 1980. However, oil has about doubled from its $36/barrel price set in 1980. Trend followers, and who knows how much fundamentally-based money, is buying the dips in gold. In 2-4 weeks, we will be lapping gold's lowest price of the global financial crisis. This will put a kind of gravitational pull downward on it, as will the amount that it is above its 200 day moving average.

But, given that the global economy has not been allowed to rest and recover organically, but instead massive government spending has goosed China, the U. S. and the U. K., there is every reason to expect that with regard to the anti-credit money asset-- gold-- will do this economic cycle what it did the last one. As I see it, no corporate insiders to any degree are buying U. S. stocks, but it is not dumb money that goes to the trouble and expense of storing record amounts of gold not under the mattress or in a safe deposit box but in Swiss vaults that are reportedly so full up that more vault space is being created. That smells like a true bull market to me.
Copyright (C) Long Lake 2009

On a Good Screed, the Economy and the Markets

Barry Ritholtz at The Big Picture has a guest post by the former head of Fast Money, Dylan Ratigan. In Why Keep Geithner, he puts forward a nice screed. It is good to see a former MSM guy speak out in this way. Where I disagree(d) with him is that I always thought that Mr. Volcker was just an old guy who the Obama campaign kept around for show, that a President Obama was getting too many campaign contributions from Big Finance (but would have been a credible vice presidential candidate), and I opposed Mr. Geithner from the get-go, given his obvious central role in the financial scam(s) of last year plus his tax fiddlings.

Switching to the economy, the Institute for Supply Management reported strong numbers re manufacturing today. The manufacturing downturn is over for now; this is not a big part of the economy.
Jobs and consumer spending data are poor. Once again, gold prices went up more than stock prices. The data point in that ISM report that struck me as supportive of a fundamental reason for that trend is that many commodities were reported to have gone up in price, but no shortages were reported. In other words, this is looking like a sort of reply of the False Recovery from the 2001 recession. Total debt to GDP is at new record highs. One has to assume that lots of leverage has been underpinning the markets.

Too many market leaders since the March stock market lows have truly poor stock charts while the averages hold up to suit me. This is typical of an evolving correction. I am out of almost all stocks on a tactical basis. A suspicion is that this market is similar to that of 1975, with a halfway-completed structural bear market after a huge rise off of a scary bottom. Just as this market has retraced half its losses, it would be reasonable to expect it to retrace half this year's gains off the bottom. Assuming Citi does not follow CIT into bankruptcy in a Lehman-like manner, then it would be reasonable to look for a second and final leg up, as in 1976, as the toxic effects of leverage tend to get hidden until the Fed tightens. And if the economy is so weak that the Fed never tightens, I have no idea what things will look like.

In any case, market risk is very high in my opinion. Revelations re Mr. Geithner, Citi, BofA, Hank Paulson, or an unexpected source could cause at least a short-lived panic and could cause a gap opening. In the meantime, any disappointment on jobs may not benefit the Treasury market as that would imply the likelihood of yet more Federal debt issuance or obligations.

Copyright (C) Long Lake LLC 2009

Ford Projects 2011 results, Skipping 2010: The New Normal?

Bemused minds will wonder about this headline from Bloomberg.com about Ford:

Ford Earns $997 Million, Projects Solid 2011 Profit

Ford Motor Co., the only major U.S. automaker to avoid bankruptcy, posted net income of $997 million in the third quarter and its first operating profit since early 2008. Ford said it expects to be “solidly profitable” in 2011. . .

The automaker will project 2010 results when it releases full-year 2009 results, the company said in a statement. Booth declined to say whether Ford will have positive automotive cash flow next year.

How can Ford project 2011 before it projects 2010?

Of course, how can any company as cyclical as Ford project anything beyond this month?

Copyright (C) Long Lake LLC 2009

Econblog Review Guest Posts on Naked Capitalism

I have recently had 2 guest posts published on Naked Capitalism. As they are lengthy and not typical fare for EBR, and as their formatting is better suited for NC, I am providing links to them. They comprise a 2-part unified set of posts, and bookending other posts linked to in the second part. These are the titles and links.

Debate on Deficits

On, and Beyond, Deficits

Copyright (C) Long Lake LLC 2009