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

Chart of the Day takes a broad — perhaps over broad– look at trading rallies. They found that major rallies (73%) result in a gains ranging from 30% to 150%. Typically, they last between 200 and 800 trading days.

Based on this data, you can conclude that the present rally is still young, and potentially has a long way to run.

That might be a premature assumption.

As we’ve discussed before, there are huge differences between cyclical and secular markets. I have been describing the current short sharp run as a cyclical bull within a longer, secular bear.

If we were to look at the duration and intensity of rallies between 1929-38 or 1966-82, or 2000-09, I suspect we would find they are both shorter, sharper. By definition, cyclical bulls are of smaller duration than secular bull markets.

Here’s your daily chart porn:

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Age and Duration of Rallies

Source: Chart of the Day

Good Evening: U.S. stocks finished mixed today after digesting a series of news stories that could hardly be described as bullish. The economic data released today (CPI, jobless claims, current account deficit, leading indicators, and the Philly Fed survey) were uneventful, but the news flow from Europe and Washington, D.C. was anything but. The non-bailout bailout for Greece is threatening to unravel, while lawmakers in the U.S. House of Representatives are hoping to pass some form of healthcare reform without really voting on it. For his part, Mr. Market seems unruffled by the games of chicken being played by politicians on both sides of the Atlantic. Both the Dow Industrials and Dow Transports hit new, post-crash highs today, thus confirming a “Dow Theory buy signal” for adherents to one of the oldest theories of technical analysis. The real question is whether investors are unwittingly playing chicken themselves with stock and bond prices at current levels.

Stocks traded in a narrow range on light volume all day on Thursday, even with the stories described above hitting the tape at odd intervals. Action in shares of FedEx reflected some of this disconnect after the company reported an earnings beat this morning. FDX swooned some 3% in early trading, only to recover and post a 3% gain by day’s end. The few remaining proponents of the “Efficient Market Theory” were unavailable for comment.

The major averages were somewhat higher mid day when a rumor floated around trading desks that the Fed would again boost the discount rate today. The resulting sell off didn’t last for long and the averages finished mixed. Led by FDX, the Dow Transports (+1%) fared best, while the Russell 2000 (-0.35%) lagged behind. Treasurys were modestly lower, with yields rising between 2 and 4 bps. The dollar eyed the commotion in Europe and rose 0.8%, a rally which tarnished silver a bit but oddly didn’t hurt gold. The yellow metal has been going its own way of late, a fact evident in not only today’s concurrent advance with the greenback but also in Thursday’s 0.25% drop in the CRB index. Perhaps gold is rightly starting to be viewed as a currency in its own right.

“The hard part about playing chicken is knowing when to flinch”. This piece of advice has been available on playgrounds for decades, but it was made memorable by Scott Glenn’s character, Commander Bart Mancuso, in the 1990 movie, “The Hunt for Red October”. As often happens in Hollywood, Commander Mancuso times his move perfectly, a feat some EU leaders have been hoping to pull off with Greece. Standing fully — if only vocally — behind their financially stricken member state, EU leaders no doubt intended to show global investors a resolve similar to that once displayed by 300 Spartans at Thermopylae. These assorted ministers were hoping bond investors would thus be impressed enough to finance Greece back to health without the need for official intervention.

As PIMCO’s Mohamed El-Erian states in the story you’ll see below, however, EU leaders will likely have to flinch and put real money behind their promises. What’s unfortunate about the way things are now turning out is that any aid package might now include the IMF. Having a member state go hat-in-hand to is not only embarrassing for official Europe, it picks the pockets of nations outside the EU and hurts the euro in the process. What the IMF calls its “resources” are comprised mostly of quota contributions from developed nations, with the size of the ding escalating with the size of a nation’s GDP. If you’re starting to wonder whether the U.S.A.’s rank in the IMF pecking order means that, in effect, U.S. taxpayers may help fund any bailout of Greece, please stop wondering. Leave it to the EU to play a game of chicken where both the participants AND the bystanders get hurt.

