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

American Association of Individual Investors (AAII)
Equity Allocations, Deviation versus 21-Year Mean

chart courtesy of Fusion Analytics

>

Here’s my partner, Kevin Lane:

“As seen above in the chart above individual investor allocations to equities has only recently moved back above its 21 year mean allocation of 60%. The massive under allocation to equities in late 2008 into the 2009 low was one of the major reasons we became so bullish on stocks since it suggested that selling was washed out of the market and that massive liquidity (aka – buying power) was built up ready to buy back into stocks.

That said we have seen assets rotate back to equities over the last 10 months and the market, being a liquidity driven animal, has responded accordingly. Currently investors have only a slight overweight to equities at 4.00 % above the 21-year mean or stated another way investors are now 64.00 % allocated to equities versus the 21-year mean of 60.00 %.

This is one reason why we continue to believe that after a bit of a correction stocks can move higher as investor liquidity is still not tapped out yet.

While not as ample as near the lows buying power still remains adequate to power/move stocks higher and keep corrections fairly well contained.

-Fusion Analytics

~~~

UPDATE: As the title suggests, this is a Sentiment Review. It is based on a survey that AAII does, and we track changes as the oscillate around a historical mean.

There are two things to understand about this: When it reaches an extreme, it is a warning of an impending reversal; Second,it generally trends from one extreme towards the other.

Market approaching key support — watch SPX 1080/85 — A close below this sets up another 5% leg down  towards 1035 area.

Pete on my trading desk tells me he sees “some buying and short covering happening at this level in here now.”

>

I always enjoy reading Jeremy Grantham’s missives, and his most recent comments do not disappoint. They are packed with great tidbits and insight.

My favorite part was this list of “Lessons Learned in the Decade” — the full list is available at GMO.com.

Here is an abbreviated version:

• The Fed wields even more financial influence than we thought.

• Low rates have a more powerful effect on driving financial assets than on driving the economy.

• The Fed is capable of being extremely out of touch with the real world and more doctrinaire than anyone could have imagined.

• Congress is nearly dysfunctional, primarily controlled by large corporations;

• Government administrations can be incompetent for long periods.

• The leadership of major corporations can be very lacking in insight and competence on a fairly routine basis.

• The two time-tested investment tools, value (P/E ratios and P/B ratios) and price momentum, are now much more heavily used and not so reliable as they once
were, say from 1977 to 1997.

• Asset classes really are more inefficiently priced than individual stocks on average, and therefore offer greater opportunities for adding value and reducing risk.

• The Fed learns no lessons!

Fascinating stuff from Jeremy Grantham of GMO.

>

Source:
What A Decade!
Jeremy Grantham
GMO, 1/25/2010

https://www.gmo.com/

World economy likely to crash and burn if it keeps gorging on debt, Kenneth Rogoff, professor of economics at Harvard University, told CNBC in Davos Thursday. Tom Glocer, CEO of Thomson-Reuters added that some of the weakness from last year still has to be worked through.

>

As we speculated in an earlier missive, once the FOMC Communiqué was released, traders would try to gun stocks to commence performance gaming for January. The only surprise was that it took about 20 minutes for traders to gain the courage to manipulate SPHs.
The probable reason for the delay is that FOMC Communiqué contains two negatives.

1) The communiqué said MBS buying would end on March 31. Various Fed officials in recent weeks advocated either extending the MBS buying or having the ability to buy as needed.

2) KC Fed President Thomas Hoenig voiced a dissenting vote as to keeping the ZIRP.
Experienced Fed watchers realize the FOMC loathes any public dissension. In the past, when discord was high, the compromise was to allow one person to voice dissent in the public record as a proxy for others that wanted to voice dissent. So the question is: who else disagrees with keeping rates near zero?

One other point – the FOMC again asserted: “…economic activity continued to strengthen and that the deterioration in the labor market is abating…” The forecast is dubious at best; but more importantly the FOMC omitted any comments about retail sales and housing – because both are in decline.

In the previous two communiqués, the FOMC asserted that housing was improving. This was not the case as today’s New Home Sales and recent Existing Home Sales demonstrated . . . How many times during 2009 did we hear ‘housing is rebounding or improving’ from economists, The Street and Fed officials?

New home sales unexpectedly fell 7.6% in December, to an adjusted 342k annual rate. 374,000 new homes were sold last year. The 23% y/y decline is the largest on record, which dates back to 1963. And this was with the ‘first-time buyer tax credit’.

Equities get it last again – partly on performance gaming. The dollar rallied (euro fell below critical 140 support briefly) while bonds and commodities declined. Copper tanked 15 handles…More importantly, 1-month Bills went negative again. We didn’t see any of the usual suspects try to downplay the fright to safety as ‘yearend’ related.

There is a troubling reason for the return to a negative T-Bills rate; and solons would like to keep the reason buried – so those in the know can adjust their holdings in an orderly manner.

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).

