The markets continue to sizzle, but once again, the price increases were revealed to be nothing more than speculation due to "liquidity", whatever that really is. Stocks started out strongly Monday even in relation to gold, which was down in price adjusted for dollar weakness, but by the day's end, gold and Treasury bond prices--that queer couple--had shown buying interest. Once again, adjusted for the price of gold, stocks went nowhere (this decade, they usually go down in gold terms). Since 9/11/2001, after which the money-printing began to go into hyperdrive, the Dow Jones is roughly even, adjusted upward for dividend payouts and downward for consumer price inflation, whereas gold has at least tripled despite having no yield.
The returns from boring, much-hated Treasuries have beaten stocks this decade and over longer time frames.
Yet it is stocks that get the publicity.
Think different. (Unrelated to finance, click on the link for an entertaining example of how a genius thought differently when asked to solve a simple science problem.)
As suggested a few days ago on this site, there is strong evidence of trend changes in the stock market that may correlate with economic changes. The charts are very interesting in that regard. Over the next several days, we will discuss fundamental and technical considerations in a variety of asset classes.
One quick comment on today's action. Within the asset price inflation that cannot produce prosperity, the large financial companies have started to underperform. Of the big guys, the only one I can find that still has a declining 200 day moving average is Citigroup ("C")*. GE is close in that regard. Citi was down 1% today on a 1% up day for the averages and GE was down 1 1/2%. JPM, GS, BAC and WFC were all roughly flat. If you think these modest degrees of underperformance for the stocks with the worst charts vs. those with stronger charts are random occurrences, well, you are entitled to your opinion. I think the pros care about movements like these, though of course one day's relative strength may reverse soon enough. The trend is your friend--until it isn't.
Also, AIG was down big time and Fannie and Freddie suffered small strokes.
Meanwhile, GSK, Merck (MRK), MCD, FPL, Du Pont and the like: large boring stocks that all yield more than the 10-year T-note, have been very strong today and very recently.
We may thus be seeing an important rotation with broader implications.
More in upcoming days.
* Full disclosure: 1. Not investment advice. 2. I went short Citigroup last week and am long several of the stocks mentioned 2 paragraphs above. Positions may change without notice.
Copyright (C) Long Lake LLC 2009
Tuesday, October 20, 2009
Monday, October 19, 2009
Fiscal Position of the States Shows Record Decline
The Nelson A. Rockefeller Institute of Government has issued its latest quarterly report about state and local finances in State Tax Revenues Show Record Drop, For Second Consecutive Quarter. It is worth reading in its entirety. It covers the second quarter of this year, not the third quarter. Here are some excerpts.
We have compiled historical data from the Census Bureau
Web site going back to 1962. Both nominal and inflation
adjusted figures indicate that the second quarter of 2009 marked
the largest decline in state tax collections at least since 1963. The
same is true for combined state and local tax collections, which
declined by 12.2 percent in nominal terms. . .
The year-over-year change in state taxes, adjusted
for inflation, has averaged negative 9.2 percent over the last
four quarters, down from the 1.2 percent average growth of a year
ago and 2.0 percent of two years ago. Real, year-over-year growth
in local taxes has slowed to an average of 0.7 percent over the last
four quarters, from 1.6 percent for the preceding year. . .
The local tax slowdown is less severe than the state tax slowdown.
In the second quarter of 2009, local tax collections declined
by 2.8 percent, mostly due to declines in local income tax and
sales tax collections. Most local governments rely heavily on property
taxes, which tend to be relatively stable and rose a surprising
3.1 percent during the quarter. . .
Second quarter
revenues fell by
amounts unseen in at
least five decades. Total
state tax revenue in
the second quarter of
2009 declined by 16.6
percent relative to a
year ago, before adjustments.
The income
tax was down by 27.5
percent, the sales tax
was down by 9.5 percent, and the corporate income tax increased
by 2.9 percent. . .
DoctoRx here. California in essence legislated accelerated income tax payments; absent that, the report elsewhere makes clear that excluding California, corporate income tax collections declined 16.4%.
State finances lagged the economic cycle after the 2001 recession. I suspect that this will be the case this time as well.
Copyright (C) Long Lake LLC 2009
We have compiled historical data from the Census Bureau
Web site going back to 1962. Both nominal and inflation
adjusted figures indicate that the second quarter of 2009 marked
the largest decline in state tax collections at least since 1963. The
same is true for combined state and local tax collections, which
declined by 12.2 percent in nominal terms. . .
The year-over-year change in state taxes, adjusted
for inflation, has averaged negative 9.2 percent over the last
four quarters, down from the 1.2 percent average growth of a year
ago and 2.0 percent of two years ago. Real, year-over-year growth
in local taxes has slowed to an average of 0.7 percent over the last
four quarters, from 1.6 percent for the preceding year. . .
The local tax slowdown is less severe than the state tax slowdown.
In the second quarter of 2009, local tax collections declined
by 2.8 percent, mostly due to declines in local income tax and
sales tax collections. Most local governments rely heavily on property
taxes, which tend to be relatively stable and rose a surprising
3.1 percent during the quarter. . .
Second quarter
revenues fell by
amounts unseen in at
least five decades. Total
state tax revenue in
the second quarter of
2009 declined by 16.6
percent relative to a
year ago, before adjustments.
The income
tax was down by 27.5
percent, the sales tax
was down by 9.5 percent, and the corporate income tax increased
by 2.9 percent. . .
DoctoRx here. California in essence legislated accelerated income tax payments; absent that, the report elsewhere makes clear that excluding California, corporate income tax collections declined 16.4%.
State finances lagged the economic cycle after the 2001 recession. I suspect that this will be the case this time as well.
Copyright (C) Long Lake LLC 2009
Civil War in Pakistan Continues
There are two divergent reports on the Government move on the Pakistani Taliban with the invasion of South Waziristan. On Bloomberg.com, we have Pakistan Kills 60 Taliban in Push Against Waziristan Home Base, wherein the title makes matters look good for the government. It is clear that the U. S. is financing this effort and that Pakistan would rather leave well enough along. The article also says:
The Taliban will “split into small groups and harass the strangers in a terrain which the Mehsuds know well,” said Bahukutumbi Raman at the Chennai, India-based Institute for Topical Studies. Pakistan is likely to face a new round of terrorist attacks in cities far from the fighting, he said.
The Pakistan-based Dawn.com reports on this action as well and suggests that the Taliban may melt away in Troops make steady gains in South Waziristan:
Security forces claimed on Sunday to have made steady gains in their assaults on militants’ strongholds in South Waziristan and army officials said they were surprised by low level of resistance.
'The area has been heavily mined. There are a lot of improvised explosive devices and mines. But the level of resistance from the militants is not very high,' one of them said.
As in Afghanistan, Iraq and Viet Nam, the U. S. or its proxy is fighting a body count war against an ideological foe. One just has to wonder what the cost in money, revenge, and other factors is going to be.
The advice from this former Viet Nam War protester but non-pacifist is to be skeptical of reports of success in Pak-ghanistan. We can hope for the best but "spin" will be everywhere.
Copyright (C) Long Lake LLC
The Taliban will “split into small groups and harass the strangers in a terrain which the Mehsuds know well,” said Bahukutumbi Raman at the Chennai, India-based Institute for Topical Studies. Pakistan is likely to face a new round of terrorist attacks in cities far from the fighting, he said.
The Pakistan-based Dawn.com reports on this action as well and suggests that the Taliban may melt away in Troops make steady gains in South Waziristan:
Security forces claimed on Sunday to have made steady gains in their assaults on militants’ strongholds in South Waziristan and army officials said they were surprised by low level of resistance.
'The area has been heavily mined. There are a lot of improvised explosive devices and mines. But the level of resistance from the militants is not very high,' one of them said.
As in Afghanistan, Iraq and Viet Nam, the U. S. or its proxy is fighting a body count war against an ideological foe. One just has to wonder what the cost in money, revenge, and other factors is going to be.
The advice from this former Viet Nam War protester but non-pacifist is to be skeptical of reports of success in Pak-ghanistan. We can hope for the best but "spin" will be everywhere.
Copyright (C) Long Lake LLC
Friday, October 16, 2009
Is ECRI's Optimism Sign of an Impending Market Top?
The top-notch economic forecasters at the Economic Cycle Research Institute are human, as was discussed recently by Mish; to read his extensive and often-incisive comments, click HERE. ECRI's caution about the economy all through 2008, and their increasing concern beginning on or about early September, was useful to my investing. However, how useful is ECRI at extremes?
Here are some comments from ECRI in late February 2009 in WLI Remains Near Cyclical Low, as the bear market was within days of ending (though not at its bottom):
The annualized growth rate inched up to negative 24.0 percent from negative 24.5 percent. "While the WLI rose for the first time in six weeks, it still remains near its cyclical low," said Melinda Hubman, research associate at ECRI. "An economic recovery is not at hand," Hubman added. The weekly index rose due to lower interest rates and stronger housing activity, with the gauge partly offset by a decline in stock prices, Hubman said.
