Twenty years junior to Warren Buffett, our Investment Guru of Year 2008 Prem Watsa is known as the “Warren Buffett of the North”, for good reasons, as you will see.
Just as Warren Buffett built Berkshire Hathaway (BRK-A), Prem Watsa built his Fairfax Financial Holding Limited (FFH) empire on the foundation of a collection of excellent insurance subsidiaries, except he cut through the deviations that Warren Buffett experienced during his earlier year -- No time for beating the bushes in textile or retail businesses; if Warren Buffett tried and failed, no need for Prem Watsa to reinvent the wheel.
If short term performance is all that matters, Prem Watsa should pride himself for outshining Warren Buffett considerably in 2008. On February 19, FFH reported best earnings in the company’s twenty-three-year history. Fourth quarter 2008 earning was $346.8 million and annual earning was $1,473.8 million for the 2008 year ($19.62 and $79.53 per diluted share, respectively). Company book value per share reached $278.28 and the company has more than $1.5 billion in cash and marketable at the holding company level.
* * *
So what do Warren Buffett and Prem Watsa have in common in when it comes to stock investing?
First of all, both have a highly concentrated portfolio.
According to GuruFocus Data, As of December 31, 2008, Warren Buffett has a stock portfolio of $52 billion, allocated among 41 stocks. For Prem Watsa, it is $5.2 billion among 44 stocks. Compared to some of other Gurus we follow, such as Kenneth Fisher who owns 632 stocks, or even the 500 companies that S&P 500 index includes, Buffett and Watsa are very concentrated.
Looking closely, their portfolios are more concentrated than these number suggested. The following table lists the top 10 holdings of Warren Buffett and Prem Watsa respectively. Each concentrates more than 85% in their top 10 holding.
Among Watsa's holdings are JNJ (2), PFE (3), DELL (5), INTC (6), GE (7).
* * *
There are twelve (12) stocks that are owned by both Gurus, in particular WFC, KFT, JNJ. The others are BNI, GE, USB, WSC, WMT, USG, GCI, SNY, GSK.
Saturday, February 28, 2009
Tuesday, February 24, 2009
Shiller's P/E below fair value
Yale professor Robert J. Shiller, the author of "Irrational Exuberance," created one of the most useful and predictive measures of stock-market valuation: the cyclically-adjusted price-earnings ratio (CAPE).
As Professor Shiller explains here, the CAPE mutes the impact of the business cycle by averaging 10 years of earnings. It thus provides a good picture of the market's value regardless of where we are in the business cycle.
Professor Shiller's P/E has finally dropped below fair value for the first time in 15 years. The market's cyclically adjusted PE is now under 14X (compared to a long-term average of about 15X).
So is Prof. Shiller going all-in? No. He's waiting until the P/E drops below 10X, which it has done at major market lows in the past.
[via paraguay2es]
As Professor Shiller explains here, the CAPE mutes the impact of the business cycle by averaging 10 years of earnings. It thus provides a good picture of the market's value regardless of where we are in the business cycle.
Professor Shiller's P/E has finally dropped below fair value for the first time in 15 years. The market's cyclically adjusted PE is now under 14X (compared to a long-term average of about 15X).
So is Prof. Shiller going all-in? No. He's waiting until the P/E drops below 10X, which it has done at major market lows in the past.
[via paraguay2es]
Japan's wipeout
Japan's painful hangover from its own version of the global financial crisis is a grim lesson for those who hope for a quick recovery from the present one. Japan is the only major industrialized country since the Great Crash of 1929 to go through a crisis of a similar scale. Like the United States and other world economies today, it suffered a market meltdown, a collapse in consumer confidence and a crisis in its banking system.
It has never fully recovered. After being knocked flat on its back by the bursting of a stock-market and real-estate bubble in the early 1990s, it stayed there for the rest of what became known as its lost decade.” It bounced back slightly after the turn of the century, only to head into trouble again as the global economy weakened. In all, the aftereffects of its crisis have lasted nearly two decades.
Japan's crisis seemed to hit like a lightning bolt from a clear blue sky. In the late 1980s, Japan was on top of the world. Its “miracle economy” had grown by an average of 10 per cent in the 1960s, 5 per cent in the 1970s and 4 per cent in the 1980s, putting its Western rivals to shame. Companies such as Honda, Canon and Sony were flooding the globe with Japanese-made cars, cameras and television sets. Japanese companies bought prized overseas assets like New York's Rockefeller Center and California's Pebble Beach golf course. In books such as Ezra Vogel's Japan as Number One, analysts predicted that Japan's tight-knit social fabric, disciplined business culture, hard-work habit and government-directed growth strategy gave it an irreversible edge over the tired economies of the West.
