Once in a while, Government statistics, which are now deliberately presented to prevent people from easily even seeing year-on-year comparisons in favor of almost meaningless month-to-month variations, end up hiding not the bad news but the good news.
Today, for example, the consumer price index was released. Allegedly, clothing and automobile costs led the price increase.
Anyone who believes that automobile prices went up last month is living in another planet. The same is true for clothing prices.
For example, all-cotton Dockers pants are on sale at Macy's for $33, down from $48, but in a post-St. Patrick's day, pre-Passover sale, they are being further discounted to $28. This price has to be a price seen many years ago. In addition, there may actually be some quality improvement, such as permanent crease and something called "micro-sanding for softness". Plus, in tune with the obesity epidemic:
"Your favorite khakis now have an invisible extra inch in the waistband that expands when you need it."
Unfortunately, the Fed keeps insisting that even modest deflation, such as a 1-2% price decline over the next year or two, is so horrible that it needs to continue its hysterical, hyperkinetic activities. Earth to Fed: get on the side of the people rather than the banksters, for a change. Raises are hard to come by. Secure financial assets yield nothing, or next to nothing. Formerly reliable dividend stocks such as GE and BofA have slashed their dividends, and everyone knows that absent the bailout, BofA might well be bankrupt, as might GE Capital. So, the Fed needs to cut the ---- about deflation expectations suddenly becoming ingrained. The truth is that inflation expectations have risen along with the massive Federal deficits and Federal Reserve actions.
Back to railing against Gov't statistics.
They even mislead us about Gross Domestic Product.
The government, for unclear reasons, assumes that even though a home is correctly counted as economic activity when it is built, a homeowner pays him/her-self rent monthly and thus contributes to GDP. This is under the theory that because rents are part of GDP, it is unfair that a house or condo, sitting innocently wherever it sits, cannot be treated like a washing machine or television that gets used regularly but does not add to measured GDP except when it is produced and sold. This "owner's equivalent rent" adds a good deal to announced GDP. Why this logic is not applied to automobiles, which also add to GDP when rented, is not clear. As with the steroids epidemic that keeps the sports records coming, owner's-equivalent rent is economic statistics on steroids- pumped up to keep the public happy.
In any case, the point here is to ignore what the Government tells you about the economy where your eyes and eyes can provide better information, and to be skeptical about all the headlines where you cannot comment (such as trade deficits).
The Establishment/Fed/Feds pound the public through every way possible with the message that the Great Depression was deflationary, and thus the only solution for any economic problem is inflation. This flies in the face of all common sense. If farmers figure out a way to safely double the yield of a crop at the same cost per acre, then they can lower the price, sell more of that crop, and make more money. That's called "good" deflation. If the crop fails, that's bad no matter what happens to the price.
What is going on now in the economy is that there are not enough savings anymore in the U. S. This is analogous to the rural family that in past years saved grain and salted meat to get through the winter, but the rats got into the grain and the meat spoiled anyway. Thus there is currently little buffer for the hard times that have arrived. Now that this year's economic crop is failing, the fact as of today is that prices of almost all freely tradeable goods, absent the governmentally-approved cartel called OPEC, are falling. This is "bad" deflation, as it comes from crisis, but it is, nonetheless, deflation.
In addition, if and when production increases, prices may fall further for a while, as costs per unit of production drop as the increased production is spread over more units with low marginal cost per extra widget produced.
From an investing standpoint, the problem with the current deflation is that there are few to no clearly attractive financial asset classes in which to invest. This is the polar opposite of the situation in the early 1980's, when almost all financial assets, from cash to bonds to stocks appeared attractive.
Re stocks, this blog was started in December 2008 with the Dow around 8500. From the start, the advice was that the stock market was suited only for gamblers. The Dow is now around 7300. The advice remains unchanged. The best investments in companies may be in private entities that have not gone public at inflated cash-out prices.
Capital preservation remains the watchword around these parts.
Copyright (C) Long Lake LLC 2009
Showing posts with label Dow Jones Industrial Average. Show all posts
Showing posts with label Dow Jones Industrial Average. Show all posts
Wednesday, March 18, 2009
Saturday, March 14, 2009
No Good Reasons to Buy Stocks Now
This image of the Dow Jones Industrial Average, dating from 1929, may be most usefully analyzed by mentally or physically turning it upside down. (Click on it to enlarge.) Turning the graph upside down will put the downtrend that is now on the top right pointing down, instead on the bottom right pointing up. The Great Crash of 1929-32 will still be on the left but will point upwards and thus look like a "Good Thing". The smaller crash of 1973-4 will look like a small bull market.