If U.S. taxpayers get nicked by an IMF bailout for Greece, we may soon be receiving a flesh wound courtesy of our Congress. I don’t wish to debate the pros and cons of any proposed legislation — at least until we find out what it looks like and whether it somehow passes via a parliamentary trick that the House has used before when playing games of chicken with minority opposition in the Senate. And, just in case you’re wondering whether you’re about to be hurt by a healthcare system that is supposed to be a source of healing, please gaze upon the last headline below. Only in America could spending almost a trillion dollars be considered deficit reduction.

Whether either of the political games of chicken described above come home to roost in the capital markets is a matter about which investors seem unconcerned. The major stock indexes are grinding higher; the latest Dow Theory signal is as green as St. Patrick’s day; and the U.S. government can finance itself out to 30 years at rates less than passbook savings accounts earned prior to financial deregulation. Risk premiums in both markets have shriveled as risk appetites have grown. It might be an open question whether investors are playing chicken with forward rates of return or not, but it seems like complacency is becoming more widespread.

The VIX is now at its lowest level since Warren Buffett himself declared the subprime mess largely over during the spring of 2008. What was missing then, as now, was a margin of safety built in to prices for what Met Life likes to call “the IF in life”. And it is indeed possible that investors need not worry about either Greece hitting the wall or healthcare reform hitting their pocketbooks. Similar cries of “wolf” have been issued before about these subjects and nothing has yet happened. I would emphasize the “yet”, especially since volatilities (i.e. the price of purchasing market insurance) are low and securities prices don’t seem to discount what may go wrong in the very near future. I hope I’m wrong, but investors might be playing chicken with Mr. Market and don’t even know it.

– Jack McHugh

El-Erian Says IMF to Aid Greece After ‘Chicken’ Game
Papandreou Seeks EU Aid Deadline, Challenging Merkel
Pelosi Tactic for Health-Care Vote Would Raise Legal Questions
Health-Care Bill to Cost $940 Billion, Reduce Deficit

As mentioned Monday, I found The Big Short discussion on 60 Minutes quite interesting. I went over to Amazon to check out the book — and was stunned at the very low review ratings for a book that had yet to be released.

At the time, there were but 7 reviews. I clicked through a few a One Star ratings, and saw some jackass had written the following:

“Watched the interview on 60 minutes last night could not wait to order the book this morning on my kindle. Your loss.”

My response to the dolt reviewer:

“The book isn’t even out yet — and because the publisher has yet to release the kindle edition, you give the book a 1 star rating? An author spends 2 years researching and writing — important enough of a subject that 60 Minutes does a piece on it. What sort of creep dismisses 2 years of someone’s work because their infantile demands could not be satisfied THIS SECOND?

There are now 77 reviews, and 41 are one star reviews for kindle related  issues. Most of these brain damaged eejits who won’t understand this, but Amazon sure as hell should:

Authors do not control when the Kindle version comes out any more than they do when the paperback is released. Publishers typically release a kindle version sometime AFTER the hardcover. My book, Bailout Nation, was released May 26, 2009, and the kindle edition came out sometime in the Fall . . . the paperback is due June 28, 2010.

As an author, you have precisely ZERO control over these dates.

Considering the 1 star ratings/complaints about the Kindle edition were posted BEFORE THE BOOK was even released, they are utterly absurd. Amazon needs to step up and delete these non-reviews of books. At the very least, they should not count in the book’s star ratings. (And as commentors have suggested, they should require a purchase prior to any reviews).

That’s the equivalent of giving a movie a bad review because the popcorn concession in the lobby was out of butter.

These pro-kindle, anti-author reviews are completely unfair to the writer. A review is supposed to be about the book, not the publishers format release schedule.

If Amazon wants to be a fair vendor of books, they need to delete these idiotic, pro-kindle, fan boy reviews. Is Amazon a fair arbiter of this, or has their mad kindle lust blinded them to what is right?

Hey Jeff Bezos !  Please show me my trust in Amazon is not misplaced! Fix these damned reviews

Good Morning: Our capital markets have lately been, in the words of one of veteran participant, “just scintillating”. Stocks, bonds, the dollar, and even commodities have been stuck in fairly narrow ranges during the past week or so, as can easily be seen in measures of implied volatility that are loitering near multi-month lows. The VIX now sports a 17 handle, down more than a touch from last month’s highs near 30. Investors seem to be waiting for some sort of decisive news flow, the latest candidate being today’s FOMC meeting. And yet, while politicians seem bent on creating headlines that should goad Mr. Market out of his recent slumber, policy makers from EU finance ministers to our own Federal Reserve Governors seem intent on fostering the type of “stability” they so crave. Whether it’s the EU’s continuously evolving policy toward Greece or the Fed’s efforts to stimulate while appearing to remove stimulus, both entities are hoping words alone will help forestall real action.

