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

From Ron Griess of The Chart Store:

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More support for the August 9, selling climax-induced bullish position?
David R. Kotok
August 24, 2011

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So far, the August 9 intraday S&P 500 Index trading low has held. It was 1100. It has been tested twice in the futures market. In each case a sharply down futures price was reversed and the market closed up. Thus, those two tests do not appear in the trading records in New York. They do appear in Asian and European market trading.

We have remained fully invested through this turmoil and continue that way. We believe that the US stock market had a peak-to-trough bear selloff that lasted from the April 29 top of 1363 to the August 9 low of 1100. Those 263 points are about 20% of the S&P 500 Index.

The selling-climax issue is important but not enough by itself to make a fully invested decision. The reason is that we do not know if the climax was an interim climax or the final one. We will not know that for another few months.

Another indicator gives us some additional comfort in our bullish position. We give specific credit to First Trust for reporting it.

This approach measures the results of the US stock market after it has experienced a down day of over 6%. Since 1950, there have been 16 episodes in which the S&P 500 sold off by more than 6%. We had episode number 16 on August 8. The S&P was off by 6.66%.

Of the 15 other episodes, only two did not result in higher stock prices after one year. One of those was the selloff after Lehman-AIG on September 29, 2008, when the market lost 7.62%. The other was the selloff on October 13, 1989, when the market fell 6.12%.

In every other case, the stock market was higher one year after a 6% down day. The average gain was 21.25%, and that is after averaging in the two loss experiences. The higher gains were in the 34%-to-45% range, and there were four such gains among the 15 episodes.

So what does this mean for 2011 and 2012? History would argue that the stock market is headed higher, and maybe much higher. Some of the valuation metrics we use suggest the same. Others compare stocks with bonds (Ned Davis) or gold (Ritholtz) and argue the valuation disparity.

Our view is that stocks are mostly washed out. This is especially true of the financial sector. My email runs 10 to 1 against banks, bankers, and other financial professionals and their enterprises. They are the target of nearly universal disdain.

At Cumberland, we think it is time to be adding weight to the financial sector. We do it with selected ETFs. We are doing that and are taking up the weights. For us it is the first time since 2007 that we are raising weights in the financial sector instead of lowering them.

Was August 9 the final selling climax? We will not know for a while. Nevertheless, every day increases the odds that it was. That said, Friday’s Bernanke speech and any other event could send the market in any direction. That is how it works when uncertainty is so high.

We are fully invested in our US stock market ETF accounts. We are terrified bulls but still bulls. We think the market (S&P 500 index) has a chance to reach 1350-1400 by yearend and over 2000 by the end of the decade. It is 1165 as this is written.

We look forward to discussing this outlook with Tom Keene on Bloomberg TV tomorrow, (Thursday) between noon and one. And again on Bloomberg radio with Tom Keene and Ken Prewitt between 7 and 9 AM on Friday morning. This assumes another earthquake does not derail the travel plans.

David R. Kotok, Chairman and Chief Investment Officer

Looks like the guys at TSCM have totally cleaned up the interface for Real Money. This is a well done, needed improvement for their premium site:

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Declining sales and new emission standards forced Mazda to finally pull the plug on the RX-8, the last of its rotary engine sports cars.

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Here’s Motorward:

The production of this car has been canceled back in July, and the remaining cars will be sold before the year end, and then the RX-8 will be gone forever. Currently there is no plan to make another rotary-engined car because, to put its simply, it’s not worth the hassle.

As a true successor to the amazing RX-7, the RX-8 featured a 1.3 liter rotary engine with an output of 232 hp, which is amazing for such an small size. At $28,000, the R-8 was one of the most affordable, and one of the most desirable, sportscar. Other great feature of it was the unique rear doors, which gave it the looks of a cool coupe, but practicality of a four-door car.

I had an RX8 about 5 years ago — the car was quirky, surprisingly exotic for a $30k — it didn’t start well cold, occasionally had some problems with flooding engine, and IMO, was underpowered by 50-10HP — but overall was terrific a well balanced car, with great steering and handling, good looks, and was a very tossable sport car.

Here’s what I wrote about the car in 2004

It takes a bit of experience with the Renesis engine to wring out the full power band — once you learn how, its a sheer delight. Yes, off the line the car is no match for big V8s. The torque is light at the low end — but it comes on strong once the tach swings past 5,000. From there, it kicks you back into the seat as it revs towards the 9,000 RPM red line. 0-60 in under 6 seconds is very respectable — but I’ll bet it beats many big blocks in the 30-70mph sprint.

