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

A conversation with theoretical physicist and mathematician Freeman Dyson on Charlie Rose:

Time to crowdsource some comedy from your creative minds, all at the expense of the Swissies:
We know that UBS, Switzerland’s largest bank, has rolled over and is divulging the dirt on 4,450 accounts to settle a lawsuit with the United States.  This is forcing the Swiss government to divest itself of its UBS position.  Those 4,450 names of American clients will go straight to the IRS for prosecution and disgorgement of back taxes — plus interest and penalties.

Question: What does the acronym U B S stand for?

U Better Sing

Unreliable Bankers Swiss

Unexpected Benefits of Secrets?

Anything else? Use comments for suggestions . . .

>

Here’s an interesting new site: SmartZip.

They have a simple scoring system for determining which homes in foreclosure markets are good buys. Their ratings are based on their own proprietary scale:

The SmartZip Score is a rating based on a quantitative evaluation of a property’s return on investment over a 10-year holding period, which investors and homeowners can use to assess and confirm purchase decisions.

SmartZip Score considers hundreds of macro and micro market attributes spanning economic, market, housing, government, community, demographic and lifestyle data. Both historical trends and predictive models are used. And we examine each property across geographic spheres of influence – national, state, metro, county, city, tract – all the way down to the neighborhood and property levels.

For more info, see the FAQ here.

Trader’s Edge Arthur Cashin Director Of Floor Operations UBS Financial Services

Airtime: Wed. Aug. 19 2009 | 8:50 AM ET

Here are 10 items that caught my eye:

• Bears prowl Wall St as insiders dump stock (Reuters) A massive rally in U.S. stocks since March has reawakened bullish spirits, but insiders are jumping out of the market in a sign the run up is getting stretched.Company executives are selling stock at a rate not seen in two years after a near 50 percent rise in the S&P 500 from a March 9 low. That suggests directors and managers may think stock prices are nearing the top end of their range in the current economic climate.

• Rogoff: Why we need to regulate the banks sooner, not later (FT) Too many policymakers, investors and economists have concluded that US authorities could have engineered a smooth exit from the bubble economy if only Lehman had been bailed out. Too many now believe that any move towards greater financial regulation should be sharply circumscribed since it was the government that dropped the ball. Policymakers should not be obsessed with moral hazard and should forget trying to micromanage the innovative financial sector.

• Growth in “Potential GDP” Shows Limited Potential (Hussman)

• Odd WSJ Real Estate Story on Vermont Mortgage Regs: (Economist’s View) The tenor of the article is that Vermont has overregulated the mortgage market preventing…wait for it…the unforgivable error of restricting loans to those who can prove an ability to repay.  Worse yet, consumers receive explicit notice of high rates and brokers are held accountable:

• Your Handy Health Care Cheat Sheet

• Credit Card Firms Face New Curbs This Week (Washington Post) The first phase of the landmark credit card legislation signed by President Obama in May will take effect this week, forcing card issuers to give consumers more time to pay their bills and to consider interest rate increases. Starting Thursday, issuers must give customers 45 days’ notice before raising their interest rates, instead of 15 days as previously required.

•  A Nuclear Renaissance Beckons Electricity demand is expected to increase 50 percent by 2030. NRC has received 17 license applications for 26 new nuclear power reactors. These are the first applications for new reactors since the late 1970s. In addition to new reactors, the NRC has seen an increase in licensing applications related to uranium recovery and fuel-processing facilities.

• Americans Pay The Most For Cellphone Service (Consumerist)

• Debate’s Path Caught Obama by Surprise (Washington Post) President Obama’s advisers acknowledged Tuesday that they were unprepared for the intraparty rift that occurred over the fate of a proposed public health insurance program, a firestorm that has left the White House searching for a way to reclaim the initiative on the president’s top legislative priority.

• Visualizing up to ten dimensions (boingboing)

Anything else you are to note?