Now, let's perform a thought experiment. Assume that there was a company that had been in existence as a publicly-owned entity all this time, and that it had kept its identity, but that business had in general been difficult. Perhaps there was incessant foreign competition, perhaps it mined a material was superseded by a cheaper material, or perhaps management was just not so hot. Now, the fundamentals had changed over the past 2 years as follows:
1. Rapidly rising sales and earnings;
1. Rapidly rising sales and earnings;
2. Rapidly rising dividends;
3. Stock priced well below tangible book value;
4. Senior management owns large stakes in the company;
5. Senior management has no "heads-I win but tails-I-don't-lose" options in the stock;
6. Senior management has been so underpaid and so used to difficult business conditions that it has sold stock after price surges in the past year;
7. Rapidly becoming free of government ownership and suddenly not needing subsidies;
8. Rapidly rising profit margins from the long-depressed levels;
9. Similar companies in similar business all over the world were suddenly experiencing booming business with similar early-stage stock breakouts to the upside.
All these points are of course the opposite of today's situation regarding general business conditions.
Obviously, professionals would buy this stock hand over fist, or with both hands and both fists.
If they wanted to buy it enough, they would remind the public that this stock had been a dog for a long time and they should be very skeptical about buying this rally.
To use another analogy, the plain and simple fact is that not only does the economy stink, but the two best forward-looking predictors of the economy and the stock market in this cycle have been the credit markets, which do not confirm the recent stock pop, and the ECRI's Weekly Leading Indicator of the economy, which yesterday dropped to a new cycle low, and is now at 1995 levels- not adjusted for inflation.
Also, for those who missed EBR's mention, the Commerce Department's advance report of business in the US of A was that $1 Trillion worth of business (pretty much the whole economy) was done in January. This was down 14-15% from January 2008. Considering all the inflation in the first half of 2008, this number should properly be adjusted to reflect the inflation, and thus would be more like a 17% decline in physical business year on year. It is said that adjusted for the deflation of the time, business in the 32 months or so of the Great Depression dropped 25% peak to trough. One therefore wonders if this about 17% real drop year on year even has a precedent in the Great Depression.
Conspiracy theorists amongst us would even wonder why no one seems to have heard of this report, though the mere 9% year on year drop in retail sales was cheered as "better than expected" (it was still a horrible double digit drop adjusted for inflation).
In any case, back to the Dow: it's a screaming buy only in a looking-glass or Bizarro world.
Copyright (C) Long Lake LLC 2009
Saturday, March 7, 2009
What's Going Down
There's something happening here
What it is ain't exactly clear. . .
Paranoia strikes deep
Into your life it will creep. .
Stop, hey, what's that sound
Everybody look what's going down.
-Buffalo Springfield, "For What It's Worth", 1967
What's been going down is the stock market, even more than the economy. Why? Among the greatest investors of all time was Warren Buffett's mentor at Columbia, Benjamin Graham, who observed about the stock market that:
"In the short run it’s a voting machine, but in the long run it’s a weighing machine."
So here's the analysis of the only three asset classes of interest to Econblog Review (EBR) in this time of crisis: the general stock market, Treasury securities, and gold. As gold is a proxy for the anti-dollar, foreign currencies may be discussed in this context.
The general belief at EBR is that many chickens have come home to roost, but that financial asset prices are "sticky" and do not yet reflect the equilibrium scenario, which smells like a lot of chicken poop.
STOCKS
Here is a long-term chart of the stock market as judged by its most familiar measuring-stick, the Dow Jones Industrial Average. (Click on it to enlarge.)
Even unadjusted for inflation, it is clear that the 2002 low has been broken. Worse, the velocity of the descent exceeds that of the 2000-2002/3 bear market and equals that of the Great Crash of 1929-32 in velocity. Indeed, 17 months from the stock peak, this downturn at least equals that of the Great Depression. Adjusted for significant deflation then and some inflation in our time, there is no doubt that the current crash is worse than then, again at the 17-month mark.
