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

heh heh –  I am decidely not at one of these things this week:

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via Wiley Miller

I just wanted to add some color to my recent post regarding why the NYSE TRIN indicator might be broken

Reader Brian adds a very interesting perspective, indicating that he’s watched TRIN and C side by side and has seen a very strong correlation. When C flips from up to down (or vice versa), there is a corresponding huge move in TRIN. This could only be the case if a stock like C comprised a large share of total NYSE volume, which indeed seems to be the case, as noted by The Big Picture blog.

Above I took C, FNM, and FRE and expressed their *composite* volumes (e.g., the volumes transacted across all exchanges) as a fraction of NYSE volume. What we see is that, early in 2007, those three stocks accounted for only 1-3% of NYSE volume. During the financial crisis of late 2008 and again as the market was bottoming in early 2009, that ratio skyrocked to well over 50%.

Read the rest of this entry »

Lorne points us to this comparison between the 1929 Dow and the 2000 Nasdaq, overlays some fib retracements, and wonders if history isn’t repeating itself:
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click for ginormous chart
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Andy Xie, former Morgan Stanley chief Asian economist, talks with Bloomberg’s Erik Schatzker about the outlook for China’s stock market. Xie, talking from Shanghai, also discusses the Chinese economy

click for video

Aug. 31 (Bloomberg)

Bloomberg

Analysis and discussion with the SEC Chairman Mary Schapiro. She says the American public needs an SEC that is aggressive on enforcement to ensure that the playing field is level for them to participate in the market. (Venture)
… (more info)
(less info)

Words from the Wise“, the Chinese Shanghai Composite Index has now recorded four consecutive down-weeks. The Index witnessed another massive sell-off this morning, declining by a further 6.7% to take its total loss since the peak of August 4 to 23.2%.

The losses happened on concerns of large Chinese share issuance and slowing bank lending. The banking regulator has already instructed lenders to raise reserves to 150% of their non-performing loans by the end of this year – up from 134.8% at the end of June, and the central bank has increased money-market rates to drain liquidity.

I have written a fair bit over the past two weeks about the overbought level of most global stock markets and also how China – a leading market on the way up – could be the catalyst for triggering a reversal of fortune in global stock markets.

Of the global stock markets I monitor, the Shanghai Composite (2,667) is the only one to have breached its 50-day moving average (3,125) and now has the key 200-day line (2,476) firmly in its sight.

Source: StockCharts.com

Interestingly, emerging markets have now seen two back-to-back weeks of declines and have been underperforming developed markets for four weeks running, as shown by the declining trend of the MSCI Emerging Markets Index relative to the Dow Jones World Index. Could this be a sign of a broad retrenchment in risk appetite?

Source: StockCharts.com

A global stock market correction could take the form of either a pullback or a consolidation (i.e. ranging). I suspect we may see at least some degree of reversion to the 200-day moving averages in a number of instances, but will be watching closely to ascertain whether we are dealing with a normal short-term correction or a more significant move threatening the primary trend. In the meantime, sit tight and be cautious as markets hopefully realign with the reality on the ground.

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It appears that NZ Farming (NZX) ran into a little trouble with the regulators when they accidentally included the suggestion of “fudging depreciation” in their account statement:

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NZ Farming Systems Uruguay Ltd – Annual Financial Statement
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I am not at all familiar with the company, but I do seem to think that this sort of accounting term is discouraged in public entities . . .

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Note:  The Company responds here:

NZ Farming Systems Uruguay Ltd – Annual Financial Statement

http://www.nzx.com/markets/NZSX/NZS/announcements/2806777/NZ-Farming-Systems-Uruguay-Ltd-Annual-Financial-Statement

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Hat tip Damien

“The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.”
-New York Times

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My definition of an investment profit is simple: You take the money you have invested, and if adds up to more that what you began with,  well, then, you have a profit.

Let’s say on the other hand, you own 20+30 positions; 5 of them are higher than where you purchased them, and all the rest deeply in the red. Net net, your portfolio is down immensely. Most rational investors would hardly call that investment a “profit.”

Looking just at early TARP repayments  means that we are ignoring a) the rest of the TARP; and b) the majority of other expenses, guarantees, loans capital injections, and outright spending that has taken place.

Perhaps the rookies are manning the terminals, with the senior people away on vacation. That would explain the inexplicably clueless headline over at the NYT this morning: As Big Banks Repay Bailout Money, U.S. Sees a Profit.

Excerpt:

“Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.”

Now, by any traditional measure of profits, you include all of the costs incurred against the total revenue, to determine if there is a net gain (or loss).  This simple mathematical analysis of what a profit is — Are we up or down? — seems to have eluded the headline writers.

At least the author makes mention of how tenuous the usage of that word is the article’s body:

“These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.”