OK. "An economic recovery is not at hand." Implicit message to investors: don't buy. And, of course, said recovery was not "at hand". No criticism from yours truly. But if you bought then and help the SPY, you'd be up about 50% as of today. Similarly, if you bought in mid-late October and November 2008 based on plunging WLI and WLI growth rate and held till today, you would be up. You would have been down a lot temporarily, and all this is with perfect hindsight.
And, ECRI has pounded the table on the economy, and you can actually chart the upmove in its WLI growth rate and correlate it with the stock averages.
Where are we today?
ECRI says: US Recovery Poised to Trounce Any Obstacle
October 16, 2009
(Reuters) - A weekly index of future U.S.economic growth edged down in the latest week, but its yearly growth rate rose to a new record high that further suggests signs of a tapering recession, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 128.1 in the week to Oct. 9 from an upwardly revised 129.1 the previous week, which was originally reported as 128.3.
But the index's yearly growth rate climbed to a fresh all-time high of 27.9 percent from 27.4 percent the prior week, which was revised higher from an original 26.1 percent.
The group's data has posted annualized economic growth at record high rates since September. Earlier this year, the growth rate was struggling to dig itself out of deeply negative territory.
"Such a pronounced, pervasive and persistent upswing in the WLI and its components assures that this economic recovery can overcome any obstacles in the months ahead," said ECRI Managing Director Lakshman Achuthan.
The report's yearly growth gains are in step with U.S. industrial production figures released earlier on Friday that suggest the third quarter closed out with surprisingly strong economic growth.
"IP numbers are very much in line with our April forecast that recession would end over the summer," said Achuthan, who has said chances of a double-dip recession are highly unlikely.
Meanwhile, the VIX collapsed under 21 today briefly, closing down 1.34% while the SPY closed down nearly 1%. As these indices normally move together, this is another negative divergence; another finger on the scale on the bear side.
Given that the certainty that the U. S. economy is mature, then exactly what the economy does for a quarter or two has little meaning in the context of stocks being valued at (say) 20 times their yearly earnings and 50 times their dividends, or 10-30 year bonds.
The public has shown extremes of optimism on standard measures for months, and this is a common phenomenon early in bull markets; and it is also standard for insiders to avoid buying. After all, they get nervous in depressions and bear markets, and they may not be rich with cash after the bear market. These facts are why certain seers have been short the market and wrong for months.
Meanwhile, stores are closing in the wealthy area in which I am renting a cottage, and the mid-range housing market is above the Fannie/Freddie conforming loan limit and remains weak. In the real world, I know almost no one who really cares about the stock market anymore as anything but a game, and the general feeling is "God Bless Bernanke" for saving the financial system.
The collapse in the VIX this month suggests that at the least, matters have moved beyond the successful speculative rally stage into the complacency stage. There are lots of profits to be taken in stocks that have gone up 3-7 times in 7 months.
The good news is that value stocks such as WMT, MCD, GSK and others are seeing rising prices.
The averages may or may not move much, but watch for rotation into the quality names that have seen little or no bull market since March. And
Copyright (C) Long Lake LLC 2009
Here are some comments from ECRI in late February 2009 in WLI Remains Near Cyclical Low, as the bear market was within days of ending (though not at its bottom):
The annualized growth rate inched up to negative 24.0 percent from negative 24.5 percent. "While the WLI rose for the first time in six weeks, it still remains near its cyclical low," said Melinda Hubman, research associate at ECRI. "An economic recovery is not at hand," Hubman added. The weekly index rose due to lower interest rates and stronger housing activity, with the gauge partly offset by a decline in stock prices, Hubman said.
OK. "An economic recovery is not at hand." Implicit message to investors: don't buy. And, of course, said recovery was not "at hand". No criticism from yours truly. But if you bought then and help the SPY, you'd be up about 50% as of today. Similarly, if you bought in mid-late October and November 2008 based on plunging WLI and WLI growth rate and held till today, you would be up. You would have been down a lot temporarily, and all this is with perfect hindsight.
And, ECRI has pounded the table on the economy, and you can actually chart the upmove in its WLI growth rate and correlate it with the stock averages.
Where are we today?
ECRI says: US Recovery Poised to Trounce Any Obstacle
October 16, 2009
(Reuters) - A weekly index of future U.S.economic growth edged down in the latest week, but its yearly growth rate rose to a new record high that further suggests signs of a tapering recession, a research group said on Friday.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 128.1 in the week to Oct. 9 from an upwardly revised 129.1 the previous week, which was originally reported as 128.3.
But the index's yearly growth rate climbed to a fresh all-time high of 27.9 percent from 27.4 percent the prior week, which was revised higher from an original 26.1 percent.
The group's data has posted annualized economic growth at record high rates since September. Earlier this year, the growth rate was struggling to dig itself out of deeply negative territory.
"Such a pronounced, pervasive and persistent upswing in the WLI and its components assures that this economic recovery can overcome any obstacles in the months ahead," said ECRI Managing Director Lakshman Achuthan.
The report's yearly growth gains are in step with U.S. industrial production figures released earlier on Friday that suggest the third quarter closed out with surprisingly strong economic growth.
"IP numbers are very much in line with our April forecast that recession would end over the summer," said Achuthan, who has said chances of a double-dip recession are highly unlikely.
Meanwhile, the VIX collapsed under 21 today briefly, closing down 1.34% while the SPY closed down nearly 1%. As these indices normally move together, this is another negative divergence; another finger on the scale on the bear side.
Given that the certainty that the U. S. economy is mature, then exactly what the economy does for a quarter or two has little meaning in the context of stocks being valued at (say) 20 times their yearly earnings and 50 times their dividends, or 10-30 year bonds.
The public has shown extremes of optimism on standard measures for months, and this is a common phenomenon early in bull markets; and it is also standard for insiders to avoid buying. After all, they get nervous in depressions and bear markets, and they may not be rich with cash after the bear market. These facts are why certain seers have been short the market and wrong for months.
Meanwhile, stores are closing in the wealthy area in which I am renting a cottage, and the mid-range housing market is above the Fannie/Freddie conforming loan limit and remains weak. In the real world, I know almost no one who really cares about the stock market anymore as anything but a game, and the general feeling is "God Bless Bernanke" for saving the financial system.
The collapse in the VIX this month suggests that at the least, matters have moved beyond the successful speculative rally stage into the complacency stage. There are lots of profits to be taken in stocks that have gone up 3-7 times in 7 months.
The good news is that value stocks such as WMT, MCD, GSK and others are seeing rising prices.
The averages may or may not move much, but watch for rotation into the quality names that have seen little or no bull market since March. And
Copyright (C) Long Lake LLC 2009
Is Pakistan Closer to the Brink than Afghanistan?
This blog has emphasized that if America escalates in the Pak-ghanistan ("Af-Pak") region, it needs to be honest and pay for it. No guns and butter, please. This will not be easy. See the latest from the WSJ, Pakistan Faces New Wave of Attacks. Here is some of the news:
A series of well-planned and audacious attacks on police and government installations that left at least 40 people dead across Pakistan Thursday exposed major weaknesses in the nation's security apparatus and appeared to show Taliban insurgents gaining the upper hand. . .
The day marked an escalation of violence even in a period marred by massive terror strikes and brazen attacks, including last weekend's assault on the Pakistani military's headquarters in Rawalpindi outside Islamabad. In the past 10 days, insurgent attacks have left more than 150 people dead.
Pakistani Interior Minister Rehman Malik said the Pakistan Taliban, an offshoot of the Afghan movement, had "started a guerrilla war." He urged Pakistanis to unite behind the government.
His tone was a marked shift from last month, when officials were boasting they had "broken the back" of the Taliban after a successful spring offensive in the Swat Valley northwest of the Islamabad and the death of the Pakistan Taliban's leader, Baitullah Mehsud, in a U.S. missile strike in August.
The 2009 winner of the Nobel Peace Prize began his Presidency with ramped-up drone attacks from the air into sovereign Pakistani territory and then sent more troops into Afghanistan to chase the elusive Taliban around hill and dale while carrying heavy packs and body equipment in the cloudless heat of the Afghan summer. He has not convinced the American people why a dispute that is largely between the traditionally independent hill people of Pakistan and their nominal government is any of our business.
In a related article on one of the attacks, the Pakistani newspaper Dawn.com reported:
Taliban spokesman Usman Ali told this correspondent on phone that the attack was revenge for the killing of their two activists.
Back and forth revenge killings in a remote land we do not understand are hardly what America needs to focus on now. How about a Pecora-type Commission to investigate the financial shenanigans of recent years?
A month ago, the article demonstrates that things were looking better for the government; this may have been just a transient victory. Somehow I am skeptical that a bunch of tribesmen for Waziristan are going to successfully fight their way to control of nukes. I suspect that if America stops reimbursing Pakistan for fighting them, peace will reign again. But then Big Finance would lack one more rationale to sell bonds, wouldn't it?
At least when LBJ escalated in Viet Nam in 1965, the economy was looking strong. Yes, America is definitely rich enough that it can afford any size war it wants, even a truly large one. But based on LBJ/Nixon and G W Bush's precedents, any enhanced war in Pak-ghanistan is likely to be fought with printed or borrowed money.
Stay tuned.
