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

Fair & Balanced?

Not exactly.

Mathematically competent?

Not one tiny bit.

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Hat tip Flowing Data

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Update: Here is the Video (Nov 23)

As technicians don’t care about fundamentals, according to them, in light of the Wednesday morning news from Dubai that so shocked markets on Thursday, we can look at the charts to see at what levels the buyers and sellers acted today. The 50 day moving average in the S&P futures is 1070 and we traded as low as 1067 this morning. The 50 day MA in the NDX futures is 1737 and they stopped at 1742 this morning. The Russell 2000 has been the laggard of late as it remains below its 50 day MA of 597 and on the flipside the DJIA has been the outperformer, remaining well above its 50 day MA of 9978 at the lows of the opening. Where the Dubai events go from here has much to do with the response from Abu Dhabi. On one hand, a no further bailout message may be highly disruptive and painful in the short term and can domino into other markets but on the other hand, debt restructurings and debt elimination is healthier for the long term.

One other stat to add to my above note, the US$ index got as high as 75.76 this morning and its 50 day moving average is 75.85. The US$ index has not closed above its 50 day moving average since April. An aside, here’s a different view of today’s US market response to the Dubai news. Since the news hit at about 7:30 Wednesday morning, the US market reaction is more of a reaction to the Asian stock market reaction on Thursday which then followed with the sharp selloff in Europe. Or, this is just a delayed reaction to the legitimate concern with the possibility of a sovereign debt default that wasn’t fully appreciated here on Wednesday.

Some looks at the Dow’s trading channels range for a slow holiday Friday:

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chart by David L. Singer at SINGER$MARKET

David Rosenberg, chief economist and strategist at Gluskin Sheff, and Thomas Lee, chief US equity strategist at JPMorgan, share their outlooks on the markets and the economy.

Airtime: Tues. Nov. 24 2009 | 7:05 AM ET

The Conference Board’s consumer confidence index may have improved (48.7 in October to 49.5 in November) and beaten consensus expectations, but it remains firmly in recession terrain. It is so obvious that consumers are tired of the over-borrowing and over-spending days of yesteryear. Despite all the temptations provided by the government, auto buying plans dropped to an eight-month low (from 4.7 in October to 4.4 in November); home buying plans slipped to a new 27-year low of 2.3 (from 2.5 in October and 3.0 in September); and intentions to buy a major appliance stayed at a 14-year low (23.2).

Source: Haver Analytics, Gluskin Sheff

Source: Haver Analytics, Gluskin Sheff

When we first introduced the theme of U.S. consumer frugality well over a year ago, it was met in many circles with guffaws …

Again, those expecting much better things from the labour market were probably not happy to see the job sub-indices in this report either; jobs hard to get (49.4 in October to 49.8 in November) and jobs are plentiful (3.5 to 3.2) hit their worst levels in 26 years.

In terms of financial markets, and this is a good contrary indicator, those expecting the equity market to go up (33.1 to 36.3) and those expecting it to go down (28.7 to 23.8) have moved to levels last seen in July 2007 (right when the market was peaking out and about to roll over).

Interest rate expectations, meanwhile, have moved in a bullish direction for bonds. Those respondents expecting yields to rise went from 50.1 to 51.3 in November and those expecting yields to fall slipped from 15.3 to 12.9 — levels last posted in August 2007 in what were the early stages of one of the biggest bond rallies in the past 30 years.

When we first introduced the theme of U.S. consumer frugality well over a year ago, it was met in many circles with guffaws. But indeed, Americans do have resolve and do have the ability to live within their means. Have a look at the front cover of the USA Today — The Spirit of This Season: Be Thankful, Spend Less. The column spoke to us because we do not measure success, as so many other economists do, by how much the consumer borrows and spends (also have a look at Cheap and Cheerful for the Holidays on page B3 of the NYT). Rather, saving for retirement and education and ensuring that our kids (and parents) are looked after is what counts. Not to mention charity.

This notion that the GDP data was disappointing in Q3 because it was led by a downward revision to consumer spending totally misses the point. But what also misses the point is government policy that continues to focus on reflating the housing stock, which carries with it no future productivity potential and job creation. More creative ways to encourage a revamp of the nation’s capital stock, especially now that capacity growth is completely stagnating in the manufacturing sector, would, in our view, be a much wiser approach for how fiscal policymakers should be allocating taxpayer funds to get the economy moving again and yet derive some future rate of return at the same time.

Housing policies may make for good politics, but not necessarily the best economics, especially considering the fact that no other sector receives as much preferential tax treatment as the homebuilding sector.