IRS Commissioner Doug Shulman on the agreement from UBS to turn over the names of 4,500 Americans holding Swiss bank accounts to avoid taxes.

In an interview that aired Wednesday on FOX Business Network, IRS Commissioner Doug Shulman comments that the IRS just blew a big hole in bank secrecy and that they are going after other institutions.

Transcript after the jump
Read the rest of this entry »

Below is the latest comment from the Institutional Risk Analyst. My former Fed colleague Dick Alford came up with the idea, then Dennis and I revised and extended.  Enjoy and have a great August.  — Chris

Systemic Risk: Is it Black Swans or Market Innovations?
The Institutional Risk Analyst
August 18, 2009

“Whatever you think you know about the distribution changes the distribution.”

Alex Pollock
American Enterprise Institute

In this week’s issue of The IRA, our friend and colleague Richard Alford, a former Fed of New York economist, and IRA founders Dennis Santiago and Chris Whalen, ask us whether we really see Black Swans in market crisis or our own expectations. Of note, we will release our preliminary Q2 Banking Stress Index ratings on Monday, August 24, 2009. As with Q1, these figures represent about 90% of all FDIC insured depositories, but exclude the largest money center banks (aka the “Stress Test Nineteen”), thus providing a look at the state of the regional and community banks as of the quarter ended June 30, 2009. Click here to register for The Institutional Risk Analyst or request a trial for our products.

Many popular explanations of recent financial crises cite “Black Swan” events; extreme, unexpected, “surprise” price movements, as the causes of the calamity. However, in looking at our crisis wracked markets, we might consider that the Black Swan hypothesis doesn’t fit the facts as well an alternative explanation: namely that the speculative outburst of financial innovation and the artificially low, short-run interest rate environment pursued by the Federal Open Market Committee, combined to change the underlying distribution of potential price changes. This shift in the composition of the distribution made likely outcomes that previously seemed impossible or remote. This shift in possible outcomes, in turn, generated surprise in the markets and arguably led to the emergence of “systemic risk” as a metaphor to explain these apparent “anomalies.”

But were the failures of Bear Stearns, Lehman Brothers, Washington Mutual or the other “rare” events really anomalous? Or are we just making excuses for our collective failure to identify and manage risk?

The choice of which hypothesis to ultimately accept in developing the narrative description of the causation of the financial crisis has strategic implications for understanding as well as reducing the likelihood of future crisis, including the effect on the safety and soundness of financial institutions. To us, the hard work is not trying to specifically limit the range of possibilities with artificial assumptions, but to model risk when you must assume as a hard rule, like the rules which govern the physical sciences, that the event distribution is in constant flux.
Read the rest of this entry »

Since September ’08 when the Lehman bankruptcy put global deleveraging into overdrive, all major asset classes had a certain correlation, sell stocks, corporate bonds, commodities, and foreign currencies and buy US Treasuries and the US$. Looking at the S&P/US$ relationship since September, thus going back 50 weeks, only 11 weeks (22%) saw a positive correlation between the two where the same week the S&P’s rose, the $ index (DXY) did too and vice versa. If this week’s trends hold, we will have seen the 3rd straight week where both stocks and the DXY have moved in the same direction. What seems to have occurred is that the $ has been trading more in line with its historical influence of interest rate differentials and less towards a risk aversion trade. Again assuming trends hold this week, the direction of 10 yr bond yields has been matched by the $ index for four straight weeks. Of course at some point this trend will change again as persistent US$ weakness will be followed by higher commodity prices and thus higher interest rates.