A series of well-planned and audacious attacks on police and government installations that left at least 40 people dead across Pakistan Thursday exposed major weaknesses in the nation's security apparatus and appeared to show Taliban insurgents gaining the upper hand. . .
The day marked an escalation of violence even in a period marred by massive terror strikes and brazen attacks, including last weekend's assault on the Pakistani military's headquarters in Rawalpindi outside Islamabad. In the past 10 days, insurgent attacks have left more than 150 people dead.
Pakistani Interior Minister Rehman Malik said the Pakistan Taliban, an offshoot of the Afghan movement, had "started a guerrilla war." He urged Pakistanis to unite behind the government.
His tone was a marked shift from last month, when officials were boasting they had "broken the back" of the Taliban after a successful spring offensive in the Swat Valley northwest of the Islamabad and the death of the Pakistan Taliban's leader, Baitullah Mehsud, in a U.S. missile strike in August.
The 2009 winner of the Nobel Peace Prize began his Presidency with ramped-up drone attacks from the air into sovereign Pakistani territory and then sent more troops into Afghanistan to chase the elusive Taliban around hill and dale while carrying heavy packs and body equipment in the cloudless heat of the Afghan summer. He has not convinced the American people why a dispute that is largely between the traditionally independent hill people of Pakistan and their nominal government is any of our business.
In a related article on one of the attacks, the Pakistani newspaper Dawn.com reported:
Taliban spokesman Usman Ali told this correspondent on phone that the attack was revenge for the killing of their two activists.
Back and forth revenge killings in a remote land we do not understand are hardly what America needs to focus on now. How about a Pecora-type Commission to investigate the financial shenanigans of recent years?
A month ago, the article demonstrates that things were looking better for the government; this may have been just a transient victory. Somehow I am skeptical that a bunch of tribesmen for Waziristan are going to successfully fight their way to control of nukes. I suspect that if America stops reimbursing Pakistan for fighting them, peace will reign again. But then Big Finance would lack one more rationale to sell bonds, wouldn't it?
At least when LBJ escalated in Viet Nam in 1965, the economy was looking strong. Yes, America is definitely rich enough that it can afford any size war it wants, even a truly large one. But based on LBJ/Nixon and G W Bush's precedents, any enhanced war in Pak-ghanistan is likely to be fought with printed or borrowed money.
Stay tuned.
Thursday, October 15, 2009
The '500' Fills the Gap
While many individual stocks look reasonably valued on a price-earnings basis, the market as a whole is looking more and more tired and more and more like a "sell" rather than a venue for gamblers.
The chart nearby (click on to enlarge) shows the S&P 500 for the past two years. It has now filled the gap around 100 created when things began to implode late in September.
Not shown is that the index is slightly more than 20% above its 200 day moving average. On the one hand, this reflects the dramatic turnaround in corporate profits. Teleologically, companies cut back inventory "too much", especially in view of all the government stimulative measures. Worse, companies cut back staff and are reluctant to hire; though, they will eventually hire if profits hold up.
Not shown is that the index is slightly more than 20% above its 200 day moving average. On the one hand, this reflects the dramatic turnaround in corporate profits. Teleologically, companies cut back inventory "too much", especially in view of all the government stimulative measures. Worse, companies cut back staff and are reluctant to hire; though, they will eventually hire if profits hold up.
Moving on, the VIX, an index that reflects actual or feared volatility and in practice correlates with the perceived trend of stock prices, has collapsed 25% from about 28 to about 21 in only two weeks. This is a large decline in a short time. In the rally since March, this situation has either been followed by a correction in stock prices or some stability in prices offset by a rise in the VIX (a rising VIX means rising volatility, and generally reflects bearish sentiment). Of course, past performance doesn't predict future . . . you know the rest. But it's nice to have precedent on your side.
From a technical standpoint, the financials, which led this rally, lagged today even as a bullish event happened over the past two days, which is a significant widening in the 2-10 year Treasury spread. Higher quality, boring stocks that have not participated in the rally began to participate, such as MCD and GSK. Might the fast money be "tired of" financials?
Nokia before the opening and IBM after the close each saw their stocks fall on bad news, which is what happens in an average market. Meanwhile, Intel had a legitimate beat-and-raise and the stock did not do much, even though it is depressed on a 2-year basis. And Alcoa, with a less impressive earnings beat, has also done little since an exuberant day; in fact it has trended down over the past week. So, under cover of rising averages, we are seeing lots of new 12-month highs, little but rising earnings estimates, and other bull market action, but evidence of fatigue.
What happens in a wild bull market is that you see stocks trading way above their 200 day moving averages. We are seeing this. When these stocks have the worst fundamentals, many prudent investors simply stand back. MU and AMD are two of many examples. Not counting its recent minor drop, GS is about 40% above its moving average and is quite the momentum stock these days. Meanwhile, there has been nearly zero corporate insider buying for several months. These guys are almost always right, though with a lag.
These sorts of stocks, even if the fundamentals are strong, have so much profit in them that in a normal bull market, one not fueled by short covering or hot money, that they move up more slowly.
Eventually, financial markets are weighing machines. The weights comprise return of capital or dividend payouts. A rising stock price for 2 decades did AIG shareholders no good when it went near zero, given the lack of meaningful dividend payouts along the way. With the S&P 500 once again yielding more or less exactly 2.0%, and with old Wall Street hand remembering when a normal (wide) fluctuating range of dividend yields was 3% at bull market tops and 6% at bear market bottoms, what we are seeing is levitation ahead of proven fundamentals.
Unfortunately, indicators such as Gallup.com's polling shows that consumer spending has not risen at all.
Based on 14-day averages of responses to smooth out weekend and other variations, Gallup found that in May 2008, consumers spent as much as $112/day above and beyond fixed costs such as mortgages (!).
Two months ago, that had rebounded from below $60/day to as high as $72 (Aug. 18). The index has dropped back to $60. Where are the money printers when we need them?
The same polling continues to detect no net hiring, which has been quite accurate in predicting the BLS monthly data. Employment is almost undoubtedly shrinking at a significant pace, and initial unemployment claims are probably understating the case due to reluctance of large and small companies to hire. And when they can hire overseas, they are doing so. There are no healthcare benefits and few if any payroll taxes in China!
The 10-year Treasury yield is back to 3.47% at a time when the CPI is negative and rents are falling for the first time in 17 years. The real yield is very high. As the peak momentum of the economic move off the bottom inevitably arrives--some week-- measured in various ways--it is likely that the media will start talking of a growth slowdown. Not only are Treasuries a buy for real return, if you ask virtually anyone which asset class will provide a better return over, say, two years or ten years, choosing between stocks, gold and Treasuries, how many people do you know who will say Treasuries? (I would also suspect that if people were asked to choose between all cash for 10 years vs. a 10-year Treasury, most people would take cash over a 3.47% annual yield.)
Gold was down on a day when oil surged. This smacks of profit-taking, given that the dollar was unchanged against a basket of other currencies.
The stock averages look vulnerable here, and many individual issues probably are more likely to drop than rise. However, the boring stocks such as MCD, GSK and WMT that have done little or nothing since March could rise even if the averages have what might be a pause that refreshes a/k/a a correction.
In a confusing world in which the financial crisis remains unresolved, yours truly remains long government securities, dividend stocks with strong long-term charts, gold and cash. Dynamic it's not. But given an outperformance over stocks by 40% last year by being in bonds and cash and out of stocks, I don't feel that aggressiveness is needed right now. Avoiding losses and investing for income and/or capital gains when they appear low risk is the DoctoRx watchword in managing money.
NOTE: Nothing said herein is investment advice for any individual. Econblog Review and DoctoRx are NOT professional money managers.
Copyright (C) Long Lake LLC 2009
Wednesday, October 14, 2009
Thinly Disguised Bribery Proposed by the President
In Obama Seeks More Payouts, the WSJ reports that the President, upset at the lack of price increases, proposes to have Congress print or borrow $13 B more for 57 million Americans, allegedly to be nice to them so that they can have a cost of living (equivalent) increase of 2%. Thus the other 250 million Americans will lose the same amount of money.
There is no economic point to this "payout". This is the equivalent of bribery to get votes, as the recipients will notice the money whereas the mass of Americans won't know the difference. There is also no fairness to this bribery, as it will presumably go to wealthy seniors but not to struggling non-seniors. Seniors are already the wealthiest Americans . . . but they vote the most.
The President is the leader of a Party that went wild when President G W Bush tried (and succeeded) to pass legislation with at least the argument that a permanent (or, semi-permanent) reduction in tax rates for all taxpayers would help the economy grow. Bill Clinton had a deficit-reduction public argument for his 1993 tax increase (and a private one, which was to fund healthcare reform in 1994). Likewise, G H W Bush and Ronald Reagan had arguments for their tax increases and tax cuts, respectively.
Just as the recent President Bush had a weak argument for his tax cut of spring 2008 and no good argument for an almost open-ended TARP and lots of other examples of him and Gentle Ben throwing other money at large complex financial institutions, the current President is just throwing money around.