Two Black Friday related issues.

The first is Ethan Trex’ A Brief History of Black Friday (Mental Floss). Ethan disposes of the myth that the name reflects when Retailers “Get in the Black”:

“According to researchers, the name “Black Friday” dates back to Philadelphia in the mid-1960s. The Friday in question is nestled snugly between Thanksgiving and the traditional Army-Navy football game that’s played in Philadelphia on the following Saturday, so the City of Brotherly Love was always bustling with activity on that day. All of the people were great for retailers, but they were a huge pain for police officers, cab drivers, and anyone who had to negotiate the city’s streets. They started referring to the annual day of commercial bedlam as “Black Friday” to reflect how irritating it was.

Apparently storeowners didn’t love having their biggest shopping day saddled with such a negative moniker, so in the early 1980s someone began floating the accounting angle to put a more positive spin on the big day.”

Another Urban Legend disposed of.

The second, via Mint, is this chart of whether Black Friday 2009 will be a Boom or Bust?

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click for ginormous chart

Well, there goes that quiet half day right after Thanksgiving. The Dubai request for a standstill agreement as a precursor for a hoped for debt restructuring is not a complete surprise considering the weekly newspaper articles on their $80b+ debt overhang. What is the surprise is the lack of any immediate support from Abu Dhabi (maybe not willing to support another bailout), the uncertainty of what exposure foreign banks have if any and where may other debt laden bodies lie, corporate and/or sovereign. The global central bank push to lower interest rates has spurred and encouraged a massive refinance wave to extend maturities. What we have not seen enough of is debt writedown, extinguishment and restructurings and the Dubai news may highlight that cheap money cannot cure all debt ills. Also of course the Dubai news comes in the context of a massive run in all markets (particularly in credit) where a shaking of the tree was likely overdue.

As noted yesterday (Look Out Below!), the sovereign debt default warning by the nation of Dubai (UAE) has caused some turmoil.

It is the excuse to send the Yen to a multi-decade highs, rally the US dollar, pressure stocks overseas, and pound the US Futures. Futures on the Standard & Poor’s 500 Index are down ~3%. Gold is down $26, while Crude oil fell nearly $4, and is back under $75.

In terms of exposure to Dubai, JPMorgan Chase & Co. writes that the Royal Bank of Scotland Group underwrote more loans than any institution to Dubai World; In terms of capital at risk, HSBC Holdings has the most in the United Arab Emirates.

Emerging Markets Index fell 2.6%, Asian Pacific Index slid 3.3%, while South Korea’s Kospi slumped 4.7%%.

FORECAST for the day (A/K/A my wild ass guess):  This is the sort of day that last year would have produced a down 500+ points situation. For the past 6 months, a deep opening gap down has brought buyers out of the woodwork. But its half a day, and I’m not sure if there will be time for that. My gut says that we end up closing down 100 or less on holiday volume (minus 40 would be ideal).

If that is wrong, and the US markets close down 2% or worse — lots of technical  damage done to key trend and support lines — than Monday could be a blood bath. But that is the lower probability outcome IMO.

Enjoy the day . . .

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I mentioned earlier some of the ways to check out the deals going on, and some people lamented the idea of going to the mall. I totally agree, and frequent Amazon regularly. (For those of you who have asked where my wish list is,  its here).

Thanks to their price war with Wal-Mart, Amazon has some mad deals going on. These are what caught my eye:

Books

• The Complete Calvin and Hobbes (Calvin & Hobbes) (v. 1, 2, 3) [BOX SET] $79.50 (that’s about half price)

• Ron Paul’s End the Fed $9.56 (that’s cheap)

• Dilbert 2.0: 20 Years of Dilbert another sale on a classic comic — from $85 to $26.67

• What the Dog Saw: And Other Adventures Malcolm Gladwell $11.25 –  I am aware of the flaws in his anecdotal style, but he remains a marvelous story teller.

• Atlas of the World slashed from $80 to $27.20

• This Is Where I Leave You Jonathan Tropper
Not a sale – but I am half through this and loving it.

• I Am America (And So Can You!) by Stephen Colbert $10.80  Haven’t read it, but its filled with Truthiness!

DVD

• Curb Your Enthusiasm: The Complete Seasons 1-6 is cut from $238.72 down to $79.99

• The Star Trek (Single-Disc Edition) (2009) movie, which I thought was fantastic (saw it 2X in theater) is $9.