The only other parts of the chart that look similar are the 1970 and 1974 lows. Adjusted for inflation, each of those market bottoms was followed by lower lows, especially after the 1980 and then the 1981-2 recession.
So whether this is more like 1931 or 1973/4, even if we are at or near an intermediate-term stock market bottom, history suggests the strong possibility of a better buying opportunity later.
Now, let us examine the stock market as a long-term store of value. From http://www.dshort.com/:
The horrifying point here is that the inflation-adjusted Dow has only just now reverted to the previous all-time highs, in 1929 (!) and1966.
Given the disastrous performance of such metrics as corporate dividend cuts, consumer confidence, global economic performance, massively high debt levels in society as a whole, in other worlds a sea of troubles, that the Dow is only now at a record valuation except for the past 15 or so years is a warning sign. Dow 2000-4000 is a real possibility.
Note: The Short web site has several interesting charts.
Who could imagine
That they would freak out in the suburbs!
(No no no no no no no no no no
Man you guys are really safe
Everything's cool) . . .
And they thought it couldn't happen here
(duh duh duh)
They knew it couldn't happen here
They were so sure it couldn't happen here
But . . .
Frank Zappa, "It Can't Happen Here"
No, we guys were not really safe re the economy or stock prices, and yes, a long-term period of poor stock market returns can happen here, even starting from today's valuations. Japan's stock market halved from its market peak of 39,000 in 1989. It is way down from that half-the-peak, to little over 7000, twenty years after the peak. Look at the inflation-adjusted Dow in 1932-3. It was below the 1921 bottom, which itself was far below the 1900 level.
Looked at another way, if the Dow was at 900 in 1979, then in the subsequent 30 years it has return 6.8% yearly at its current price. Adding in dividends gives about a 10% yearly return.
What if the Dow were now at 3000? We would still be looking at a 7+% compounded annual return.
The S&P 500 yields about 3.2%. At major market bottoms, yields have been in 6-7+% range.
Given poor current prospects for dividends, and given a very high stock price:tangible book ratio, there is no fundamental reason to expect this to be a stock market bottom.
In other words, while the stock market will gyrate, given the obvious technical breakdown of the stock market, the poor current and short-term outlook for the economy, the weak state of the major financial institutions, the lack of fiscal discipline out of the Federal Government, etc., the stock market is riskier than it was a year ago. If the stock market were a stock, it would be a stock to avoid or to short-sell on moves upward.
GOLD
Gold remains in a structural bull market. Its nominal price remains above its 19790-80 bull market high, which is a positive sign. However, most commodities are in major bear markets. The Economic Cycle Research Institute's Future Inflation Gauge fell again in February to the lowest level since 1958.
Following the 1958 recession, the U.S. experience several years of stable prices until the Viet Nam War and Great Society programs led to a ramp-up of inflation and began the structural bear market that began in 1966 and bottomed in 1982. During that time gold rose about 20 times in price.
To this observer, the chart of gold is worrisome. It continues to give a negative year-on-year return, has become popular beyond sophisticated investors, and simply is not a currency. Thus, it is speculative in an ultimate disaster case, and perhaps is best considered as a necessity to have physically on hand or in a secure, accessible location in a foreign country in case of breakdown of the world's monetary system. However, so much deficit spending is proposed by the Obama administration, along with frank monetization of debt out of the U.K., that the case for potential significant inflation has strengthened. A much higher gold price to keep pace with inflation and perhaps to reflate global economies is very possible.
Hedges against the dollar can be considered by buying the depressed securities, BZF and ICN, which are interest-bearing investments in the currencies of Brazil and India relative to the U.S. dollar. Both countries avoided toxic derivatives, have large home markets, are not mature enough for their people to have fallen prey to the Merchants of Debt, are not involved in any wars, and have democratic governments that from this observer's perspective in Florida appear to be more prudent than our Federal Government. However, the charts on each of these securities is weak, with ICN's better and currently our favorite.
TREASURIES
Here is a real conundrum. A 5-year T-note at a 2% per annum yield gives a positive and significant return against current deflation, where almost everything for which prices vary is on sale; however, there is now a 1% per annum default risk premium on U.S. Government securities, so that the "real" nominal yield is only 1% per year.
