Posts filed under “Think Tank”

HOW TECHNICAL ANALYSIS CAN IMPROVE FUNDAMENTAL ANALYSIS

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Investment letter – August 26, 2009

HOW TECHNICAL ANALYSIS CAN IMPROVE FUNDAMENTAL ANALYSIS

Over the last 3 years, most economists have fallen into one of two groups. The smaller group were those economists who saw the housing and credit crisis coming. Granted, most were a bit early and turned negative in 2006. Given subsequent events and the severity of the crisis, being early was certainly not a character flaw. The second and far larger group of economists failed to see almost any aspect of the credit crisis and severe recession coming. Many were still forecasting that there would be no recession as late as last July and August.

What I find fascinating is how these two groups believe the economy will perform in coming quarters. The first group, who correctly anticipated the crisis and recession, believe the economy will bounce and then dip again and form a W pattern. A few think the economy will remain in recession until 2010. For the most part, this group did not see the rally in the stock market coming, and now believe valuations are too high, especially in light of the coming second dip and its impact on corporate earnings.

After failing to see the deepest recession since the Depression coming, and a 50%+ decline in the stock market, the second group of economists are the most stringent supporters of the V-shaped recovery. This view is credible, since economic activity is giving signs of at least bottoming, and nascent signs of improvement. The rally in global stock markets and commodities like oil is based on the expectation of better economic growth. Strategists then cite the improvement in markets as proof of the recovery. This bit of circular logic is taken as an article of faith by those who believe markets ‘know’ something about the future, and are merely discounting better times. I’m not sure what better times the stock market was discounting in October 2007. But this inconvenient truth never fails to dissuade the ‘market discounts the future’ fools from advancing this bit of Wall Street ‘wisdom’.

Something each group of economists and strategists have in common is the omission of technical analysis as part of their analysis. It is a critical omission, and accounts for why each group missed either the significant turning points in October 2007, or March 2009.

Most of the economists who saw the housing crisis coming turned negative on the economy and stock market in 2006. Although housing was clearly rolling over, technical indicators of the stock market’s health uniformly showed that the up trend in the stock market was intact. Throughout 2006, the advance/decline line continued to make higher highs after every decline. As I noted numerous times throughout 2006, there was a very supportive supply/demand dynamic at work. Companies were buying enormous quantities of their own stock and private equity firms were using cheap credit to take over a record number of firms. In total, almost 5% of the supply of existing shares was absorbed thru buybacks and takeovers. This underlying demand was not met with much selling since the economy was in good shape. Had those crisis prescient economists incorporated technical analysis into their fundamental analysis, they would have remained more constructive on the stock market, without compromising their excellent fundamental work.

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Category: Technical Analysis, Think Tank

Worst Month for Equities Set to Begin on a Sour Note

Dan Greenhaus is the Chief Economic Strategist at Miller Tabak + Co. where he covers global economies, markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi). This is his most recent commentary: ~~~ It is well known at this point…Read More

Category: Economy, Think Tank

The Battle Between Politics and Economics Goes Global

Good Evening: U.S. stocks finished a strong August on a down note, causing investors to wonder what awaits them during the seasonally weak months of September and October. With some strong (though admittedly junior) economic data released this morning, today’s downdraft had little to do with the U.S. economy. Global market participants were instead more…Read More

Category: Markets, Think Tank

Shanghai cracks

Category: Think Tank

Sugar High or LSD?

Years ago Charles Goodhart minted an eponymous law that is applicable today in financial markets. Last week, Pimco’s Mohammed El-Erian coined the metaphor “sugar high.” He was talking about the converse of Goodhart’s Law. We think he wasn’t harsh enough; hence, we use the metaphor “LSD.” The 99th edition of Pears Cyclopaedia (1990-1, pp. G27,…Read More

Category: Think Tank

Words from the (investment) wise August 30, 2009

Words from the (investment) wise for the week that was (August 24 – 30, 2009)

Stock markets, in general, again logged gains last week as pundits perceived economic data to be better than expected. But the recovery path is not home and dry yet, as shown by declines in crude oil, a number of emerging stock market indices, small cap indices and high-yield corporate bonds. All said, risky assets displayed some fatigue despite positive economic reports.

Caution remained over the robustness of any economic upswing, as reflected by the solid performance of government bonds, with safe-haven currencies such as the US greenback and the Japanese yen also edging up.