Yesterday there were stories in the press that indicated EU finance ministers were in disagreement about what to do with Greece (see below). The ideas ranged from doing nothing (“they don’t need our help”), to providing loan guarantees, to the type of bond purchases that will look to their constituents like nothing short of a bailout. Today, however, comes a different story, one of seeming unity on the subject (see below). The ministers have cobbled together some sort of financial “lifeline” for Greece , though sticky details like how, when, and how much have been left for investors to imagine for themselves. “The clear hope is that the mere promise of support will reassure investors enough to bring Greek bond yields down further,” said Ben May, an economist at Capital Economics Ltd. in London (source: Bloomberg article below). Mr. May has it exactly right; the ministers are hoping cheap talk will supplant the need for politically expensive financial support.

Our Fed has a different challenge in front of it, but the FOMC will also likely call upon a press release to do its work instead of substantive policy changes. The governors will debate ways they can thread the policy needle of a monetary stance easy enough to encourage economic growth (thus providing aid and comfort to equity investors) while still appearing tough enough to restrain long term inflation expectations (and thus term premiums in the bond market). Whether the FOMC decides to hike the mostly symbolic discount rate again or shift around a few words like “extended period”, I honestly have no idea. What’s important to remember is what they do, not what they say. No matter how the Fed phrases its press release, the fed funds rate is unlikely to head north any time soon.

Why do I think the funds rate will stay at snake-belly levels? It may just be my read of the situation, but I think the Fed feels its biggest risks are of the economic and political variety. Inflation risks — to them — are distant and manageable. Reading Chairman Bernanke’s old speeches about Japan ’s need to target “positive inflation” in the midst of their long stagnation might even mean that Bernanke and company would welcome some inflation here in the U.S. But I can’t prove it. What I do know is that the dovish Janet Yellen has been tipped to occupy the vice chair seat next to Mr. Bernanke.

What also seems clear is that the Fed would like an expanded supervisory role in any financial regulatory changes now under consideration. Since this legislative effort falls to Congress to engineer, the Fed may wish to focus on the “full employment” aspect of its dual mandate over “price stability” while its supervisory role is up for debate. On this score, the Obama administration weighed in this morning with its own cute reminder of what it sees as the highest priority for the Fed. Does the following choice of words ring a bell? “The percent of Americans who can’t find work is likely to ‘remain elevated for an extended period,’ Treasury Secretary Timothy F. Geithner, White House budget director Peter Orszag and Christina Romer, chairman of the Council of Economic Advisers, said in a joint statement.” (source: Bloomberg article below).

Other risks to the economic outlook the FOMC may not choose to discuss in today’s press release include the aforementioned financial stresses in Europe, a brewing currency/trade spat with China , and another attempt at passing healthcare reform. What’s more, small and midsize banks have real estate losses that are curtailing new lending; the housing industry is still flat on its back; and the auto industry has potential customers keeping one foot on the brake over new purchases because they can’t be sure if the other foot will cause a new accelerator to stick. There are other risks, too, so the Fed’s plate is a full one today. Like everyone else, I don’t know what words will pour forth from the Eccles building this afternoon. I do know, however, that just like their ministerial colleagues in Europe , the Fed hopes that today’s words alone will be enough to keep various market constituencies calm.

Whether this trust investors still have in our central bank can last is another question. Volatile markets may or may not reappear before the FOMC’s next meeting in late April, but Mr. Bernanke and his merry band of governors won’t be able to rely on words forever. Like fiat currencies, press releases are only worth the paper they’re printed on.

– Jack McHugh

EU Spars Over Aid for Greece, Bets on No Need for Bailout
EU Lays Groundwork for Greek Lifeline to Bolster Euro
Obama Aides See Jobless Rate Elevated for ‘Extended Period’ Fed May Seek to Avoid Lower Inflation as Officials Debate Exit

I have a few good quotes about secular bear markets in The Bear: Dead or Just Sleeping?:

“And, in fact, many in the bear camp believe the market is destined to meet its maker as soon as the Fed starts to raise interest rates – which could happen late this year.