My only complaint about the car — accurately described as a practical sports car — is the  lack of a 2 driver memory. If you build the car for practicality, as Mazda did, they should assume there will be more than one RX8 driver per household. Adjusting the side view mirrors and seats each and everytime me or the wife gets behind the wheel is a bit of a pain. Considering that the car has nearly every imaginable electronic gizmo — Navigation, heated seats, heated sideview mirrors, Xenon headlights, auto dim rear mirror, multi garage opener — it makes little sense not to offer the memory setting as an option.

By the way, if you are not taking the car from dealer stock (we got our 2004 at a year end sale), then order the  indash multi disc CD player. You’ll have less stuff lying around the door pockets.
(prior comments here and here).

There are a few 100 units left — go see if you can buy one at a deep discount…

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Source:
Mazda RX-8 Bites The Dust
Motor Ward, August 23,2011

The urge goes back to the ancients: “me want shiny stuff”. But is there now a risk the gold price is entering bubble territory? Investment editor James Mackintosh examines the 1970s gold bubble, as well as the correlation between price and real yields.

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click for video

Aug 23 2011 4m 18sec

Headline Durable Goods rose 4%, twice expectations led by a 43.4% rise in nondefense aircraft orders and 11.5% gain in vehicles/parts as Japan supplies came back on line. Ex these and taking out defense aircraft saw orders rise .7%, better than expectations of down .5% and June was revised up. However, the core reading of non defense capital goods ex-aircraft fell by 1.5%, about in line with forecasts. Orders for computers/electronics and primary metals were up while electrical equipment, machinery and fab metals were lower. Shipments, which get directly plugged into GDP, rose 2.5% and because inventories rose just .8%, the inventory to shipments ratio fell to 1.79 from 1.82, the lowest since March. Bottom line, from the markets perspective, the unexpected gain in orders ex transports was enough to bring us back but the decline in the core cap ex component still points to a still very uneven economy and specifically, today’s data is from July and we know the world changed in Aug.

Some really interesting reading today:

• West shows worrying signs of ‘Japanisation’ (FT)
• Growth Forecasts for U.S. Cut at Citigroup, JPMorgan Amid Global Slowdown (Bloomberg)
• It’s the household debt, stupid (Washington Post)
• Slower Business Spending Spells Trouble (WSJ)
• The State and Local Budget Crisis (Truman Factor)
• Derivatives: Repositories may need collateral data – report (International Financing Review)
• Google’s nagging media problem (Fortune)
• Renewables Give Us More Power Than Nuclear (Green Economy)
• Slip-Up in Chinese Military TV Show Reveals More Than Intended (The Epoch Times)
• Quake sensors removed around Virginia nuke plant due to budget cuts (Raw Story)

What are you reading?

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Rich Vetstein
August 23, 2011

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Massachusetts Real Estate Law,Mortgage Crisis,Mortgages,Title Defects

There was finally a shift of substance to the bearish side in a least one measure of investor sentiment, the weekly II measure. Bulls fell to 40.9 from 46.2 while Bears rose to the most since Sept ’10 at 33.3 from 23.7. The wide spread between the two in the weeks prior in the face of a sharp selloff was evidence of bulls who didn’t want to throw in the towel and wanted to buy the dip. Today’s data shows finally some white flag waving on the part of the bulls. With this said, bulls are still above bears and to compare, in the panic of late ’08, early ’09, bears got as high as 54.4% and bulls were as low as 22.2%. The German economy is showing signs of buckling as the IFO business confidence figure fell to 108.7 from 112.9, below expectations of 111 and the weakest since June ’10. It still though is above its 10 yr average of 101.5. Greek 2 yr note yields are rising to a record as the issue of collateral backing for any loan to them continues to muck up the entire 2nd bailout. Moody’s downgraded Japan’s credit rating to Aa3 but puts them now in line with S&P’s downgrade in Jan. Japan’s 5 yr CDS is trading at the highest since March. Thailand raised interest rates by 25 bps to 3.5% as expected but hinted that it may be the last for now. In the US, the MBA said purchase apps fell 5.7% to the lowest since 1996 as mortgage rates at 4.39% doesn’t matter if one is worried about work and securing a loan.