I would like to be out of my gold holdings. I enjoyed being bearish on gold year after year from 1980 to 2001; rooting it down, as it were. But the politicians and Big Finance make it hard to regain my prior enthusiasm for conventional assets.
It's time to do things the old-fashioned way. Spock could have said the following.
"Work hard and prosper."
Payouts which are just handouts are symptomatic of the much larger handouts to the financial class. Favored groups get the fruits of the labor of others. Not fair. And not the way to retain world financial dominance.
Copyright (C) Long Lake LLC 2009
There is no economic point to this "payout". This is the equivalent of bribery to get votes, as the recipients will notice the money whereas the mass of Americans won't know the difference. There is also no fairness to this bribery, as it will presumably go to wealthy seniors but not to struggling non-seniors. Seniors are already the wealthiest Americans . . . but they vote the most.
The President is the leader of a Party that went wild when President G W Bush tried (and succeeded) to pass legislation with at least the argument that a permanent (or, semi-permanent) reduction in tax rates for all taxpayers would help the economy grow. Bill Clinton had a deficit-reduction public argument for his 1993 tax increase (and a private one, which was to fund healthcare reform in 1994). Likewise, G H W Bush and Ronald Reagan had arguments for their tax increases and tax cuts, respectively.
Just as the recent President Bush had a weak argument for his tax cut of spring 2008 and no good argument for an almost open-ended TARP and lots of other examples of him and Gentle Ben throwing other money at large complex financial institutions, the current President is just throwing money around.
I would like to be out of my gold holdings. I enjoyed being bearish on gold year after year from 1980 to 2001; rooting it down, as it were. But the politicians and Big Finance make it hard to regain my prior enthusiasm for conventional assets.
It's time to do things the old-fashioned way. Spock could have said the following.
"Work hard and prosper."
Payouts which are just handouts are symptomatic of the much larger handouts to the financial class. Favored groups get the fruits of the labor of others. Not fair. And not the way to retain world financial dominance.
Copyright (C) Long Lake LLC 2009
NFIB Uses Newspeak to Write an Upbeat Headline
Headline: NFIB SBET: Small Business Optimism Returns
Here's some of the text:
WASHINGTON, October 13, 2009 –The National Federation of Independent Business Index of Small Business Optimism gained 0.2 points in September to 88.8 (1986=100). Four of the 10 Index components posted gains, two were unchanged, and four declined.
“The good news is the Index didn’t decline. The bad news is that improvements were far less than what we hoped for,” said NFIB Chief Economist William Dunkelberg. . .
Almost 2 years from the economic peak, certainly there are some employment gains?
Employment
In September, small business owners reported a decline in average employment of 0.83 workers per firm during the prior three months, a substantial improvement from May but virtually no change from July and August and historically the sixth largest loss per firm in the 35 year survey history (the record is negative 1.26 in May, 2009). Seven percent of the owners increased employment and 23 percent reduced employment, yielding a seasonally adjusted net negative 16 percent of owners decreasing employment in the last three months, unchanged from August. The job generating machine is still in reverse. Sales are not picking up, so survival requires continuous attention to costs, and labor costs loom large.
(Unsaid in the above, and without opining on the merits of any healthcare legislation that may be passed soon, those business owners who do not carry health insurance for their employees are looking at materially higher costs from said legislation. Every single small business owner is considering this issue.)
What about capital spending? That drives growth, which since we are a full half year from green shoots language, has to occur to drive said growth?
Overall, a dismal performance, only vehicle purchases were up most likely due to the cash for clunkers program.
Are the small businesses moving the merchandise?
The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months was negative 26 percent, up a point and 8 points better than the record low set in March and revisited in July.
It looks as though that answer is NO. Surely the "money-printing" from the Fed and the record gold price mean that there are pricing pressures:
The weak economy continued to put downward pressure on prices. Ten percent of the owners reported raising average selling prices, but 32 percent reported price reductions. Widespread price cutting is a major factor shaping the reports of lower nominal sales.
Unsurprisingly, earnings trends were poor:
Reports of positive profit trends were unchanged at a net negative 40 percent.
To end the press release and end the section about credit (difficult to obtain but much less a problem than sales), Dr. Dunkelberg states:
“It is no surprise that credit is more difficult to obtain since sales prospects and profit trends are very weak.”
So, where did that press release's headline come from? Perhaps even NFIB isn't so independent of the Newspeak wherein bad news is good news nowadays.
The DoctoRx summary:
Price increases for most common stocks have as little to do with the overall economy as the fall 1929 stock market correction from a hyped bubble peak had to do with the economic collapse that began later, after the passage of the Smoot-Hawley Tariff Act and all sorts of post-WW I political and financial machinations. The message of the facts and the markets appears to be: times are tough and not visibly improving. Government credit guarantees and back-t0-bubble financing of homes is doing what it is doing. "Banks" which are really not banks in the traditional sense of making well-secured loans with depositors' savings accounts but which are trading and gambling houses are thriving, but real banks are not doing well. In other words, the oligarchy is prospering. There is no money either in equity or loans for the vaunted scrappy start-up that wants to challenge an entrenched player.
I'm apathetic about the Dow crossing 10,000 again. But with U. S. banks holding hundreds of trillions of dollars of "notional" value in interest rate swaps, dwarfing the tens of trillions of dollars they may be holding in credit default swaps, the conclusion remains that the gambling that is going on is on such a grand scale that conventional financial instruments are pawns in a greater game.
For those people who avoid gold for the reason that it has quadupled in nominal price in 8 years (from an almost 22-year nominal price low), consider that BofA stock (BAC) is up more than 7 times in 7 months. Was this a panic low? Yes. But wasn't BofA paying out dividends for years and buying its stock, leaving no retained earnings, when in retrospect it had no margin of safety when a little panic occurred, as it always might? Yes.
Whereas the point with gold is that it pays nothing, so its total return comes from what some call price appreciation but others call preservation of purchasing power. The most basic reason to invest in gold is a highly conservative one: keep what one has, rather than try to grow it as with a speculative growth vehicle.
Big Finance is playing poker against everyone else and, as with Goldfinger gambling in Miami Beach, they see your cards but you don't see theirs. And the government will provide downside protection for them but not you. Nice work if you can get it. How long will going with this sort of stock continue to be a one-way bet for the public without government backstop of the stock price?
Copyright (C) Long Lake LLC 2009
Here's some of the text:
WASHINGTON, October 13, 2009 –The National Federation of Independent Business Index of Small Business Optimism gained 0.2 points in September to 88.8 (1986=100). Four of the 10 Index components posted gains, two were unchanged, and four declined.
“The good news is the Index didn’t decline. The bad news is that improvements were far less than what we hoped for,” said NFIB Chief Economist William Dunkelberg. . .
Almost 2 years from the economic peak, certainly there are some employment gains?
Employment
In September, small business owners reported a decline in average employment of 0.83 workers per firm during the prior three months, a substantial improvement from May but virtually no change from July and August and historically the sixth largest loss per firm in the 35 year survey history (the record is negative 1.26 in May, 2009). Seven percent of the owners increased employment and 23 percent reduced employment, yielding a seasonally adjusted net negative 16 percent of owners decreasing employment in the last three months, unchanged from August. The job generating machine is still in reverse. Sales are not picking up, so survival requires continuous attention to costs, and labor costs loom large.
(Unsaid in the above, and without opining on the merits of any healthcare legislation that may be passed soon, those business owners who do not carry health insurance for their employees are looking at materially higher costs from said legislation. Every single small business owner is considering this issue.)
What about capital spending? That drives growth, which since we are a full half year from green shoots language, has to occur to drive said growth?
Overall, a dismal performance, only vehicle purchases were up most likely due to the cash for clunkers program.
Are the small businesses moving the merchandise?
The net percent of all owners (seasonally adjusted) reporting higher sales in the past three months was negative 26 percent, up a point and 8 points better than the record low set in March and revisited in July.
It looks as though that answer is NO. Surely the "money-printing" from the Fed and the record gold price mean that there are pricing pressures:
The weak economy continued to put downward pressure on prices. Ten percent of the owners reported raising average selling prices, but 32 percent reported price reductions. Widespread price cutting is a major factor shaping the reports of lower nominal sales.
Unsurprisingly, earnings trends were poor:
Reports of positive profit trends were unchanged at a net negative 40 percent.
To end the press release and end the section about credit (difficult to obtain but much less a problem than sales), Dr. Dunkelberg states:
“It is no surprise that credit is more difficult to obtain since sales prospects and profit trends are very weak.”
So, where did that press release's headline come from? Perhaps even NFIB isn't so independent of the Newspeak wherein bad news is good news nowadays.
The DoctoRx summary:
Price increases for most common stocks have as little to do with the overall economy as the fall 1929 stock market correction from a hyped bubble peak had to do with the economic collapse that began later, after the passage of the Smoot-Hawley Tariff Act and all sorts of post-WW I political and financial machinations. The message of the facts and the markets appears to be: times are tough and not visibly improving. Government credit guarantees and back-t0-bubble financing of homes is doing what it is doing. "Banks" which are really not banks in the traditional sense of making well-secured loans with depositors' savings accounts but which are trading and gambling houses are thriving, but real banks are not doing well. In other words, the oligarchy is prospering. There is no money either in equity or loans for the vaunted scrappy start-up that wants to challenge an entrenched player.