~~~

January 27, 2010

On our website, under Special Reports, you will find the letter of Congressman Darrell Issa, http://www.cumber.com/content/Special/Towns012610.pdf, requesting the subpoena of documents from the Federal Reserve. We want to offer some very quick thoughts in the heat of politics now casting a major pall over financial markets and economic decisions.

This is a week filled with politics on a collision course with financial markets and economics. Bernanke is likely to be reconfirmed as Fed Chairman by a US Senate vote with the narrowest of margins. There will be a cloud over the Fed for some “extended period” of time.

Fed policy will need to be understood and must be continuously examined. The Fed is engaged in a creative development of its policy implementation apparatus. We have written about this many times, and we will not delve into those nuances here.

Unfortunately, the Fed has failed in communication. It may get a passing grade for policy and it may get support for prompt and strategic action after Lehman and AIG. However, it does not get good grades for the early pre-Lehman period of this evolving financial crisis.

Remember, the first Fed primary dealer to fail was Countrywide. It was merged with another primary dealer, Bank of America. The second primary dealer casualty was Bear Stearns. It was merged with primary dealer JP Morgan Chase. Merrill Lynch was a primary dealer that was also merged with another primary dealer, Bank of America. All this activity involving primary dealers occurred in the early phase of the financial crisis, under Chairman Bernanke’s supervision. More importantly, it also occurred while Tim Geithner was president of the Federal Reserve Bank of New York.

In the Congress, in the country at large, on Main Street and on Wall Street, we now witness witch hunting over Geithner and Bernanke. It is important to distinguish between them.

Bernanke is a respected academic. He did not come in with a cloud of ethical questions over his head when he took office as a Federal Governor, as an economic advisor to the President, and as Fed Chairman. Disagreements with Bernanke occurred in the realm of policy making. Some argue he is a creative savior who avoided a Great Depression. Others argue he did not have the forecasting proficiency to see the crisis coming.

The arguments in all cases are about policy making and professional economic skill. So far, no one has been able to produce a smoking gun that impugns Bernanke’s character. That is the reason Bernanke will survive the political firestorm and be confirmed by the Senate for another term as Chairman.

Revelations about Geithner’s taxes damaged his character when they were revealed. Additional revelations about the behavior of New York Fed board members provided fuel for the Geithner critics. For the last year, as Treasury Secretary, Geithner has operated under this cloud of embarrassment. In addition, a number of his proposals reached an ignominious end. PPIP is a good example.

Now we are engaged in a detailed examination involving the role of the Federal Reserve and the specific role of Secretary Geithner, targeting payments made by AIG. We have learned that there were internal memos examining one course of Fed action and that there were subsequent reversals. We have learned that memos were not revealed and that certain documents and information were placed under a sealed agreement involving the SEC and others.

This episode of secrecy in American financial history hangs over financial markets and our economy. It continues to rain poison like a toxic cloud.

Now we have a Congressional request to subpoena documents. We have an inquiry to gain transparency that was not forthcoming from the Federal Reserve or Treasury. That transparency and full revelation of all hidden elements is now absolutely essential. We cannot obtain full meaningful financial reform in the US without it. Financial markets need the truth in order to properly discount America’s economic and financial future.

The narrative of this crisis must be accurately written. If Secretary Timothy Geithner becomes a political casualty in the process, so be it.

David R. Kotok, Chairman and Chief Investment Officer

Initial Jobless Claims totaled 470k, 20k above expectations but down from 478k last week (and 444k the week before) where the Labor Dept attributed the spike to administrative backlogs in processing claims. There was unfortunately not more of a drop this week which is clean of distortions and bears watching. Smoothing out the recent data has the 4 week average at 456k, a 4 week high. Continuing Claims, capturing up to 26 weeks of claims and whose data is delayed by 1 week, fell by 57k but were a touch above expectations. Extended benefits past this, whose data is delayed by 2 weeks, fell by 305k but comes after a spike of 613k in the prior week so its likely best to average the 2 weeks in order to get a better gauge of those collecting benefits past 26 weeks and up to 99 weeks in some states. Bottom line, the labor market data in terms of hiring is still very cloudy and the pace of firings has stopped getting better.

