The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Terribly amusing posting on the Freakonomics blog yesterday that made me check if it was April Fool’s Day:

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Thanks for the compliment — I think we both know this was correlation rather than causation.

We recorded that on Monday afternoon, and they posted it early Tuesday. But if you looked at the US Futures market, you can see they were very strong once Asia opened up big.

Chalk it up to fortuitous timing more than anything else . . .

Note: This was A bottom; whether its THE bottom has yet to be determined.

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Source:
When Barry Ritholtz Talks, People Listen
STEPHEN J. DUBNER
Freakonomics
NYT March 11, 2009, 1:13 PM

http://freakonomics.blogs.nytimes.com/2009/03/11/when-barry-ritholtz-talks-people-listen/

See also:
Thursday links: bullets dodged
Abnormal Returns, 12Mar09

http://abnormalreturns.com/2009/03/12/thursday-links-bullets-dodged/

Via the WSJ comes this scorecard from Economists:

Of course, given the horrific track record economists have amassed . . .

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Source:
Obama, Geithner Get Low Grades From Economists
PHIL IZZO
WSJ, MARCH 11, 2009

http://online.wsj.com/article/SB123671107124286261.html

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This morning’s guest post comes from long time analyst — and my favorite and MidWest curmudgeon — Bill King. I have been reading Bill’s “Independent View of the News” for years, and always find his insights away from the mainstream and refreshing.

Wednesday
March 11, 2009 – Issue 3465

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With credit markets deteriorating again and stocks hesitant to rally, solons had to do something to divert
attention.  So Bernanke, once again picked a bottom, calling for the US economy to bottom in 2009.
Then a memo by Citi CEO Pandrit suspiciously appeared in the WSJ to announce that Citibank turned a
profit in January and February and that its quarterly performance to date, before taxes and special items, was the best since the third quarter of 2007.  However Pandit did NOT address the pressing issues of credit losses, toxic paper, derivatives, SIVs, off-balance sheet items and related items.

Profit from operations is not and has not been the problem for financial institutions.  It’s the write offs and toxic assets.  Mr. Pandit’s dubious memo is a reiteration of what any professional already knows.

Business Week: Strip away the billions of toxic assets and the billions more that the feds have pumped
into Citigroup, and what you have is a dandy little bank that actually makes money.  At least that was the upbeat takeaway from Citi’s beleaguered CEO Vikram Pandit, who distributed a memo to employees late on Mar. 9 about the bank’s bright prospects, despite the current $1-a-share price tag.

Pandit’s apparent purposeful leak begs the question: Why did taxpayers have to rescue Citi for a
third time only two weeks ago if Citi is doing so well this year?

Here’s riddle for investors: If Pandit is being less the totally transparent, do you think that regulators
would press him to give a total accounting of credit & toxic paper woes?

We hope Mr. Pandit isn’t doing an Immeltdown.  The GE CEO proclaimed GE’s dividend was safe on
February 5.  Three weeks later, it was severely cut.

The other main rationale for yesterday’s explosive rally is talk that the uptick rule will be reinstated.  As
we have mentioned in the past, and we related to reporter yesterday, any professional trader with a
modicum of guile knows how to circumvent the uptick rule.

We have decades of experience is seeing this done. We used to accommodate hedge funds by buying
from them on an uptick on a regional and then hitting the bid. The hedgie would provide a generous
commission.  You can get a counter-party to sell you a stock with a hedging derivative; so you can then
pound the stock.  You can do an EFP on baskets.  You can sell another trader a deep in the money call
spread, stamp an exercise notice and pound the stock in concert with the other trader.  We witnessed this scheme regularly on the CBOE – about 30 years ago!

So when the financial media or traders appear to talk about how the uptick rule will halt abusive short
selling, they really don’t understand the market or the major players. But the uptick rule will impede day traders and fantasy stock traders.

The short-term/relief rally that we anticipated appears to be in bloom, ignited by short-covering in
financial stocks.  We noted in yesterday’s missive that a tradable rally could be triggered in one of two
ways: a dramatic purge or a breakout above 700 on the S&P 500 with contained pullbacks.

Obviously the breakout above 700 appeared. But astute traders realize that there have been two robust
rallies in each of the previous two weeks and they did not mark tradable bottoms. This rally has better
technicals and a more benign seasonal setting so the probability of a tradable rally is much higher.

Pullbacks must be contained so traders will now employ a buying dips instead of selling rallies strategy.

This rally could endure for a few weeks, but unless there is some dramatic fundamental change, this rally
is nothing more than a tradable rally.

Looking at the calendar, stocks should form and ‘A-B-C’ corrective rally that lasts into the first day or so
of April. As we mentioned in a previous missive, we are looking for a similar rally that occurred in
December and topped out at the second trading session of 2009.