• One of the funnies British sitcoms ever is Coupling — there were only 4 seasons, and they were brilliant (written entirely by Steven Moffat). Half price: $99.98  on sale for $49.99

• Paul McCartney: Good Evening New York City [LIVE] I saw this show — it was mostly Beatles tunes — and totally loved it.  At $15, 2 CDs + 1 DVD is a good deal.   (recall Spontaneous Crowd Chorus)

• Planet Earth – The Complete BBC Series (2007) I already ordered this – $30.49 down from $80 — this is the original U.K. broadcast version narrated by David Attenborough, whom I much prefer to the Sigourney Weaver version. The prior series, Blue Planet: Seas of Life, is also on sale for the same price (but is less of a bargain)

• Quantum of Solace [Blu-ray] $9.99  I really liked Casino Royale (which is $10.99), but I haven’t seen this one yet — but for $10 bucks, I may try it.

• All of the Doctor Who seasons are on sale for about half price per season — $42 vs $80

Happy Shopping!

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As I have always disclosed from the very beginning of this blog, I am an Amazon affiliate and get 7% percent of any purchases you make.

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).

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November 26, 2009

We’ve spent two weeks traveling almost 20,000 miles and visiting three cities: Tokyo, Hanoi & Singapore. Meetings included quality time spent with central bankers, investors, pension fund managers, academics, commercial bankers, and others. It has been a whirlwind and well worth the fatigue.

We will summarize the observations with some key points.

Our trip confirms that the Asian emerging-market story is real and is likely to accelerate. This is not just a China story, and folks who view it that way are making a mistake. China is the largest player in the region, but the others need respect. This conclusion is true for newly emerging economies and markets like Vietnam (devaluation of currency notwithstanding) and for seasoned and established ones like Singapore.

At Cumberland, our global portfolio strategy maintains an overweighted position on non-Japan Asia. Asian emerging markets are a terrific story. This is true both for the fledgling ones and for the largest one, China. There are many in the region and they need to be examined separately. We will be going back to Shanghai and Hong Kong in January for another look at the region and to examine how US policy is playing out there. Or should I say, how US policy is failing miserably to play out there. More on that below, but first let’s wrap up the Japan report.

We are still not ready to take the Japan weight to a bullishly overweighted position. That may come after next summer’s Japanese elections, and if the new government is strong enough and determined enough to change policy. Both the electoral outcome and the willingness to change policy are open questions. It is the present policy that keeps the yen very strong and keeps deflationary forces at work in Japan. Government officials know it but are not yet compelled to change. Many there believe that a stable price level or a slightly falling price level is a better choice than an inflation-prone policy. Many reject the Bernanke approach of massive monetization. They heard his lecture many years ago and have taken a different view. We shall see what unfolds now that those in Japan have the opportunity to watch Bernanke apply the policy that they rejected. In sum, the final chapters of this book on Japan and deflation and on QE and inflation are not yet written.

Now to the regional takeaway from our trip

We believe that few trust the United States. This is obvious in private conversation. And it is clear to all that confidence in the dollar is low. This is mostly mentioned only in private.

In public there is quiet response when the Treasury Secretary of the United States utters words about a strong dollar. Asians have heard that for years and with the many different accents of the various Treasury Secretaries. Geithner would serve the country better by ceasing to mouth the same words that his predecessor Snow and others used. He is not believed. Frankly, in some circles he is actually seen as an incompetent political hack. He is blamed by some for the insufficiency of the New York Fed under his presidency to supervise the primary dealers that failed – Countrywide, Bear Stearns, and Lehman. And the ethics issues surrounding the NY Fed under his tenure are viewed as appalling; this continues to surface in private conversations. Some folks are puzzled about why Obama maintains his support for Geithner. Some just attribute it to the President’s inexperience as a leader.

My takeaway is that our present Secretary of the Treasury is seriously and sustainably injuring the image of the United States. He has lost credibility. His actions are real and they impact markets. My conversations with those who are attempting to market GSE securities to Asians and getting rebuffed are validation enough for me on this point. When the Fed stops buying GSE mortgage backed securities, this reality will hit the markets in a re-pricing of that asset class. Spreads are going to widen.

The American federal budget deficits are worrisome everywhere. Policy promises from Washington to reduce them are greeted with great skepticism. Often they are privately described as American arrogance. Publicly, Asians are very polite and do not often subject their guests to embarrassing criticism. Privately they are quite candid. In my view they are correct: America is arrogant and seems to pretend that it is still the best and most trustworthy financial and capital market in the world. There is no basis for the US to have such a view of itself. We have squandered our reputational capital as a financial center leader.

