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

More on why I have changed the president’s name in a few minutes . . .

A conversation about Regulatory Reform with Steven Pearlstein of “The Washington Post”

Thursday, June 18, 2009

Words from the (investment) wise for the week that was (June 15 – 21, 2009)

Caution last week crept back into investors’ vocabulary for the first time in more than three months as they faced up to President Barack Obama’s plan to reform the US financial market regulations, weighed the prospects of a global economic recovery and whether the “green shoots” needed more monetary water, and also started pondering the second-quarter earnings season.

As risk-taking moderated, profit-taking on equities and commodities set in after a colossal advance since early March. Government bonds rallied further, high-yield corporate bonds met selling pressure, spreads on credit derivative indices widened, and the US dollar marked time. “We could be seeing one of those occasional ‘all-change signals’ in short-term trends,” said Fullermoney editor David Fuller from across the pond.

From his new abode at Gluskin Sheff & Associates, David Rosenberg said: “Post-credit collapse and asset deflation cycles are always gripped with fragility; the intermittent beta trades and flashy rallies only serve to tell us that nothing moves in a straight line. In the meantime, the incoming data do suggest that recession pressures are subsiding, but it is difficult to see what the sources of recovery are going to be outside of government spending.”

Source: Gary Varvel

The week’s performance of the major asset classes is summarized by the chart below. Not shown, the entire precious metals complex was again out of favor with investors, with gold bullion’s (-0.5%) high-beta cousins – platinum (-3.7%) and silver (-4.1%) – being sold off by cautious investors.

Source: StockCharts.com

The US dollar ended the week virtually unchanged after Russian President Dmitry Medvedev told a regional summit on Tuesday that new reserve currencies, in addition to the dollar, were needed to stabilize the global financial situation. Meanwhile Brazil, Russia, India and China went on the biggest dollar-buying binge in eight months during May, adding $60 billion to their reserves, as cited by MoneyNews (via Bloomberg).

Many stock markets on Monday registered their worst single-session losses in a month. Mature markets perked up towards the end of the week, but emerging markets, in a number of instances, were down for all five trading days. After a four-week winning streak, the MSCI World Index (-3.0%) and the MSCI Emerging Markets Index (-5.0%) closed the week at their lowest levels since the last week of May.

Facing lackluster volume, the major US indices all ended the week in the red, but less so than most European and emerging bourses, as seen from the movements of the indices: S&P 500 Index (-2.6%, YTD +2.0%), Dow Jones Industrial Index (-2.9%, YTD -2.7%), Nasdaq Composite Index (-1.7%, YTD +15.9%) and Russell 2000 Index (-2.7%, YTD +2.7%).

To put the decline in context, the biggest pullback in the S&P 500 since the March 9 low happened in late March when the Index dropped by 5.9% over the course of two days. The most recent decline took the Index down by 5.0% between May 8-15. The S&P 500 is currently a more modest 2.7% off its high of June 12.

After climbing into the black for the year to date in the prior week, the Dow fell back to -2.7% last week – the only major US index in the red for 2009 – and, along with the FTSE 100 Index (-2.0%), one of the few global indices in this unenviable position.

Click here or on the table below for a larger image.

As far as non-US markets are concerned, returns ranged from top performers – mostly African countries – Sri Lanka (+10.7%), Kenya (+9.5%), Namibia (+8.5%), Uganda (+7.3) and Côte d’Ivoire (+5.0%), to Russia (-9.8%), Qatar (-9.8%), Argentina (-8.4%), Ukraine (-6.9%) and Finland (-6.8%), which experienced headwinds.

In a bullish move, the Shanghai Composite Index – one of the leading markets in the advance over the last few months – bucked the downtrend with a gain of 5.0%. However, the Russian Trading System Index – the top-performer for the year to date (+70.7%) and since the November 20 lows (+104.8%), succumbed to profit-taking, losing 9.8% on the week. Also, the Bombay Sensex 30 Index (-4.7%) declined after rising for 14 consecutive weeks. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

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In this short talk from TED U, Joachim de Posada shares a landmark experiment on delayed gratification — and how it can predict future success. With priceless video of kids trying their hardest not to eat the marshmallow.

Joachim de Posada’s infectious energy and humor have turned him into a popular motivational coach. Working in Spanish and English, he helps companies and teams find deep and lasting reasons to succeed. His books include How to Survive Among the Piranhas and his latest, No te comas el marshmallow … todavia, or Don’t Eat the Marshmallow … Yet. (He’s recently updated the book for the recession, calling it Don’t Eat the Marshmallow … Ever.)

