Don’t Fight the Tape

Early in our career, we learned the importance of
recognizing when the market was telling you that you were wrong. While some
people dismiss this out of hand, claiming to be only “early” or “late,” we do
not adhere to that philosophical dodge.

You either nail it or you don’t.

That’s why each and every one of our market forecasts has a
built in error detector, a line in the sand where we must acknowledge that the
market is behaving differently than anticipated. Those lines, laid out on May
(and before), were Dow 10,400, Nasdaq 1990, and SPX 1165. The SPX crossed
first, then the Nazz and finally the Dow last Wednesday. That was the signal to
us that a bearish stance was untenable, at least for the intermediate term.
Having those upside triggers performs two functions: first, it creates a stop
loss on any market call. While we are willing to be wrong (and quite frequently are)
we are unwilling to stay wrong.

Thus, these limits prevent the markets from
running too far a field from any positions we have.

Second, this acts as a rigorous error correction methodology
to prevent us from calcifying into a perma-anything. All too many of our peers
who were bullish in 1999 remained that way all the way down, as Nasdaq shed 80%
of its value. Conversely, we are aware of too many strategists who had drunken
the kool-aid, and
ignored the markets when they bottomed and reversed in October 2002 and March

To our way of thinking, wearing the scarlet letter “P” (for
Perma-B___) is a fate worse than death. As such, it is our ongoing endeavor to
remain flexible, nimble and open-minded to what Mr. Market is saying. And he
has been speaking quite loudly lately.

As we noted several times last week,
with those lines crossed.

The question which remains is how much cash to deploy and how fast.
The speed of the markets lift upwards urges some caution. A short period of
digestion is the likely result of the blast off from April’s lows. However,
that may be offset by the generally under-invested position of much of the
Hedge fund community. They are still licking their wounds following the GM long
short trade, and may be suffering from a combination of excess cash and
performance anxiety. Recall this was potent combo in late Spring 2003.

As such, we counsel legging in here slowly. Of the major
indices, Nasdaq has looked the strongest technically, with SemiConductors
particularly robust. But its overextended, and that warrant a more deliberate
capital deployment, preferably, on dips. Our lines in the sand are now to the
downside: Dow 10,400, SPX 1,181, and
Nasdaq 2005. Those are your hard stops.

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What’s the U.S. Savings Rate Really?



Are we spenders or savers?

That’s a significant question looked at by Dan Gross in the Sunday NY Times. Its an issue that has significant ramifications for the economy, interest rates, and the ongoing social security debate.

Gross references Bear Stearns Economist David Malpass:

"Some say that a flaw may exist not in our national character but in the way the government calculates savings: because the bureau’s method of tallying income and consumption doesn’t take into account structural changes in the finances of Americans, it may systematically understate income and overstate consumption.

For example, income includes wages and salaries, interest on bonds, and stock dividends. But it doesn’t include capital gains on stocks, profits from selling a house, or withdrawals from 401(k) plans. Nearly 70 percent of families own homes, nearly half of all households own stocks and mutual funds, and an increasing number of baby boomers are turning to 401(k)’s for income. Those trends, some say, can make a big difference. "The structure of the household portfolio has changed over time," said David Malpass, chief economist at Bear Stearns.

Convinced that Americans aren’t frittering away all their income, Mr. Malpass plumbed the Federal Reserve’s Flow of Funds data, a trove of information on Americans’ spending and saving habits. In 2004, he found that the net worth of all households – their assets minus their liabilities – stood at $48.525 trillion, up 9.6 percent from 2003. Sure, rising home prices helped. "But even if you take out houses completely, it still shows huge savings," he said.

The problem with Malpass’ analysis is that he is taking a mathematical approach to what is essentially a behavioral issue. (Hey, it happens) Call it a rationalization. We tend to see those from both the Bullish and Bullish contingencies, as way to feel comfortable with those ideologies.

Let’s state this another way:  As a nation, are we spenders or savers?

It raises a host of issues, some net positive, others more troubling. How does our behavior as consumer impact economic downturns? (It seems to smooth them out, at least recently). Why haven’t Businesses been as spendthrift as Consumers this recovery?  (My theory is execs are afraid to see their options go underwater again). And the $64,000 question, how might this low savings rate impact retirees when the Baby Boom generation starts playing shuffleboard?   

I believe we are not savers. The fact that so many pension plans, 401ks and IRAs go unfunded is a big clue as to that. (It also reveals how Tax ignorant all too many people are).

But stop for a moment to contemplate this: That people would rather spend their money consuming, rather than put it into a 401K where their employer does dollar-for-dollar matching is proof positive of our savings mindset.

That’s right, as opposed to GETTING FREE MONEY, many Americans still prefer to shop — rather than save.

I’m curious today iof Malpass is correct. So here’s a suggestion for what would be a signifcant and useful analysis:  Use Malpass’ methodology for calculating the national savings rate — and then apply it to as many countries we can get data for. I’d like to see a list that includes at least: the U.S., Japan, Great Britain, Norway, Sweden, France, South Korea, Italy, Germany, Australia, Canada, Spain, Israel and South Africa. That’s a short list, but we want it as extensive and complete as possible.

The goal is to determine whether or not, as judged against a planet of our peers, we Americans are — relatively speaking — savers or spenders.

Should be a rather interesting discussion . . .


UPDATE May 22, 2005 4:20pm
There’s a long but fascinating discussion on related topics at Whiskey and Gunpowder. You can see excerpts and related graphics below.


Is It a Savings Crisis or a Math Error?
By Daniel Gross
NYT, May 22, 2005


Read More

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Tony Crescenzi had an interesting article on RealMoney this week. In it, he notes that as the housing market soars, it ends up knocking rents lower. After all, why rent if ultra low real interest rates allow you to buy for the same price, and with nearly no money down? So what’s the problem with…Read More

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