As expected, Federal Reserve Chairman Ben Bernanke was appointed by President Barack Obama on Tuesday to serve a second term. “Mr Obama is said to credit Mr Bernanke with a leading role in helping to avert economic catastrophe. By reappointing Mr Bernanke – who worked in the Bush White House – Mr Obama can also emphasize his bipartisan credentials at a time when he is embroiled in a fiercely partisan battle over healthcare reform,” commented the Financial Times.

30-08-09-01

Source: LOLFed.com

However, critics of Obama’s decision were plentiful and Morgan Stanley’s Stephen Roach, blaming Bernanke for his pre-crisis actions, said (via the Financial Times): “It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.” Bill King (The King Report) ascribed the stock market rising subsequent to Obama’s announcement to a “thank God it’s not Larry Summers” rally.

The past week’s performance of the major asset classes is summarized by the chart below – a set of numbers showing both the S&P 500 Index and government bonds rising, indicating an expectation of a subdued economic recovery and that the Fed’s monetary policy will stay easy for an extended period of time.

30-08-09-02

Source: StockCharts.com

A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.

The MSCI World Index (+1.3%) and MSCI Emerging Markets Index (-0.2%) again followed separate paths last week as China, Hong Kong and Brazil underperformed. Mature stock markets have recorded gains for a straight seven weeks, whereas emerging markets have seen two back-to-back weeks of declines. The end result is that emerging markets have now underperformed developed markets for four weeks running. Could this be a sign of a retrenchment in risk appetite?

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Category: Think Tank

An Uncomfortable Choice

An Uncomfortable Choice

August 28, 2009
By John Mauldin

An Uncomfortable Choice

What Were We Thinking?

Frugality is the New Normal

And Then We Face the Real Problem

Argentina, Brazil, Uruguay, New Orleans, Detroit, and More

We have arrived at this particular economic moment in time by the choices we have  made, which now leave us with choices in our future that will be neither easy, convenient, nor comfortable. Sometimes there are just no good choices, only less-bad ones. In this week’s letter we look at what some of those choices might be, and ponder their possible consequences. Are we headed for a double-dip  recession? Read on.

An Uncomfortable Choice

As our family grew, we limited the choices our seven kids could make; but as they  grew into teenagers, they were given more leeway. Not all of their choices were good. How many times did Dad say, “What were you thinking?” and get a mute reply or a mumbled “I don’t know.”

Yet how else do you teach them that bad choices have bad consequences? You can  lecture, you can be a role model; but in the end you have to let them make their own choices. And a lot of them make a lot of bad choices. After having raised six, with one more teenage son at home, I have come to the conclusion that you just breathe a sigh of relief if they grow up and have avoided fatal, life-altering choices. I am lucky. So far. Knock on a lot of wood.

I have watched good kids from good families make bad choices, and kids with no seeming chance make good choices. But one thing I have observed. Very few teenagers make the hard choice without some outside encouragement or help in understanding the known consequences, from some source. They nearly always opt for the choice that involves the most fun and/or the least immediate pain, and then learn later that they now have to make yet another choice as a consequence of the original one. And thus they grow up. So quickly.

But it’s not just teenagers. I am completely capable of making very bad choices as I approach the end of my sixth decade of human experiences and observations. In fact, I have made some rather distressing choices over time. Even in areas where I think I have some expertise I can make appallingly bad choices. Or maybe particularly in those areas, because I have delusions of actually knowing something. In my experience, it takes an expert with a powerful computer to truly foul things up.

Of course, sometimes I get it right. Even I learn, with enough pain. And sometimes I just get lucky. (Although, as my less-than-sainted Dad repeatedly intoned, “The harder I work the luckier I get.”)

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Category: Think Tank

Income/spending/savings rate

July Income was flat vs expectations of a gain of .1% but June was revised higher by .2% to a decline of 1.1%. Spending rose .2%, in line with forecasts and June was revised up by .2%. Because the headline PCE was flat, REAL spending rose by .2% (vs .1% gain in June) and with…Read More

Category: MacroNotes

UoM Final Consumer Confidence

The Final August U of Michigan confidence figure was 65.7, above the preliminary reading of 63.2, higher than the consensus estimate of 64 but is a touch below the 66 seen in July. Both Current Conditions and the Future Outlook rose from the Aug preliminary number. However, from July, Current Conditions fell almost 4 points…Read More

Category: MacroNotes

Income/Spending/Savings

July Income was flat vs expectations of a gain of .1% but June was revised higher by .2% to a decline of 1.1%. Spending rose .2%, in line with forecasts and June was revised up by .2%. Because the headline PCE was flat, REAL spending rose by .2% (vs .1% gain in June) and with…Read More

Category: MacroNotes