In college, I was pretty blown away by this book. So when I stumbled across the MIT openware course on Douglas Hofstadter’s Pulitzer Prize winner, Godel, Escher, Bach: An Eternal Golden Braid, I just had to share it:

Here’s the MIT course description:

What do one mathematician, one artist, and one musician all have in common? Are you interested in zen Buddhism, math, fractals, logic, paradoxes, infinities, art, language, computer science, physics, music, intelligence, consciousness and unified theories? Get ready to chase me down a rabbit hole into Douglas Hofstadter’s Pulitzer Prize winning book Gödel, Escher, Bach. Lectures will be a place for crazy ideas to bounce around as we try to pace our way through this enlightening tome. You will be responsible for most of the reading as lectures will consist primarily of motivating the material and encouraging discussion. I advise everyone seriously interested to buy the book, grab on and get ready for a mind-expanding voyage into higher dimensions of recursive thinking.

Videos are found here (Real Player Required)

I don’t know why I find this so amusing, but I do:

An 80s brat pack movie mashup to the tune of Lisztomania:

The official video is here

The long awaited Porsche Panamera:

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Video after the jump

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There are two areas of academic research I have long found fascinating — Behavioral Economics, and Cognitive Psychology.

For investors, Behavioral Economics looks primarily at rationality: How rational or irrational are investors in what they do — their behavior, decision making, investing, etc. Cognitive Psychology, on the other hand, is concerned with our wetware — how we process information, what foibles inadequacies, and are prone to errors. The focus is our internal mental dynamics. Combine the two, and we end up with something like NeuroEconomics.

Which is what I was thinking about when I read this New Yorker piece on the ability of children to delay gratification as a marker of subsequent success.

The article refers to an experiment: Kids are offered a marshmallow — and then offered a deal: They could eat one marshmallow right away or, if willing to wait a few minutes, they could have two marshmallows. The results are quite surprising.

But it got me wondering: How much of what is described as risk aversion is merely another form of behavioral or cognitive issues — like self-discipline of gratification delay?

Food for thought . . .

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Source:
DON’T! The secret of self-control.
Jonah Lehrer
New Yorker, MAY 18, 2009

http://www.newyorker.com/reporting/2009/05/18/090518fa_fact_lehrer

See also:
Mischel’s Marshmallows
Podcast
Radiolab, March 9, 2009

http://blogs.wnyc.org/radiolab/2009/03/09/mischel’s-marshmallows/

Some 15 weeks after the March 666 lows, indices are 40% higher. After that sprint, might the buyers be suffering from some fatigue? Are the markets now fully reflecting a second half recovery?

Are we priced for perfection?

Those questions are looked at in Barron’s Up & Down Wall Street column this week:

“There were hints, as well, that bullish sentiment, which for a spell remained fairly constrained, had escalated to something approaching euphoria. Investors Intelligence readings of advisory sentiment showed most of these supposed savants, who often function best as contrary indicators, have come a bit late to the party; in recent weeks, the percentage of bulls among them have registered in the mid-40s, compared with the low 20s for the bears.

Moreover, trading took on a distinctly more speculative tone, with small stocks chalking up big gains despite their conspicuous lack of very much in the way of sales and nothing in the way of profits or prospects. And perhaps the most persuasive evidence of the gamier spirit abroad in Wall Street is that, despite the mounting demolition of the commercial-property market, Morgan Stanley plans to sell re-securitized commercial mortgages.

Which, as one portfolio pro acidly observed to Dow Jones Capital Markets, amounts to peddling tarnished assets nicely repackaged with higher ratings. That kind of thing has been going on in residential asset-backed securities in recent months, presumably fueled by the notion that the housing decline has bottomed. But that it now has spread to commercial mortgages when things are getting notably worse is clear indication that the mind-set and, indeed, some of the very stuff that got us into such a jam is back. Alas.”

Hence, the expectation that the rally may have run its course, and is heading south.

That seems to be too pat for Mr. Market, who delights in confounding everyone. A more frustrating course of action would be to back and fill — but not collapse  –and  keep going up (albeit at a slower pace) after some digestion over the summer months.  Sucker some more people in, only to retest the lows in September / October period.

That’s just my guess . . .

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Source:
Under the Gun
Alan Abelson:
Barron’s June 22, 2009

http://online.barrons.com/article/SB124545077577632639.html

The High Line, an ambitious new public space opens in Manhattan this week. Set atop once-abandoned railway tracks, the new park has been given a makeover and is already spurring development near by. Sushil Cheema reports.