However, this rally should be shorter in duration because the same rally impediment that appeared in
January, earnings reporting season, will arrive in three and a half weeks.

What could thwart the rally? Any one of the myriad financial landmines or nukes could suddenly
detonate, especially with credit markets worsening. However, the most likely rally killer would be a key
company or companies releasing ugly earnings & guidance earlier than scheduled.

S&P 500 Index with CCI (middle chart) and MACD (bottom chart)

The November 20 low had screaming momentum (CCI – Commodity Channel Index)) and trend
divergences. The divergences present now are with the October panic and they are not nearly as dramatic as what appeared at the November low.

As long as key moving average are downward sloping and the index is far below them, the best one can
hope for is a rally that carries to the short term (55 day) or intermediate term (126 day) moving averages.

Stocks must ‘do some work’ to turn the technicals to a more benign condition. If stocks rally over the
next two to three weeks an April-early May decline, even with new lows, should create screaming
technical divergences. And valuations could be better. Then a very robust rally could appear.

Someone, probably a broken-clock bull, sent around a message yesterday that noted that stocks closed at a 5-day high after making a new low the previous day and the last time this occurred was the bottom in 1982. Ergo “the bottom” is in!

Besides being egregiously spurious, the causation for the rally in 1982 was Paul Volcker abandoning his
quantitative tightening to flood the system with liquidity to keep Mexico and Latam from defaulting.

More importantly, stocks in 1982 were at one of their cheapest levels in history. We were at Jefferies
then and at a firm soiree in the Sears Tower, a few months before “The Bottom”, Ned Davis beat the table about stocks being as cheap, and perhaps cheaper, than at the all-time “Bottom” in 1932.

“The Bottom” in 1982 is technically superior to what current conditions. The ’82 divergences are more
pronounced but more importantly the MACD (trend) and CCI (momentum) kept vacillating around the
zero line as stocks kept trying to commence a bull market. Also, the key moving averages vacillated,
making it easier to turn positive and signal a rally. Current moving averages show no rally signs.

Dow Jones Industrial Average, March 23, 1981 to October 8, 1982

For the past several months, gold tends to rally on Thursday-Friday ahead of anticipated ugly news that
has been appearing from Friday afternoon to Monday morning. Gold tends to fall Monday to Wednesday.

With gold being oversold short-term, there could be a trade opportunity late today or on Thursday.

You’re the kind of person you meet at certain dismal, dull affairs
Center of a crowd, talking much too loud, running up and down the stairs
Well, it seems to me that you have seen too much in too few years
And though you’ve tried you just can’t hide your eyes are edged with tears

You better stop, look around
Here it comes, here it comes, here it comes, here it comes
Here comes your nineteenth nervous breakdown

-19th Nervous Breakdown
Rolling Stones

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Barry’s been complaining about a lack of quality time lately.

So here, before anybody else public, our guess about the list of “Too Big Too Fail” banks.  Tell me if we are on the right track.  (Notice no foreign names).

We’ll be commenting on same tomorrow:

Institutional Risk Analytics‘ TBTF List of Banks

Jamming on the final chapters . .  .

This is as strong an argument for receivership/recapitalization as I’ve seen. The otherwise healthy life Insurance business is getting dragged through the muck by the collapsing banking and brokerage industries:

“The tumbling financial markets are dragging down the life-insurance industry, an important cog in the U.S. economy, as mounting losses weaken the companies’ capital and erode investor confidence.

A dozen life insurers have pending applications for aid from the government’s $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the coming weeks. The government so far hasn’t said whether insurers will be eligible for the program.

Life insurers have taken a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59% since the beginning of the year, leaving it down 82% since its May 2007 all-time high. The Dow Jones Industrial Average has lost 21% year to date, off 51% since its October 2007 record.”

The longer we dawdle . . .

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Source:
The Next Big Bailout Decision: Insurers
SCOTT PATTERSON and LESLIE SCISM
WSJ, MARCH 12, 2009

http://online.wsj.com/article/SB123681439092901753.html

This is truly an astonishing number:

Freddie Mac reported yesterday that it lost $50.1 billion last year, almost half of it in the final three months of 2008, and would need an additional $30.8 billion in taxpayer assistance to stay solvent . . .

The federal government, which seized Freddie Mac and its counterpart, Fannie Mae, last fall, has agreed to cover $200 billion in losses at each firm. Freddie Mac has already received $13.8 billion. Fannie Mae has asked for nearly $15 billion.”

That is some serious wood . . .