I'm apathetic about the Dow crossing 10,000 again. But with U. S. banks holding hundreds of trillions of dollars of "notional" value in interest rate swaps, dwarfing the tens of trillions of dollars they may be holding in credit default swaps, the conclusion remains that the gambling that is going on is on such a grand scale that conventional financial instruments are pawns in a greater game.
For those people who avoid gold for the reason that it has quadupled in nominal price in 8 years (from an almost 22-year nominal price low), consider that BofA stock (BAC) is up more than 7 times in 7 months. Was this a panic low? Yes. But wasn't BofA paying out dividends for years and buying its stock, leaving no retained earnings, when in retrospect it had no margin of safety when a little panic occurred, as it always might? Yes.
Whereas the point with gold is that it pays nothing, so its total return comes from what some call price appreciation but others call preservation of purchasing power. The most basic reason to invest in gold is a highly conservative one: keep what one has, rather than try to grow it as with a speculative growth vehicle.
Big Finance is playing poker against everyone else and, as with Goldfinger gambling in Miami Beach, they see your cards but you don't see theirs. And the government will provide downside protection for them but not you. Nice work if you can get it. How long will going with this sort of stock continue to be a one-way bet for the public without government backstop of the stock price?
Copyright (C) Long Lake LLC 2009
Tuesday, October 13, 2009
Economic Update
The fundamentals of the U. S. economy aren't looking so hot to ordinary people or to CFOs. Duke University published last month its quarterly CFO Survey. It's an ideal survey for bond bulls. The CFOs have mild optimism but in general plan to cut jobs and capital spending next year. They also plan to outsource jobs to Asia next year, where capital spending plans are relatively robust. They do plan to increase their cash balances as profits slowly improve.
Meanwhile, Gallup.com continues to show dismal hiring/letting go numbers.
I have not talked to one person in the small-midsized business community who sees a pickup in business--au contraire, in general.
Amongst my several banker contacts, one thing is clear. The bankers ARE NOT LENDING except to clients who barely need to borrow, or where there is a Federal backstop. Banks are purchasing munis and Treasuries for lack of anything better to do.
Yes, every traditional cyclical indicator suggests good growth ahead. Perhaps this is the pause that refreshes. But as a physician, I treated every case as a new one. Anomalies occur. Somehow the current economic/financial/markets case just feels different. Right now, I'm taking "the under" on the economy. (Not too brave, since I'm agreeing with Dr. Hatzius of Goldman Sachs!)
Prosperity must be just around the corner . . .
Copyright (C) Long Lake LLC 2009
Meanwhile, Gallup.com continues to show dismal hiring/letting go numbers.
I have not talked to one person in the small-midsized business community who sees a pickup in business--au contraire, in general.
Amongst my several banker contacts, one thing is clear. The bankers ARE NOT LENDING except to clients who barely need to borrow, or where there is a Federal backstop. Banks are purchasing munis and Treasuries for lack of anything better to do.
Yes, every traditional cyclical indicator suggests good growth ahead. Perhaps this is the pause that refreshes. But as a physician, I treated every case as a new one. Anomalies occur. Somehow the current economic/financial/markets case just feels different. Right now, I'm taking "the under" on the economy. (Not too brave, since I'm agreeing with Dr. Hatzius of Goldman Sachs!)
Prosperity must be just around the corner . . .
Copyright (C) Long Lake LLC 2009
The Push Continues for a Value-Added Tax and Lots and Lots of Debt
Early in his Presidency, Bill Clinton was overheard to muse about the good things that the Government could do with the revenues from a Europe-styled value-added tax (VAT). This idea went away after it received a frosty reception but has been resuscitated in the Obama era.
In a refreshingly honest and allegedly fiscally responsible manner, two Brookings Institute economists have a WaPo editorial laying out the need for and virtues of a VAT. The title is: Bend the Revenue Curve; Health Reform Alone Won't End Deficits.
Only an economist could speak about "bending" the revenue curve when talking about tax increases, pure and simple. And only the Brookings Institute and their allies seriously believe that the more government becomes the payer/subsidizer etc. for Americans' health care, the more money it and we will save. No doubt the pharmaceutical industry bellied up to the health care reform bar with a $150 M ad campaign to save us money!
Medicare was supposed to be a small, easily affordable program. Now, everyone's paycheck has a 2.9% additional tax laughingly called a "Medicare tax". But it's just a tax that goes into general revenues.
The VAT proposed by Drs. Aaron and Sawhill is just another tax in addition to the crazy quilt of taxes Americans are faced with.
Unfortunately, the more one taxes something--in this case production and sales of goods and services--the less one gets of it.
In investing, one of the enduring adages is to keep it simple. Large scale unemployment in the U. S. never occurred for long until the interventionist president Herbert Hoover hoved onto the scene. What we think of as one depression from 1929-32 was at least two. The 1929 downturn appeared to end quickly in 1930, with a major decline in unemployment in the first half of 1930, but an immediate double dip occurred, perhaps related to the Smoot-Hawley Tariff Act of June 1930. The low-tax region of Hong Kong has had nothing but economic dynamism decade after decade.
The saying that the government is best that governs least is from to the anti-slavery activist Henry David Thoreau- hardly a reactionary.
Part of me applauds the point made in the above-linked editorial: pay for what the government spends, but only part of me, because I don't believe they mean it. All of me believes that the progressive agenda involves paying for all the good things that the progressives want government to do for the people with unending borrowing and where suitable with frank money printing. The commentator Marshall Auerback states this repeatedly, such as in Time for a New "New Deal":
Is President-elect Obama another Franklin Roosevelt, ready to embark on a radical remaking of the country’s political and social fabric?
We hope so. There is no shortage of places in which to invest: extended unemployment insurance, state fiscal relief, increased food stamp programs, and large scale infrastructure. No question, there will be more debt, lots and lots of it.
The American progressive agenda is a copy of what the European "Social Democrat" parties advocate. To Europe's credit, the socialists are honest about what they are. If America wants to go more and more socialist, at least it should do so with a much simpler tax system. Adding a VAT on top of all our other taxes and exemptions would be inefficient and confusing.
As stated at EBR many times, statism is on the march in the U. S. It became apparent for real a year ago with the statist/crony capitalism actions of the Bush Administration and the Fed in response to the failure of highly leveraged financial companies. It is intensifying under the Obama Administration. The most consistent financial market response has been toward higher gold prices.
The market does not always get the future right, but investors need to be aware of the major trend and separate it from the churning actions. Short term, Goldman Sachs came out last week with a call for a relatively weak economy in 2010, no Fed action to raise short term interest rates for a year or so, and a rally in the 10 year Treasury toward 3% by yearend 2009. This strikes me as realistic, and I bought TLT back after a sudden 3-4 point sudden dip, but only for a trade. When the powers that be in Washington want more debt and more spending, with more taxes to allow yet more borrowing and spending, the unending supply of debt offerings hardly makes for a compelling long term supply-demand proposition.
Copyright (C) Long Lake LLC 2009
In a refreshingly honest and allegedly fiscally responsible manner, two Brookings Institute economists have a WaPo editorial laying out the need for and virtues of a VAT. The title is: Bend the Revenue Curve; Health Reform Alone Won't End Deficits.
Only an economist could speak about "bending" the revenue curve when talking about tax increases, pure and simple. And only the Brookings Institute and their allies seriously believe that the more government becomes the payer/subsidizer etc. for Americans' health care, the more money it and we will save. No doubt the pharmaceutical industry bellied up to the health care reform bar with a $150 M ad campaign to save us money!
Medicare was supposed to be a small, easily affordable program. Now, everyone's paycheck has a 2.9% additional tax laughingly called a "Medicare tax". But it's just a tax that goes into general revenues.
The VAT proposed by Drs. Aaron and Sawhill is just another tax in addition to the crazy quilt of taxes Americans are faced with.
Unfortunately, the more one taxes something--in this case production and sales of goods and services--the less one gets of it.
In investing, one of the enduring adages is to keep it simple. Large scale unemployment in the U. S. never occurred for long until the interventionist president Herbert Hoover hoved onto the scene. What we think of as one depression from 1929-32 was at least two. The 1929 downturn appeared to end quickly in 1930, with a major decline in unemployment in the first half of 1930, but an immediate double dip occurred, perhaps related to the Smoot-Hawley Tariff Act of June 1930. The low-tax region of Hong Kong has had nothing but economic dynamism decade after decade.
The saying that the government is best that governs least is from to the anti-slavery activist Henry David Thoreau- hardly a reactionary.
Part of me applauds the point made in the above-linked editorial: pay for what the government spends, but only part of me, because I don't believe they mean it. All of me believes that the progressive agenda involves paying for all the good things that the progressives want government to do for the people with unending borrowing and where suitable with frank money printing. The commentator Marshall Auerback states this repeatedly, such as in Time for a New "New Deal":
Is President-elect Obama another Franklin Roosevelt, ready to embark on a radical remaking of the country’s political and social fabric?