The US banking sector is not healthy.

There is a fundamental misunderstanding about the Wall Street bailouts amongst the public, and quite a few policy makers at Treasury and the Federal Reserve: Somehow, they “fixed” the banking system. All it took was few trillion dollars in liquidity and a few $100 billion dollars in recapitalization, and all is now fine (I suspect some people at the Fed know the Truth).

In fact, they did nothing of the sort. The banking system was not saved; The massive injection of liquidity temporarily salved the day-to-day operations of banks, but they did not repair what ailed our financial institutions. Indeed, pouring billions into nearly identical management teams that mismanaged the risk, over-leveraged exposure, and drove banks off the cliff in the first place was an invitation for another crisis.

And that crisis now appears to be arriving. And, its our own fault.

Consider what was actually done in 2008-09, and you will understand why none of the underlying problems have been repaired:

• Bank holdings: Remain stuffed with declining assets, primarily in Housing and Derivative holdings. Another leg down in Housing could be nearly fatal.

• Transparency: Balance sheets are unnecessarily Opaque; Eliminating Fair value accounting via FASB 157 did not fix balance sheet problems, but instead allowed banks to hide them.

• Capitalization:  Remains too thin; leverage should be mandated back to the pre-2005 rule change of no more than 12 to 1; As we have learned, management does not keep adequate capital unless mandated to do so (sufficient capital reserves cuts into profits);

• Misaligned Incentives: Compensation and bonus schemes were not significantly changed after bailouts, except during loan repayments. Thus, management and traders still have the same upside to roll the dice, but do not have the downside risks, which remains on shareholders and taxpayers;

Let’s use a counter-factual, a simple thought experiment of what would have been had we gone Swedish on banks like Citi and B of A, placing them into a prepackaged reorganization (that’s a polite phrase for “bankruptcy”).

The easy stuff: Senior management all gets fired. More than just the CEO — nearly the entire top floor at the bank, including the Board of Directors, gets canned. Equity shareholders get wiped out. Whatever is left over after all is said and done goes to the bondholders, typically, at about 25-50 cents on the dollar. (Note that in Sweden, bondholders got 100 cents on the Kroner, but that currency was significantly devalued — so the bondholders were not made whole, they lost between 50-75%).

Temporary nationalization is the play: Uncle Sam provides debtor-in-possession financing to keep operating. All of the bad holdings, mortgages, derivatives and other liabilities are pulled out, and auctioned off. This includes the REOs, the CDS/CDO book, defaulted mortgage obligations. Remember, there is no such thing as toxic assets, only toxic prices. At some valuation, these are worthwhile investments — just not 100 cents on the dollar. Let healthy buyers pay 15-30 cents.And anything that is worthless is written down to zero.

We recapitalize the parent bank, and spin off each division: IPO Merrill Lynch for $20 billion, spin out a clean  Countrywide at $8 billion, sell of all of the non depository bank pieces. What you have left over is a well capitalized bank, owned by Taxpayers, with well capitalized former divisions as stand-alone companies. All of the above have transparent balance sheets (No FASB 157 required to hide the garbage investments). Eventually, everything is spun out back to the public markets. Uncle Sam is repaid, and what is left over goes to the bondholders.

This would have created a transparent, unleveraged, adequately capitalized banking system that would be contributing to, rather than detracting from, the US economy.

But all that was a missed opportunity — for W and O alike. What we have today instead is an over concentrated set of banking behemoths, barely off life support. Many of these remain mortally wounded by the holdings — holdings that they would have to shed through a healthy reorg.

The recent downturn in the banking sector? I suspect it amounts to nothing more than a credible bet that these banks are not in any condition to withstand the next recession. (No, it was not Henry Blodget’s Fault). A rise in unemployment and another next leg down in Housing could very well be fatal.

If the banks come crawling back to Uncle Sam for another bailout, it will be proof that “rescuing” failing financial institutions that blow themselves up is the exact wrong strategy.

Real Capitalists know failure is part of the process. I suspect we may have another chance at a banking reorg. Let’s hope we do it correctly this time . . .

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Previously:

Banking Sector Remains (literally) Unchanged (January 4th, 2010)

Bank of America Credit Spread: FUGLY (August 23, 2011,)

GM Style Reorg for BAC, C (August 9th, 2011,)