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Source:
Freddie’s 2008 Loss Exceeds $50 Billion
Mortgage Giant Seeks More Taxpayer Money, Names Interim Chief
Zachary A. Goldfarb
Washington Post, March 12, 2009; Page D01

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/11/AR2009031101068.html

Good Evening: Without much more to go on than just the afterglow surrounding yesterday’s stock market rally, our capital markets struggled during most of Wednesday’s session. Stocks did manage to hold on to yesterday’s gains, but it seemed as if investors were waiting for more information. Perhaps tomorrow’s economic data (jobless claims and retail sales) will allow them to decide whether or not to further expand their risk appetites, but believe it or not, waiting for more information (a.k.a. patience) is indeed a viable investment strategy these days.

Stock futures were higher this morning in the wake of yesterday’s rally, but there wasn’t much in the way of economic data to digest. Mortgage purchase applications during the latest reporting week were modestly higher in response to lower mortgage rates, and oil inventories rose a bit instead of declining as many had been expecting. The major averages popped by 1.5% or so before the release of the oil numbers nicked the shares of many energy producers. Equities then spent much of the rest of the day grinding back to, and then below, the unchanged mark before a late day rally and drop left the averages mixed. Hopes and fears (such as those chronicled in the pieces you see below) essentially wrestled to a draw.

The Dow Transports led the way with a gain of 2%, while the Russell 2000′s 0.4% drop left it the odd index out. Treasurys were weak in the early going, but a decent 10 year auction sparked a comeback that left yields lower by 2 to 10 bps. The dollar was knocked around for a 1.2% loss, but the greenback’s fall didn’t help commodity prices. Though the precious metals were higher, a 7.4% drop in crude oil was hard for the CRB index to overcome as it fell 2% today.

Yesterday I discussed Jeremy Grantham’s views about investors going catatonic during bear markets. Wondering where the bottom is and staying frozen until one can be identified is NOT an investment strategy. Having a plan and waiting for more information, however, is indeed a legitimate strategy in this turbulent world. Bill Fleckenstein addressed this issue for his readers today in his always-excellent “Daily Rap” (www.fleckensteincapital.com).

Having run a short fund for many years, Bill is commonly portrayed as a bear. Recently, journalists who either can’t read or who can’t find Bill’s phone number to ask him what he really thinks, have decided to call him a bull because he decided late last year to wind down his fund. Fortunately, Bill’s own words settle the matter. He’s agnostic about stocks these days and thinks it’s wise to wait for a few more cards to be played before deciding how to commit his chips. Here is what Bill wrote this afternoon about his what seems to be the most urgent issue of the day — determining whether we’ve seen “the” bottom — as well as his current plan of action:

“I could easily see how this rally could continue and it could turn out to be the bottom (though that isn’t my belief). After all, the financial index has collapsed 85% from the top. There isn’t much more room for a lot of financials to sink. And, not all of them are going to zero. Leaving the market ‘out of it,’ there are plenty of stocks which appear cheap. However, I think the fundamentals are still poor enough generically that I am not willing to look at buying too many stocks just yet. I personally would rather pay up down the road — having a little better understanding of how so many of our problems are going to work themselves out. And, there’s always the possibility that one might not even have to pay up. To sum up, perhaps this will be a decent rally or perhaps the start of something bigger. However, for my money I still don’t like the risk/reward landscape in the aggregate.”

As one of Bill’s constant readers, I was struck by his willingness to be patient, even if it means he misses the ultimate bottom. He wants to wait for the odds of success to become easier to asses, which, unlike doing nothing, IS an investment strategy. Perhaps a Texas Hold ‘Em analogy will better explain Bill’s current approach. Pre-flop, you only know your hand and have little information about where your hand stands relative to those of other players. After the flop, you now know more about the potential for your hand (say one card away from a flush), but you might not stick around if the price of calling someone else’s bet is too high. If everyone checks, however, you get to see a free card or two that will give you a better assessment of your odds of winning the hand.

Waiting for more information allows a patient gambler to better know when to commit his or her chips. Sure you might have to fold the potential winning hand if the price of calling early on is too rich to take a chance on hitting the right card(s), but so what? There’s always another hand to be played. Protests from either the SEC or the Nevada Gaming Commission aside, investing requires a similarly sober approach. The stakes are high and the price of making a mistake is accordingly high in a wild market environment such as the one we are now facing. There’s always another hand to be played, just as there will always be a new set of investment opportunities to consider.

– Jack McHugh

U.S. Markets Wrap: Stocks Gain as Banks Rise, Oil Plunges 7.4%

Banks’ Bondholders May Face Sharing of Bailout Pain

Libor’s Creep Shows Credit Markets at Risk of Seizure

Not your father s recession .pdf

Well, here is the final version of the cover, by graphic artist/cartoonist John Sherffius.

John also did the ‘toons that adorn each of the 5 Section pages.

Its available for pre-order at Amazon with a May 4 publication date.

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His work is awesome . . .