We hope so. There is no shortage of places in which to invest: extended unemployment insurance, state fiscal relief, increased food stamp programs, and large scale infrastructure. No question, there will be more debt, lots and lots of it.
The American progressive agenda is a copy of what the European "Social Democrat" parties advocate. To Europe's credit, the socialists are honest about what they are. If America wants to go more and more socialist, at least it should do so with a much simpler tax system. Adding a VAT on top of all our other taxes and exemptions would be inefficient and confusing.
As stated at EBR many times, statism is on the march in the U. S. It became apparent for real a year ago with the statist/crony capitalism actions of the Bush Administration and the Fed in response to the failure of highly leveraged financial companies. It is intensifying under the Obama Administration. The most consistent financial market response has been toward higher gold prices.
The market does not always get the future right, but investors need to be aware of the major trend and separate it from the churning actions. Short term, Goldman Sachs came out last week with a call for a relatively weak economy in 2010, no Fed action to raise short term interest rates for a year or so, and a rally in the 10 year Treasury toward 3% by yearend 2009. This strikes me as realistic, and I bought TLT back after a sudden 3-4 point sudden dip, but only for a trade. When the powers that be in Washington want more debt and more spending, with more taxes to allow yet more borrowing and spending, the unending supply of debt offerings hardly makes for a compelling long term supply-demand proposition.
Copyright (C) Long Lake LLC 2009
Monday, October 12, 2009
How Difficult Asian Geopolitics Aid the Price of Gold
From Dawn.com:
The Pakistani Taliban have claimed responsibility for a brazen weekend attack on the army's headquarters compound in the city of Rawalpindi.
Taliban spokesman Azam Tariq called The Associated Press on Monday and said the attack that killed 20 people was only the first in a planned series of strikes intended to avenge the killing of their leader Baitullah Mehsud in a CIA drone attack in August.
He said the raid on army headquarters was carried out by a Punjabi faction of the militant group and it had given orders to other militant branches across the country to launch similar operations.
He also warned the army that if it launched a planned offensive into Waziristan it would be its undoing.
The Nobel Peace Prize winner Barack Obama authorized, directly or indirectly, that CIA drone attack.
If he wants to be a war president, then in good conscience he should refuse the Peace Prize. He can say that he will be pleased to accept it if it is reoffered after he has fought and won the good fight and helped bring peace to a tortured region. If he wants to be a "peace now" president, then it is hard to see how he believes that an America of questionable financial solvency should be so involved in the internal affairs of a sovereign nation. Please recall that the Mehsud tribal leader that our country killed (in cold blood) has not been asserted to have been involved in fighting in Afghanistan. What did that killing have to do with the Afghan insurgency?
The game of tit for tat amongst tribes and factions in Pakistan is a difficult one for America to play now.
Here is what Pakistan is really concerned about, also from today's Dawn.com: Massive war games showcase deepening India-US ties:
NEW DELHI: India and the United States began a massive joint military exercise on Monday, underscoring their deepening security ties they view as crucial in a troubled South Asia region.
Pakistan created the Taliban, very likely with U. S. assistance and encouragement, during the Soviet Union's occupation of Afghanistan. Months of reading Dawn.com tell me that Pakistan regards its Taliban as country bumpkins. Meanwhile, Pakistan has fought three wars with India and developed nukes because India had them.
Think of Pakistan as Cambodia, Afghanistan as Viet Nam, and Obama as Nixon. Nixon's expansion of the Viet Nam War to Cambodia was useless to our Viet Nam effort and may have led to the murderous Pol Pot regime coming to power in Cambodia. It would be quite an irony, and a sad one, if Mr. Obama followed the Nixon example with similar results.
The greater the U. S. military involvement in the internal affairs of faraway people, the greater the chance that via one route or another, we will get more rather than less involved. Such is the nature of positive feedback loops. Given our economic and financial problems, is President Obama willing to demand the domestic stringencies necessary to fight an expanded war in Asia if he deems it necessary without resorting to out-and-out money printing to finance it?
The above represents another argument for gold ownership as a hedge if our role in the Afghan war or the Pakistan civil conflict expands and the answer to the above question is the answer Presidents Johnson, Nixon and Bush II gave.
Copyright (C) Long Lake LLC 2009
The Pakistani Taliban have claimed responsibility for a brazen weekend attack on the army's headquarters compound in the city of Rawalpindi.
Taliban spokesman Azam Tariq called The Associated Press on Monday and said the attack that killed 20 people was only the first in a planned series of strikes intended to avenge the killing of their leader Baitullah Mehsud in a CIA drone attack in August.
He said the raid on army headquarters was carried out by a Punjabi faction of the militant group and it had given orders to other militant branches across the country to launch similar operations.
He also warned the army that if it launched a planned offensive into Waziristan it would be its undoing.
The Nobel Peace Prize winner Barack Obama authorized, directly or indirectly, that CIA drone attack.
If he wants to be a war president, then in good conscience he should refuse the Peace Prize. He can say that he will be pleased to accept it if it is reoffered after he has fought and won the good fight and helped bring peace to a tortured region. If he wants to be a "peace now" president, then it is hard to see how he believes that an America of questionable financial solvency should be so involved in the internal affairs of a sovereign nation. Please recall that the Mehsud tribal leader that our country killed (in cold blood) has not been asserted to have been involved in fighting in Afghanistan. What did that killing have to do with the Afghan insurgency?
The game of tit for tat amongst tribes and factions in Pakistan is a difficult one for America to play now.
Here is what Pakistan is really concerned about, also from today's Dawn.com: Massive war games showcase deepening India-US ties:
NEW DELHI: India and the United States began a massive joint military exercise on Monday, underscoring their deepening security ties they view as crucial in a troubled South Asia region.
Pakistan created the Taliban, very likely with U. S. assistance and encouragement, during the Soviet Union's occupation of Afghanistan. Months of reading Dawn.com tell me that Pakistan regards its Taliban as country bumpkins. Meanwhile, Pakistan has fought three wars with India and developed nukes because India had them.
Think of Pakistan as Cambodia, Afghanistan as Viet Nam, and Obama as Nixon. Nixon's expansion of the Viet Nam War to Cambodia was useless to our Viet Nam effort and may have led to the murderous Pol Pot regime coming to power in Cambodia. It would be quite an irony, and a sad one, if Mr. Obama followed the Nixon example with similar results.
The greater the U. S. military involvement in the internal affairs of faraway people, the greater the chance that via one route or another, we will get more rather than less involved. Such is the nature of positive feedback loops. Given our economic and financial problems, is President Obama willing to demand the domestic stringencies necessary to fight an expanded war in Asia if he deems it necessary without resorting to out-and-out money printing to finance it?
The above represents another argument for gold ownership as a hedge if our role in the Afghan war or the Pakistan civil conflict expands and the answer to the above question is the answer Presidents Johnson, Nixon and Bush II gave.
Copyright (C) Long Lake LLC 2009
The Message of the Markets and a Master of the Markets on How to Allocate Assets
Skeptical minds are wondering why Bloomberg.com is running Rallying S&P 500 Never Cheaper in Europe on Dollar. I don't recommend that you read all of it. That would IMO be a waste of time. Its point can be summarized as follows: The U. S. stock market has been going nowhere in international units of money. The article is dangerous because it suggests that despite the massive inflation in asset prices of stocks, the media continues to flog them. What are we to make of the prominence given to an obscure financial researcher, as follows?
“The valuation for the market is still below normal levels,” said Jason Pride, director of research at Haverford Investments, which oversees $6 billion in Radnor, Pennsylvania. “We still believe there’s a fairly good, positive bias in the direction of the market.”
What is that valuation?
The MSCI World was valued at 27.7 times the earnings of its 1,659 companies in September, exceeding the S&P 500’s ratio by 7.75 points, according to monthly data compiled by Bloomberg.
In other words, global stock markets are at bubble valuations. The U. S., the epicenter of the latest global financial crisis, is merely at fully-priced valuations that were sustained for a while in the 1950s but still has emergency zero short rates in place because . . . supposedly there's a crisis.
Meanwhile, as I complete this post, GLD is up 0.80% and SPY is up 0.6%. Quietly, gold continues its outperformance. Someone is accumulating it and has been doing so ever since the U. S. began a guns and butter-type economy following the 9/11 attacks. In general, the collective accumulator is to some degree the public via exchange traded funds, but the signs of a peak in public enthusiasm for gold are not very visible. Check out the small ETF with the symbol GTU to see that it is only today even beginning to emerge from a bearish chart pattern of several months duration, despite the bullish configuration from the better known ETF GLD for quite some time. If the public were fully engaged, GTU should have been flying.
Technically, gold has no overhead resistance. Think stocks, circa late 1982 or early-mid Clinton years. Fundamentally vs. other asset prices, gold is neither overvalued nor undervalued. More fundamentally, the massive Federal deficit is a gift that keeps on giving. So, it is not hard to see gold moving toward a richer valuation, and possibly an over-rich one (think NASDAQ late 1990s). IF that happens, then it would be a "don't buy" or "sell". But that has not happened yet and may not.