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

~~~~~

September!!!! Also, Closing the Lehman Gap
August 18, 2009

From the Wall Street Journal of August 11:

“For investors, the period between Labor Day and Halloween is proving an annual fright show. And no one knows why. It was, of course, in September last year that Lehman collapsed and everything fell apart. But then it was also September-October 2002 that the last bear market plunged to its lows. The 1998 financial crisis? It began late August, and rolled on for two months. The famous crash of 1987 came in October. But most people have forgotten that the market actually started sliding downhill in late August. That’s almost exactly what happened in 1929 too. The big crash came in October, but the market peaked just after Labor Day. Prices began falling through September, and then tumbled further still. The worst month of the Depression? September, 1931, when the Dow fell about 30 percent. It was also in September, 2000, that the bear market really got going. The 9/11 crisis, of course, came in September. That was hardly caused by investors. But what is forgotten is that the stock market was already looking wobbly. In the two weeks before the terrorist attacks, the Standard & Poor’s 500-stock index fell 7 percent. The great panic of 1907? October. The great crash of 1873? September. Yikes.”

When Bianco Research excerpted this piece in their weekly news clips they added the calculations of total return for each month since 1926. For the S&P 500 index, the only month with a negative total return from 1926 through 2008 is September. OK, this is history, but has anyone explained why it happens? There are many theories but no hard facts to point to.

Meanwhile, the US stock market recovery stalled at S&P 500 index level 1000 and seemed to reverse itself with a VIX-spiked vengeance in mid-August from the 2009 ascendant move of five months. The 1000 level is about a 35% retracement of the fall from the October 2007 peak to the March 2009 low. Market technicians would like to see the market break decisively above this level in order to run bullish in a more robust way.

The 1000 level is also the bottom of the five-week waterfall when the market tumbled over 200 S&P 500 index points last year. This period is called the “Lehman gap” and is measured by about 1000 on the downside and about 1200 on the top. It represents a time when stocks fell on a worldwide, highly correlated basis following the Lehman Brothers failure.

A number of market strategists expect the US stock market to eventually try to close the Lehman gap. We are among them. Our target for this closure is next spring. Others, like Ed Yardeni, argue that it will happen quickly as earnings outcomes for the 4th quarter of this year are discounted this coming October. Others point to the large amount of uninvested cash as the source of fuel for the additional stock market rally to come. Yet others look to all the “golden crosses” in various indices as a reason for optimism.

A golden cross is when a 50-day moving average of a price breaks up through a declining 200-day moving average. Strategas Research noted that June was the 15th time since 1929 that we have seen the golden cross. Only twice out of the previous fourteen times did this indicator fail to reach a new high twelve months after its occurrence. The failing years were 1941 (down 13.8%) and 1857 (down 6.1%).

Even counting the two down periods, a year after a golden cross found the market up 18.8% on average. That rise would take the S&P 500 Index to the top of the Lehman gap. The largest post-golden cross upward twelve months followed Sept, 19, 1932; the market rose 50.8% in the subsequent year. The most recent golden cross was on June 28, 1988; it was followed by a 19.6% twelve-month rise.

Golden crosses get a lot of respect among the technician crowd for good reason.

We are not technicians at Cumberland; however, we do look at their work. We do that because it is important to see what others are using to guide their decisions. And we do find some value in the technical work of research firms like Ned Davis or Strategas.

We find that technical work cannot predict the future. Technical methods do help keep you in a trend longer than you would otherwise do. This is important, since stocks are mean reverting but rarely stop or stay at the mean. They tend to overshoot in both directions.

We raised a little cash in US stock account is mid-August. So far that has served our clients well. We have buy targets for a number of ETFs. They are sitting on the trading desk awaiting an entry point. But for now, we will give September a little more respect than we give Rodney Dangerfield.

We wish to add this postscript. With all the Healthcare debate cacophony, has anyone noticed that there is a fully functioning federal healthcare system with a nationwide electronic records system and millions of users? It competes in the present environment. It maybe analyzed for systems use and it may be both praised and criticized for its good and bad points. It is funded by the federal government. I haven’t heard a single Congressman use it either as a positive argument or a negative one. I wonder it holds the key to a compromise and that it has in place a national infrastructure so that a new wheel doesn’t have to be discovered. It is called the Veterans’ Administration; the hospitals and clinics are ubiquitous in the United States.

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