What this is more appropriately described as is a return of capital; to call this a profit is to ignore trillions of dollars in taxpayer monies that have been spent, lent, guaranteed, drawn against and otherwise consumed in what will likely be the greatest transfer of wealth in the planet’s history.

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Source:
As Big Banks Repay Bailout Money, U.S. Sees a Profit
ZACHERY KOUWE
NYT August 30, 2009

http://www.nytimes.com/2009/08/31/business/economy/31taxpayer.html

See also:
Is TARP Profitable?
Daniel Gross
Slate, Aug. 28, 2009

http://www.slate.com/id/2226517/

Years ago Charles Goodhart minted an eponymous law that is applicable today in financial markets. Last week, Pimco’s Mohammed El-Erian coined the metaphor “sugar high.” He was talking about the converse of Goodhart’s Law. We think he wasn’t harsh enough; hence, we use the metaphor “LSD.”

The 99th edition of Pears Cyclopaedia (1990-1, pp. G27, G31) restated Goodhart’s Law as follows: “As soon as the government attempts to regulate any particular set of financial assets, these become unreliable as indicators of economic trends.” The converse could be stated as, once markets succumb to Goodhart’s warning of this unreliability, classic standards of value will prevail again.

The recent stock market rally of certain financial stocks is an example of Goodhart’s warning at work. Barron’s Mike Santoli summed it up in his August 31 column:

“How is it possible, though, that Citigroup (ticker: C), Fannie Mae (FNM), Freddie Mac (FRE), Bank of America (BAC) and AIG (AIG) – with a combined market value near $200 billion – could ‘drive’ a stock market worth more than $10 trillion and that has added about $1 trillion in value this month, as measured by the Wilshire 5000? And how could it be that a handful of speculative stocks are muscling around the market when nearly 90% of the S&P 1500 index members were above their 200-day average price? This is an extreme also last seen in the ’03-’04 period. It says the move has been powerful, widely inclusive, that it’s probably time for a rest or a little downside shakeout, or a period when the market becomes a bit more selective.”

Let’s look at these five basket cases, which the Wall St. Journal has identified as accounting for “31% to 43% of daily NYSE share volume last week.” They lead the famous Jim Bianco list with total losses over half a trillion dollars. They have raised capital mostly from the government. They have about $100 billion less now than when the mess started. Their losses are projected to continue for some time.

BAC may be the least worst of the lot, although it is still under attack by the government. BAC is one of the 19 identified as “too big to fail.” That doesn’t mean it is going to succeed as a profitable and growing institution. It may, but time needs to pass to see that occur. C is being slowly dismantled. It, too, is one of the magic 19. We would consider these two banks as quasi-GSEs (government sponsored enterprises). How they will eventually emerge from the government bailout and what will be left for the existing shareholders is a subject of fierce debate.

AIG is in a class by itself. It would not exist were it not for the Geithner-Bernanke package of assistance. It is gradually being dismantled. It is the subject of speculation, and the legal fight with its former chairman has intensified the lawyers’ efforts. Is it worth the $50 a share market price currently trading on the reverse split stock? Maybe, but here, too, we wonder how much will be left for the shareholder after the government extracts its investment. See August 31 Barron’s column (pg.40) by Andrew Bary: after the US government’s preferred is factored in, AIG “has no tangible common equity.” We’re not sanguine. In the future, investors may wish they had seized the $50 bid when it was available.

Lastly we have the two true GSE carcasses. Fannie and Freddie stock prices have rallied without any underlying basis for increased value. Both face major additional losses. Both will need billions more in capital from the Treasury. If they were private companies, they would be insolvent. Shareholders may not realize anything of a tangible result for decades, if ever.

So let’s see. BAC and C are likely to show Goodhart’s law at work. With luck and massive stimulus on a continuing basis for many years the converse of Goodhart may ultimately lead to a profit for those who buy the shares today. Anyone who does so must think of himself as a raw speculator.

AIG may qualify for the El-Erian sugar-high metaphor. Without Geithner and Bernanke, market forces would have bankrupted AIG last September. Dismemberment may prove orderly, but restoration of value is another matter. Share buyers may want to choose “Equal” or “Splenda” and save their calories (money) for something better.

To buy Fannie or Freddie is an act in the LSD category. We wouldn’t do it with our own money. We certainly will not do it for clients. At the end of 2004 we recommended the sale of Fannie at $70 a share. At the $2 price today, it is still a sale unless the share buyer is hallucinating.

.David R. Kotok, Chairman and Chief Investment Officer, email: david.kotok@cumber.com

I am leaving for some fun and sun this week, retuning after Labor Day.

I will of course, have the trusty MacBook Pro with me, but at Mrs. BP’s insistence, no wireless card allowed. Morning visits to Starbucks will be allowed for limited periods of time.

No worries though — in addition to a few limited posts of my own, I have a stellar lineup of guest posters who will be inspiring and provoking you.