To conclude with a quote from John Paulson (from Your dollars are just Monopoly money by Bill Fleckenstein), the hedge fund manager who made billions in 2007-8 largely from shorting subprime at the right time:
"What I'm looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I'm looking at is where is gold going to be vis-à-vis the dollar one year from now, three years from now, five years from now. And I think, with a high probability at each of those points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point."
If by 2012 it is Springtime in America again and Barack Obama is headed for a 49 state electoral sweep because the economy is growing and adding lots of jobs and he has justified winning the Nobel Peace Prize, and therefore my gold holdings have underperformed inflation, I will be so happy for my children and for the majority of my assets that are not gold that I will be a happier person than if times stay unsettled and I own gold that continues to outperform cash and stocks.
In other words, one does not have to be a "gold bug" to own gold. One simply has to ignore the spin from the MSM and focus on facts and preservation of purchasing power of one's mostly electronic assets we call money.
Copyright (C) Long Lake LLC 2009
“The valuation for the market is still below normal levels,” said Jason Pride, director of research at Haverford Investments, which oversees $6 billion in Radnor, Pennsylvania. “We still believe there’s a fairly good, positive bias in the direction of the market.”
What is that valuation?
The MSCI World was valued at 27.7 times the earnings of its 1,659 companies in September, exceeding the S&P 500’s ratio by 7.75 points, according to monthly data compiled by Bloomberg.
In other words, global stock markets are at bubble valuations. The U. S., the epicenter of the latest global financial crisis, is merely at fully-priced valuations that were sustained for a while in the 1950s but still has emergency zero short rates in place because . . . supposedly there's a crisis.
Meanwhile, as I complete this post, GLD is up 0.80% and SPY is up 0.6%. Quietly, gold continues its outperformance. Someone is accumulating it and has been doing so ever since the U. S. began a guns and butter-type economy following the 9/11 attacks. In general, the collective accumulator is to some degree the public via exchange traded funds, but the signs of a peak in public enthusiasm for gold are not very visible. Check out the small ETF with the symbol GTU to see that it is only today even beginning to emerge from a bearish chart pattern of several months duration, despite the bullish configuration from the better known ETF GLD for quite some time. If the public were fully engaged, GTU should have been flying.
Technically, gold has no overhead resistance. Think stocks, circa late 1982 or early-mid Clinton years. Fundamentally vs. other asset prices, gold is neither overvalued nor undervalued. More fundamentally, the massive Federal deficit is a gift that keeps on giving. So, it is not hard to see gold moving toward a richer valuation, and possibly an over-rich one (think NASDAQ late 1990s). IF that happens, then it would be a "don't buy" or "sell". But that has not happened yet and may not.
To conclude with a quote from John Paulson (from Your dollars are just Monopoly money by Bill Fleckenstein), the hedge fund manager who made billions in 2007-8 largely from shorting subprime at the right time:
"What I'm looking at is not where gold is going to be tomorrow, one week from now, one month from now, three months from now. What I'm looking at is where is gold going to be vis-à-vis the dollar one year from now, three years from now, five years from now. And I think, with a high probability at each of those points, gold will be higher than it is relative to the dollar today. That probability increases the further out you go. So when I look at what the risk is, the risk to me is far more staying in dollars than it is in gold at this point."
If by 2012 it is Springtime in America again and Barack Obama is headed for a 49 state electoral sweep because the economy is growing and adding lots of jobs and he has justified winning the Nobel Peace Prize, and therefore my gold holdings have underperformed inflation, I will be so happy for my children and for the majority of my assets that are not gold that I will be a happier person than if times stay unsettled and I own gold that continues to outperform cash and stocks.
In other words, one does not have to be a "gold bug" to own gold. One simply has to ignore the spin from the MSM and focus on facts and preservation of purchasing power of one's mostly electronic assets we call money.
Copyright (C) Long Lake LLC 2009
Friday, October 9, 2009
Something's Coming?
You can believe that the economy is already improving when you see the following (MarketWatch):
Washington starts cooking third stimulus
Bleak job report moves plan from back burner
The bleak September jobs report appears to have cracked the political logjam blocking progress on a third stimulus package.
Many economists have come to think that a third stimulus makes good sense. "I think the economy needs more help and they should provide it," said Mark Zandi, chief economist at Moody's Economy.com.
The more debt that is out there, the more business Moody's gets. A third "stimulus"? Earth to Washington: the stock market is up 60% or so. Business profits are rebounding. Layoffs are decreasing. The normal next part of the business cycle is for hiring to pick up. It's supposed to be free enterprise. Just please build more medical, nursing and other schools so that we can properly care for the Boomers when we start doddering.
Here's where the article gets toxic:
. . . analysts say that Democrats are likely to need a new initiative to show voters they are trying to create more jobs.
I'm all in favor of Democrats creating jobs. I'm also in favor of Republicans, independents, Libertarians, Naderites, etc. creating jobs. But I'm not a big fan of politicians "creating jobs". Because, you see, it's our money they are using with which to create jobs. Call politicians the parasitic job-creating class. Politicians earn their money the old-fashioned way. They extract it from others at the implicit point of a gun, or they print it. The rest of us have to earn it.
The truth is that the public "gets it". There was a housing bubble based on mortgage fraud. There was unsound financing and there was gambling going on within the very structures of Big Finance. The worst offenders, AIG and Fannie/Freddie, exist as zombie institutions with publicly traded stocks for no apparent reason other than to continue to provide jobs for financial types and to provide stock trading commissions for Merrill Lynch et al. Big Finance helped cause the aforementioned problems just as it got rich on overinvestment on tech stuff a decade ago. Big Finance is getting richer due to government fiat. That is why there are insufficient jobs. The money was looted. Why do you think the Swiss are building more storage for physical gold? How many ordinary people do you know who are keeping physical gold in Switzerland?
Rather than trading the same barrel of oil over and over again, or clearing stock trades that serve no other economic purpose than to enrich the middlemen, perhaps the financiers who know enough to have been buying physical gold should emulate the Obamas and grow organic vegetables. Actually physically cultivate and care for them. Something useful, in other words.
The same government that is keeping zombie institutions alive and that is in a real sense forcing and for certain encouraging people to speculate again in the stock market and other markets by recapitalizing the banks by forcing short-term interest rates to zero is, if the MarketWatch report is correct, once again going to pull a Herbert Hoover and intervene unnecessarily in the private economy (think Hawley and Smoot) when it should focus on helping the needy through these difficult times while letting the business cycle create jobs that actually have a point. These jobs fulfill a societal need and therefore allow a business, large or small, to create profits. Those profits can then be part of a virtuous cycle. Think Microsoft in its creative years and the numerous companies and technologies that formed around its products.
A guess: a new government "stimulus" program will be viewed by the financial markets as counter-productive unless it is really relief for the needy disguised as stimulus. In either case, the guess here is that it will be bad for T-bond prices and bullish for precious metals. The effects on stocks are murkier.
The cynic in me says that Big Finance is long gold and short T-bonds if indeed we find early next week that a third "stimulus" is going to happen. Could be, who knows.
The EBR solution: hold your bonds unless you are overweight already but buy no more Treasuries. Make sure that you have a significant weighting in gold and other precious metals with your risk capital. And watch Afghanistan.
Copyrighti (C) Long Lake LLC 2009
Washington starts cooking third stimulus
Bleak job report moves plan from back burner
The bleak September jobs report appears to have cracked the political logjam blocking progress on a third stimulus package.
Many economists have come to think that a third stimulus makes good sense. "I think the economy needs more help and they should provide it," said Mark Zandi, chief economist at Moody's Economy.com.
The more debt that is out there, the more business Moody's gets. A third "stimulus"? Earth to Washington: the stock market is up 60% or so. Business profits are rebounding. Layoffs are decreasing. The normal next part of the business cycle is for hiring to pick up. It's supposed to be free enterprise. Just please build more medical, nursing and other schools so that we can properly care for the Boomers when we start doddering.
Here's where the article gets toxic:
. . . analysts say that Democrats are likely to need a new initiative to show voters they are trying to create more jobs.
I'm all in favor of Democrats creating jobs. I'm also in favor of Republicans, independents, Libertarians, Naderites, etc. creating jobs. But I'm not a big fan of politicians "creating jobs". Because, you see, it's our money they are using with which to create jobs. Call politicians the parasitic job-creating class. Politicians earn their money the old-fashioned way. They extract it from others at the implicit point of a gun, or they print it. The rest of us have to earn it.
The truth is that the public "gets it". There was a housing bubble based on mortgage fraud. There was unsound financing and there was gambling going on within the very structures of Big Finance. The worst offenders, AIG and Fannie/Freddie, exist as zombie institutions with publicly traded stocks for no apparent reason other than to continue to provide jobs for financial types and to provide stock trading commissions for Merrill Lynch et al. Big Finance helped cause the aforementioned problems just as it got rich on overinvestment on tech stuff a decade ago. Big Finance is getting richer due to government fiat. That is why there are insufficient jobs. The money was looted. Why do you think the Swiss are building more storage for physical gold? How many ordinary people do you know who are keeping physical gold in Switzerland?