A tentative suggestion is to buy no new Treasuries longer-term than 2 years other than for quick trades and to consider selling on strength. Given the real possibility of renewed panic a la last fall, a re-test of the December lows in yield (highs in price) of Treasuries of all durations is possible.
Treasury-equivalents such as Ginnie Mae securities, whether purchased individually or through the Vanguard or Fidelity mutual fund families, may well be superior to straight Treasuries at this time, though investors need to understand the general principles of mortgage-backed securities before investing in them.
CONCLUSION
The fundamentals of capitalist principles are strong, but the fundamentals of the economy are weak and weakening. The technical structure of the stock market is poor. There are numerous stock market metrics that are nowhere near trough historical valuations.
There really is nothing new under the sun.
If you began with the equivalent of one dollar the year Jesus was born in Nazareth and looked for 1.5% interest compounded annually, you would now own all the world's current financial worth, approaching 100 trillion dollars. Thus there is no reason to assume that any particular rate of return should occur, or should even be positive in nominal terms, much less in today's situation where debt defaults by previously apparently credit-worthy borrowers are happening and are likely to accelerate.
In plain language, the needs of the many to eat, be clothed and be housed will trump the desires of those owning that theoretical construct called capital are going to win out during hard times.
Common stocks are far riskier than are cash or bonds. Given how much our current situation resembles that of the early 1930s and Japan post-bubble, maximum caution is strongly advised.
Copyright (C) Long Lake LLC 2009
What it is ain't exactly clear. . .
Paranoia strikes deep
Into your life it will creep. .
Stop, hey, what's that sound
Everybody look what's going down.
-Buffalo Springfield, "For What It's Worth", 1967
What's been going down is the stock market, even more than the economy. Why? Among the greatest investors of all time was Warren Buffett's mentor at Columbia, Benjamin Graham, who observed about the stock market that:
"In the short run it’s a voting machine, but in the long run it’s a weighing machine."
So here's the analysis of the only three asset classes of interest to Econblog Review (EBR) in this time of crisis: the general stock market, Treasury securities, and gold. As gold is a proxy for the anti-dollar, foreign currencies may be discussed in this context.
The general belief at EBR is that many chickens have come home to roost, but that financial asset prices are "sticky" and do not yet reflect the equilibrium scenario, which smells like a lot of chicken poop.
STOCKS
Here is a long-term chart of the stock market as judged by its most familiar measuring-stick, the Dow Jones Industrial Average. (Click on it to enlarge.)
Even unadjusted for inflation, it is clear that the 2002 low has been broken. Worse, the velocity of the descent exceeds that of the 2000-2002/3 bear market and equals that of the Great Crash of 1929-32 in velocity. Indeed, 17 months from the stock peak, this downturn at least equals that of the Great Depression. Adjusted for significant deflation then and some inflation in our time, there is no doubt that the current crash is worse than then, again at the 17-month mark.The only other parts of the chart that look similar are the 1970 and 1974 lows. Adjusted for inflation, each of those market bottoms was followed by lower lows, especially after the 1980 and then the 1981-2 recession.
So whether this is more like 1931 or 1973/4, even if we are at or near an intermediate-term stock market bottom, history suggests the strong possibility of a better buying opportunity later.
Now, let us examine the stock market as a long-term store of value. From http://www.dshort.com/:
The horrifying point here is that the inflation-adjusted Dow has only just now reverted to the previous all-time highs, in 1929 (!) and1966.
Given the disastrous performance of such metrics as corporate dividend cuts, consumer confidence, global economic performance, massively high debt levels in society as a whole, in other worlds a sea of troubles, that the Dow is only now at a record valuation except for the past 15 or so years is a warning sign. Dow 2000-4000 is a real possibility.
Note: The Short web site has several interesting charts.
Who could imagine
That they would freak out in the suburbs!
(No no no no no no no no no no
Man you guys are really safe
Everything's cool) . . .
And they thought it couldn't happen here
(duh duh duh)
They knew it couldn't happen here
They were so sure it couldn't happen here
But . . .
Frank Zappa, "It Can't Happen Here"
No, we guys were not really safe re the economy or stock prices, and yes, a long-term period of poor stock market returns can happen here, even starting from today's valuations. Japan's stock market halved from its market peak of 39,000 in 1989. It is way down from that half-the-peak, to little over 7000, twenty years after the peak. Look at the inflation-adjusted Dow in 1932-3. It was below the 1921 bottom, which itself was far below the 1900 level.