“When rates go up, it becomes more expensive to borrow, corporate profits slide – all the negative things that take place that make the market less appealing as an investment opportunity,” Mr. Ritholtz says.

In fact, Mr. Ritholtz is one of several commentators who believe this rally has merely been a temporary cyclical swing in the midst of a longer-term bear market – one that began roughly a decade ago and is far from over. These long-term, or “secular,” market trends tend to last 15 to 20 years.

“This does not have the characteristics of a secular bull market,” Mr. Ritholtz says. Not only would it be starting ahead of schedule, he argues, but even at the market lows of a year ago the stock valuations were never as low as they typically get at turning points in secular market trends.

“In the past, at the start of these big secular bull markets, you have really cheap stocks … I’m not sure we ever got to that point,” he says. “Stocks became reasonable in March [2009] for a month. Now, there are plenty of stocks that are expensive and there are plenty of indexes that are pricey.”

There is a lot more in the article . . .

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Source:
The bear: Dead or just sleeping?
David Parkinson
From Thursday’s Globe and Mail
Published on Thursday, Mar. 11, 2010 XXX http://www.theglobeandmail.com/globe-investor/the-bear-market-dead-or-just-sleeping/article1497020/

Posting will be light this morn, as I am presenting at the NYHFRT today.

The topic: The housing boom and bust, the credit bubble, as well as the stock market crash — where do we go from here and how to repair the financial markets.

Looks like a good crowd of fund managers — I’ll be back before noon.

On Friday, the Federal Reserve released their Z.1 Flow of Funds statement for Q4 2009.

FoF is essentially a snapshot of households, companies and governement’s balance sheet. It showed a very modest improvement in the aggregate debt levels.

Barron’s noted that consumers showed some signs of cleaning up their balance sheets ever so slightly:

The Numbers
1.3%: gain in U.S. household net worth in the fourth quarter from the third
$54.18 trillion: household net worth in the fourth quarter
1.7%: decline in U.S. household debt in 2009, the first annual drop since record-keeping began in 1945
$13.5 trillion: total household debt in 2009

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Sources: Federal Reserve, Barron’s

Be sure to see the 60 Minutes piece with Michael Lewis, discussing his new book “The Big Short: Inside the Doomsday Machine.”

Fascinating stuff . . .

Video here.

The bankruptcy report on Lehman is both revealing and damning. Once again, the investing public learns — after the fact — the basic truisms of modern markets:

-Major accounting firms are worthless to investors. They were either unable or unwilling to detect fraud amounting to 50 billion dollars. The incompetents at Ernst & Young deserve the same fiery death as Arthur Anderson; Whether they are hired guns or paid whores, they — like the rating agencies — are worthless to investors.

-Corporate management engages in fraud all too regularly: Am I reading this correctly — that Dick Fuld’s defense will be “I didn’t know that Lehman was a giant Ponzi scheme, and I was unaware we were hiding billions in bad debt and leverage off balance sheet?”

Based on the release of the bankruptcy court report, LEH was technically insolvent perhaps years before it collapsed;

-The Shortsellers turn out to be the good guys. Consider the absurdity fraud of “protecting” the bankster frauds — fromt he truth, as revelaed by Einhorn et. al.

-The SEC is utterly incapable of comprehending how markets function. They believe the criminals who commit the fraud, and  ignore the whistleblowers who uncover it;

-The ban on short selling is an indictment of the inability of the SEC to understand WTF is going on, and a reward tot he criminal corporate management teams;

-The Media did a terrible job uncovering the fraud as well. Some media folk were used by CEOs. Some of the TV press who relied on access to their subjects, actually rallied to the defense of these CEOs, including Fuld, and trashed the short sellers. Most notably Charlie Gasparino from his CNBC days, but their were others as well.

-The Analyst community, for the most part, failed as well.  The few who publicly acknowledged the debacle were notable for being so far outside of the herd. 95% of them were wrong.

Pathetic

All in all, the entire system failed. The situation is utterly disgusting, and if the investing public pulls its money out of the completely corrupt public markets for a generation or more, it would not surprise me . . .

All 2200 pages.

If only I had the time . . .