Rather than trading the same barrel of oil over and over again, or clearing stock trades that serve no other economic purpose than to enrich the middlemen, perhaps the financiers who know enough to have been buying physical gold should emulate the Obamas and grow organic vegetables. Actually physically cultivate and care for them. Something useful, in other words.
The same government that is keeping zombie institutions alive and that is in a real sense forcing and for certain encouraging people to speculate again in the stock market and other markets by recapitalizing the banks by forcing short-term interest rates to zero is, if the MarketWatch report is correct, once again going to pull a Herbert Hoover and intervene unnecessarily in the private economy (think Hawley and Smoot) when it should focus on helping the needy through these difficult times while letting the business cycle create jobs that actually have a point. These jobs fulfill a societal need and therefore allow a business, large or small, to create profits. Those profits can then be part of a virtuous cycle. Think Microsoft in its creative years and the numerous companies and technologies that formed around its products.
A guess: a new government "stimulus" program will be viewed by the financial markets as counter-productive unless it is really relief for the needy disguised as stimulus. In either case, the guess here is that it will be bad for T-bond prices and bullish for precious metals. The effects on stocks are murkier.
The cynic in me says that Big Finance is long gold and short T-bonds if indeed we find early next week that a third "stimulus" is going to happen. Could be, who knows.
The EBR solution: hold your bonds unless you are overweight already but buy no more Treasuries. Make sure that you have a significant weighting in gold and other precious metals with your risk capital. And watch Afghanistan.
Copyrighti (C) Long Lake LLC 2009
Time to Get Bearish on Stocks?
To answer the title question, not quite; but now that bullishness on the economy is so widespread and CEOs are at multi-year levels of optimism on the economy while not buying the stocks of their own companies, yours truly has largely exited the stock market except for bond equivalents such as MCD and FPL.
Regular EBR readers know that the view since the blog began in late December 2008 was that the general stock market was for gamblers. After the bottom was seen, some specific buy suggestions were made. These included stocks that have gone to all-time highs, such as (symbols only) NPK, ROST, and TEVA. For patient income-oriented buy and hold investors (not traders), MCD was suggested and remains in the portfolio of yours truly in increased quantities given improved fundamentals (see below).
The stock market as measured by SPY has now more or less filled the gap set when it collapsed last September and October. It has outperformed the long T-bond this year by a massive amount. Its long-term chart is churning. Bloomberg has a headline today that CEO confidence has reached a 5-year high. The ECRI growth rate of its economic indicators has reached a new record (reflecting the bungee jump moves up and down in these indicators), and in most weeks it refers to improvement in the housing market as the main mover.
Yet now we see increasing evidence that the housing market is being kept alive by FHA making loans by the bucketful with limited care being given to each loan, even though they are more or less free of a significant down-payment, with increasing default rates. Bubble financing redux. With mortgage rates rock-bottom and the dollar down, can things look better in housing land? Yes they can, but probably only in the high end, where there are no government subsidies and where it would appear that sellers are continuing to ask too much.
I wrote this winter that panic was not appropriate, the world was still turning, and the economy was continuing to fill the basic needs of the populace. What remains still lacking is transparency on our financial situation. The large financial institutions are faith-based. For publicly-traded companies to be completely opaque as to what assets they own is unfair.
Businesses are still not doing much hiring, though layoffs have decreased. Corporate profits are rebounding, which makes sense given that the Feds have to put the $1.8 T deficit to work. Call it privatizing the profits and socializing the costs. The earnings from above-normal deficit spending get a P/E of about one in my world.
Stocks are normally valued by the asset values of the companies, financial strength, dividend-paying capability, takeover value, and also by earnings. The same magical thinking that allows a new President who is a war President to date and has ended no war, solved no Middle East conflict, brought no peace to any part of Africa etc. to be deemed worthy of the Nobel Peace Prize is used to justify stock prices by talking only about P/E's, even if the earnings derive from no tangible asset base.
The sense here is that Treasuries are so hated and too many people missed the breakout in gold (if they care about gold at all) to provide a strong feeling that their bull markets have ended, though for me Treasuries are primarily trading vehicles given that we are probably in an up part of the economic cycle that has been discounted and perhaps then some by equities and given the extraordinary efforts of the government to sell debt to benefit private companies and some individuals.
Until common stocks have better valuations not only regarding P/E's but re dividends and price to tangible equity, they remain subject to large moves down. It was valuation and not earnings that broke the falls in stock prices in 1932-3 and in the early 1980s and that allowed the massive bull market from 1942-65 despite 5 recessions in that time. The stock market rally since March has now moved toward (but not to) the upper part of its long-term inflation-adjusted trading range, which uptrend itself is not guaranteed to continue. When McDonald's stock goes absolutely nowhere despite an earnings yield of about 7%, a current dividend yield of about 4%, record earnings, rising earnings estimates for 2009 and 2010, and has tremendous international diversification, but Macy's with negligible tangible book value and highly variable and uncertain earnings has tripled in only 7 months, market risk appears very high.
CIT quadrupled from its August low, and has been cut in half in only 10 days on no real fundamental news. I like the risk-reward in well-timed purchases (and sales) of Treasuries, gold and MCD much better than the kind of speculation that ownership in Macy's (M) represents, and I don't give a second's thought to the investment merits of CIT or AIG. That said, any market can go anywhere, especially a low-volume one. So, shorting this market is also quite risky.
The above is a lengthy way of saying that a pause that, should it occur, I hope refreshes has a good chance of being close at hand for the stock averages.
Copyright (C) Long Lake LLC 2009
Regular EBR readers know that the view since the blog began in late December 2008 was that the general stock market was for gamblers. After the bottom was seen, some specific buy suggestions were made. These included stocks that have gone to all-time highs, such as (symbols only) NPK, ROST, and TEVA. For patient income-oriented buy and hold investors (not traders), MCD was suggested and remains in the portfolio of yours truly in increased quantities given improved fundamentals (see below).
The stock market as measured by SPY has now more or less filled the gap set when it collapsed last September and October. It has outperformed the long T-bond this year by a massive amount. Its long-term chart is churning. Bloomberg has a headline today that CEO confidence has reached a 5-year high. The ECRI growth rate of its economic indicators has reached a new record (reflecting the bungee jump moves up and down in these indicators), and in most weeks it refers to improvement in the housing market as the main mover.
Yet now we see increasing evidence that the housing market is being kept alive by FHA making loans by the bucketful with limited care being given to each loan, even though they are more or less free of a significant down-payment, with increasing default rates. Bubble financing redux. With mortgage rates rock-bottom and the dollar down, can things look better in housing land? Yes they can, but probably only in the high end, where there are no government subsidies and where it would appear that sellers are continuing to ask too much.
I wrote this winter that panic was not appropriate, the world was still turning, and the economy was continuing to fill the basic needs of the populace. What remains still lacking is transparency on our financial situation. The large financial institutions are faith-based. For publicly-traded companies to be completely opaque as to what assets they own is unfair.
Businesses are still not doing much hiring, though layoffs have decreased. Corporate profits are rebounding, which makes sense given that the Feds have to put the $1.8 T deficit to work. Call it privatizing the profits and socializing the costs. The earnings from above-normal deficit spending get a P/E of about one in my world.
Stocks are normally valued by the asset values of the companies, financial strength, dividend-paying capability, takeover value, and also by earnings. The same magical thinking that allows a new President who is a war President to date and has ended no war, solved no Middle East conflict, brought no peace to any part of Africa etc. to be deemed worthy of the Nobel Peace Prize is used to justify stock prices by talking only about P/E's, even if the earnings derive from no tangible asset base.
The sense here is that Treasuries are so hated and too many people missed the breakout in gold (if they care about gold at all) to provide a strong feeling that their bull markets have ended, though for me Treasuries are primarily trading vehicles given that we are probably in an up part of the economic cycle that has been discounted and perhaps then some by equities and given the extraordinary efforts of the government to sell debt to benefit private companies and some individuals.
Until common stocks have better valuations not only regarding P/E's but re dividends and price to tangible equity, they remain subject to large moves down. It was valuation and not earnings that broke the falls in stock prices in 1932-3 and in the early 1980s and that allowed the massive bull market from 1942-65 despite 5 recessions in that time. The stock market rally since March has now moved toward (but not to) the upper part of its long-term inflation-adjusted trading range, which uptrend itself is not guaranteed to continue. When McDonald's stock goes absolutely nowhere despite an earnings yield of about 7%, a current dividend yield of about 4%, record earnings, rising earnings estimates for 2009 and 2010, and has tremendous international diversification, but Macy's with negligible tangible book value and highly variable and uncertain earnings has tripled in only 7 months, market risk appears very high.
CIT quadrupled from its August low, and has been cut in half in only 10 days on no real fundamental news. I like the risk-reward in well-timed purchases (and sales) of Treasuries, gold and MCD much better than the kind of speculation that ownership in Macy's (M) represents, and I don't give a second's thought to the investment merits of CIT or AIG. That said, any market can go anywhere, especially a low-volume one. So, shorting this market is also quite risky.
The above is a lengthy way of saying that a pause that, should it occur, I hope refreshes has a good chance of being close at hand for the stock averages.
Copyright (C) Long Lake LLC 2009
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