This recent financial crisis is quite different from its predecessors. In 1997-1998, the Asian currency crisis and Russian ruble collapse wasn’t viewed as America’s responsibility. We didn’t cause it. We didn’t cause the 1994 Mexican peso crisis either. And while we contributed to the tech-stock bubble, we weren’t the only ones to do so. But the last two years of Madoff scandal, federal agency failure, rating agency restatement, bond insurer demise, Fed primary dealer (Lehman) bankruptcy, and mortgage securitization deception (CDOs) are all Made in the USA. We led the world into crisis. We caused it. And we haven’t fixed it.

To Asian eyes it appears that this American-made tragedy continues to this day. Proposals for reforms in America are greeted abroad with skepticism and doubt. The political structure of America is seen as a weakness. And confidence abroad is falling, just as it is at home.

Some will view our conclusions as harsh. Maybe so. But the lists of American-made errors that have cost the world billions are factually correct. Say what you want, but Madoff WAS regulated by the SEC, Fannie IS a federal agency, and AAA used to be a respected rating that that has turned out to mean nothing.

This is not just a Democrat or Republican critique. Both political parties have failed the country miserably and both are seen as contributing to the mess, from the Asian perspective. Personally I agree. Our Washington leadership under this president and under the last one has proven to be impoverished. The money influence in politics seems to have overwhelmed any sense of centering ethics.

We come back from this trip more determined than ever that investors must protect themselves. The starting point for that defense is an old principle: diversification of risk. To do that they must take a global view. And Americans need to be very critical of US policy and distrusting of their politicians.

Cumberland’s recommendations include worldwide diversification of security risk and worldwide diversification of currency exposure. Favor spread product in the fixed-income area and avoid US Treasury securities. View all positions as subject to change in strategic ways. Require independent verification of credit rating opinions and do not depend solely on rating agencies. And be prepared to change course as events unfold. Act prospectively and preemptively and not reactively.

Lastly, separate the silos of investment approaches. This may seem self-serving to say, but we believe that the separation of investment management, brokerage, and custody is needed to insure safety. At Cumberland that has always been our view. Not one of our managed client’s accounts had any money exposed to Madoff, Sanford, or any others of their ilk. Separate silos prevent that risk and allow for audit trails.

Cumberland does not take custody of client’s assets; they are held by investment firms or banks. Cumberland believes that a separately managed bond account must be able to “trade away” from the firm where it is domiciled and in whose “wrap” program it is placed. We will not manage an account where we cannot trade independently.

We are finding this view acceptable worldwide. As the globe grows, investors and financial professionals are becoming more and more skilled at their work and less and less trusting of governments and policies. They have good reason, in our view. This approach works for Asians and needs to be the foundation of investing for Americans.

We are often asked if we are optimistic about the future. For the world as a whole the answer is yes. Most of the world is seeking growth and peaceful economic outcomes that enhance the quality of life.

We are less optimistic for the US. Our longer-term trends are working against us. We have squandered our political capital and are neglecting the education of our youth. We practice polices of subsidy and deceit instead of self-determination and transparency.

No, we are not about to abandon our country; we have deep respect for our entrenched American traditions of freedom. But we are directing the harshest of criticism against our politicians of both parties. They are equally accountable and responsible for the mess we have. If only we could limit them – but the citizens are not yet angry enough to do that.

When we Americans have had enough, the voters will throw many of the bums out and start over. That will be a great day of celebration in America. We expect that others in the world will join the celebration. I hope that day arrives sooner, not later. By the way, financial markets will anticipate this change and be moving higher before the votes are actually counted. Markets measure change with sensitivity and find the pulse of that change before events are widely known.

Speaking of events, we built a little cash reserve in the US stock market accounts in the run-up to the Thanksgiving holiday. The Dubai World debt crisis has contagion risk. Insolvency cannot be permanently papered over by excess liquidity, not in the Middle East nor, for that matter, in America. In our global portfolios we are underweight the UK and have zero ETF exposure to the Persian Gulf states. Readers are directed to the Gartman letter. Dennis Gartman identified this Dubai risk well in his Thanksgiving Day missive. At Cumberland, we want to see the market make the adjustment for this risk before we resume a fully invested posture.

In America we have much to be thankful for. Our great freedoms are our strength. Our ability to speak and write with openness and to articulate diverse views is a powerful force. Our press is permitted to investigate and disclose. Our courts are honest and our legal systems include entrenched respect for individual rights. World travel confirms that for me every trip. I worry for my country but I still love it.

Happy Thanksgiving. Stay safe.

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