Dec Durable Goods rose .3%, below estimates of 2% but ex transports saw a gain of .9%, .4% above forecasts. Non defense capital goods ex aircraft rose 1.3% and is now up 3 of 4 months. Orders for vehicles and parts rose 3.6% and are up for 7 straight months and is a key part of the inventory boost to GDP. Orders of computers/electronics fell by 3% and electrical equipment was down 3.9%. Machinery orders and primary metals both were up strongly. Shipments, which get directly plugged into GDP, rose 2.9% and is up for a 4th straight month with Dec being the strongest of them and its contribution will be seen in tomorrow’s Q4 GDP report. Inventories overall remained lean however as the inventory to shipments ratio fell to 1.66 from 1.72, the lowest since Sept ’08. Bottom line, headline orders have been very lumpy, rising one month, falling another but the inventory story may have more legs with end demand still an open question.

The Baltic Dry Index fell 5% today and has broken below 3000 for the first time since Oct 28th and follows the recent correction in Chinese/Hong Kong equities. The market pullback has been of course due to policy steps to slow lending growth and tame the growing property/construction bubble that is heavily reliant on steel and thus iron ore and iron ore is the key commodity in dry bulk.

Obama’s speech last night rightly focused on jobs but the policy initiatives discussed were known to the markets already over the past few days so there were no surprises. After falling 11 of 12 days and down 10% on slowing China concerns, Hong Kong bounced 1.6% and the Shanghai index rose for the first day in 5 and it helped to lift the rest of Asia. The rally continued into Europe helped out by a better than expected jobs report in Germany and euro region economic sentiment that was better than expected and rose to the highest since June ’08. Keeping a lid though on the European rally which fell from its early morning highs at about 5ish am was another round of selling in Greece, Portugal, Spain, Italy and Irish bonds. Greek 10 yr yield is up another 18 bps to 6.92%, up 84 bps in 5 trading days. Also helping the S&P’s is another round of earnings beats, today from F, CL, PG, MOT, EL, LMT, NOK, CNX, MMM and RTN to name a few.

Last week, we discussed a highly politicized, misleading front page article about new bank rules (WSJ Jumps the Shark).

If you recall, that story included a large chart showing much various banks declined, in dollar and percentage terms.

Turns out the data was wildly wrong.

The Journal ran a milquetoast correction, under the heading “Corrections & Amplifications.” It was posted at the very bottom of that page, a location  not likely to be seen by many people.

It was not exactly a model of clarity:

Shares of Goldman Sachs Group Inc. fell $6.92, or 4.1%, to $160.87 in trading Thursday, while shares of Bank of America Corp. declined $1.02, or 6.2%, to $15.47; shares of J.P. Morgan Chase & Co. fell $2.86, or 6.6%, to $40.54; shares of Morgan Stanley fell $1.29, or 4.2% to $29.34; shares of Citigroup Inc. fell $0.19, or 5.5%, to $3.27; and shares of Wells Fargo & Co. rose $0.18, or 0.6%, to $28. A chart published with a Page-One article Friday about new bank regulations incorrectly said the shares fell 7% for Goldman, 1% for Bank of America, 3% for J.P. Morgan, 1% for Morgan Stanley, 0.2% for Citigroup and rose 0.2% for Wells Fargo.

They also pulled the incorrect chart.

What they should have done was correct the data in the table, but for some reason, they chose not to. Since they failed to make the appropriate correction, perhaps we can be of assistance:

>

WSJ New Bank Rules Sink Stocks article:

>
Thus, they misreported the change by a factor of 692%. Remove the outlier (Citi’s 2,650%) and its off a mere 300%.

Now, when a newspaper skews its front page for political purposes, that is a form of bad journalism and intellectual sloppiness that leads to all manner of errors.

In my opinion, what caused this is this a form of political gaming of journalism that puts facts and objectivity second, and politics, first.

I am not suggesting that anyone purposely altered the numbers — but when the goal is no longer objective reporting of info, these things happen.

And when you can’t trust the front page of a paper to do basic math, you can’t trust ANYTHING in it.