Looked at another way, if the Dow was at 900 in 1979, then in the subsequent 30 years it has return 6.8% yearly at its current price. Adding in dividends gives about a 10% yearly return.
What if the Dow were now at 3000? We would still be looking at a 7+% compounded annual return.
The S&P 500 yields about 3.2%. At major market bottoms, yields have been in 6-7+% range.
Given poor current prospects for dividends, and given a very high stock price:tangible book ratio, there is no fundamental reason to expect this to be a stock market bottom.
In other words, while the stock market will gyrate, given the obvious technical breakdown of the stock market, the poor current and short-term outlook for the economy, the weak state of the major financial institutions, the lack of fiscal discipline out of the Federal Government, etc., the stock market is riskier than it was a year ago. If the stock market were a stock, it would be a stock to avoid or to short-sell on moves upward.
GOLD
Gold remains in a structural bull market. Its nominal price remains above its 19790-80 bull market high, which is a positive sign. However, most commodities are in major bear markets. The Economic Cycle Research Institute's Future Inflation Gauge fell again in February to the lowest level since 1958.
Following the 1958 recession, the U.S. experience several years of stable prices until the Viet Nam War and Great Society programs led to a ramp-up of inflation and began the structural bear market that began in 1966 and bottomed in 1982. During that time gold rose about 20 times in price.
To this observer, the chart of gold is worrisome. It continues to give a negative year-on-year return, has become popular beyond sophisticated investors, and simply is not a currency. Thus, it is speculative in an ultimate disaster case, and perhaps is best considered as a necessity to have physically on hand or in a secure, accessible location in a foreign country in case of breakdown of the world's monetary system. However, so much deficit spending is proposed by the Obama administration, along with frank monetization of debt out of the U.K., that the case for potential significant inflation has strengthened. A much higher gold price to keep pace with inflation and perhaps to reflate global economies is very possible.
Hedges against the dollar can be considered by buying the depressed securities, BZF and ICN, which are interest-bearing investments in the currencies of Brazil and India relative to the U.S. dollar. Both countries avoided toxic derivatives, have large home markets, are not mature enough for their people to have fallen prey to the Merchants of Debt, are not involved in any wars, and have democratic governments that from this observer's perspective in Florida appear to be more prudent than our Federal Government. However, the charts on each of these securities is weak, with ICN's better and currently our favorite.
TREASURIES
Here is a real conundrum. A 5-year T-note at a 2% per annum yield gives a positive and significant return against current deflation, where almost everything for which prices vary is on sale; however, there is now a 1% per annum default risk premium on U.S. Government securities, so that the "real" nominal yield is only 1% per year.
A tentative suggestion is to buy no new Treasuries longer-term than 2 years other than for quick trades and to consider selling on strength. Given the real possibility of renewed panic a la last fall, a re-test of the December lows in yield (highs in price) of Treasuries of all durations is possible.
Treasury-equivalents such as Ginnie Mae securities, whether purchased individually or through the Vanguard or Fidelity mutual fund families, may well be superior to straight Treasuries at this time, though investors need to understand the general principles of mortgage-backed securities before investing in them.
CONCLUSION
The fundamentals of capitalist principles are strong, but the fundamentals of the economy are weak and weakening. The technical structure of the stock market is poor. There are numerous stock market metrics that are nowhere near trough historical valuations.
There really is nothing new under the sun.
If you began with the equivalent of one dollar the year Jesus was born in Nazareth and looked for 1.5% interest compounded annually, you would now own all the world's current financial worth, approaching 100 trillion dollars. Thus there is no reason to assume that any particular rate of return should occur, or should even be positive in nominal terms, much less in today's situation where debt defaults by previously apparently credit-worthy borrowers are happening and are likely to accelerate.
In plain language, the needs of the many to eat, be clothed and be housed will trump the desires of those owning that theoretical construct called capital are going to win out during hard times.
Common stocks are far riskier than are cash or bonds. Given how much our current situation resembles that of the early 1930s and Japan post-bubble, maximum caution is strongly advised.
Copyright (C) Long Lake LLC 2009
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