But trouble was brewing. Officials deregulated the financial markets and lowered interest rates, the same combination that would lead to the credit fiasco in the United States. With money easy to borrow, companies invested heavily in property and stocks, sending prices soaring. The Nikkei stock-market index more than tripled from 1985 to 1989. A square foot of land in Tokyo's Ginza shopping district was going for $139,000 (U.S.). It was said that the property around the sprawling Imperial Palace was worth more than the whole state of California.
When the bubble finally burst, it was a wipeout. The Nikkei dropped by two-thirds over the next two years. Commercial land values in the big cities fell by 80 per cent between 1991 and 2000. They never returned to their bubble levels. Neither did stocks. Today, the Nikkei stands at one-fifth of its 1989 peak.
[via kemcheca]
It has never fully recovered. After being knocked flat on its back by the bursting of a stock-market and real-estate bubble in the early 1990s, it stayed there for the rest of what became known as its lost decade.” It bounced back slightly after the turn of the century, only to head into trouble again as the global economy weakened. In all, the aftereffects of its crisis have lasted nearly two decades.
Japan's crisis seemed to hit like a lightning bolt from a clear blue sky. In the late 1980s, Japan was on top of the world. Its “miracle economy” had grown by an average of 10 per cent in the 1960s, 5 per cent in the 1970s and 4 per cent in the 1980s, putting its Western rivals to shame. Companies such as Honda, Canon and Sony were flooding the globe with Japanese-made cars, cameras and television sets. Japanese companies bought prized overseas assets like New York's Rockefeller Center and California's Pebble Beach golf course. In books such as Ezra Vogel's Japan as Number One, analysts predicted that Japan's tight-knit social fabric, disciplined business culture, hard-work habit and government-directed growth strategy gave it an irreversible edge over the tired economies of the West.
But trouble was brewing. Officials deregulated the financial markets and lowered interest rates, the same combination that would lead to the credit fiasco in the United States. With money easy to borrow, companies invested heavily in property and stocks, sending prices soaring. The Nikkei stock-market index more than tripled from 1985 to 1989. A square foot of land in Tokyo's Ginza shopping district was going for $139,000 (U.S.). It was said that the property around the sprawling Imperial Palace was worth more than the whole state of California.
When the bubble finally burst, it was a wipeout. The Nikkei dropped by two-thirds over the next two years. Commercial land values in the big cities fell by 80 per cent between 1991 and 2000. They never returned to their bubble levels. Neither did stocks. Today, the Nikkei stands at one-fifth of its 1989 peak.
[via kemcheca]
a lost generation?
The legacy of common stocks as the cause of so much misery in the 1930s has been made all the more emphatic by historians who have felt compelled to finish the story by reminding readers that it took the once mighty Dow Jones industrial average until 1954 — a lost generation it would seem — to claw its way back to the summit reached in 1929. The image is teeming with innuendo.
The implication is that those who acquiesced to their greedy impulses in the late ’20s, which by all appearances included just about everybody, served penance for a quarter of a century thereafter.
To be sure, most who speculated and lost never purchased another stock for the rest of their lives. Even today, the universal mental image of the era begins with the wealth-destroying stock market crash, followed by the demoralizing and seemingly endless economic depression—and culminating with the manifold uncertainties of World War II.
Fear and remorse sounded the death knell for investment in what everyone had come to believe was the riskiest of all asset classes: common stocks. That perception stubbornly clings to the collective psyche as one of the great investment myths when talk turns to the Depression and its aftermath.
Facts Tell a Dramatically Different Story
Using annual data from the beginning of 1930 until the end of 1954, here are the plain facts, presented dispassionately. For openers, if one includes reinvested dividends, as clearly one should, $1 invested on January 1, 1930, in the S&P 500 was made whole during 1936.
That’s less than seven years to break even, not the much-ballyhooed quarter of a century.
As for the so-called “lost generation” from January 1, 1930, to December 31, 1954, the average annual total return (including dividends) for the more broadly based S&P 500 was 8.1%. Starting three years later in the depths of the Depression, on January 1, 1933, the average annual total return jumped to 14% for the 22 years. Sadly, the greater loss for a generation was opportunity, not money.
-- Frank Martin, Martin Capital Management, 2008 Annual Report [via lethean46]
see also http://stockmarketeers.blogspot.com/2009/04/4-12-sounds-better-than-25.html
The implication is that those who acquiesced to their greedy impulses in the late ’20s, which by all appearances included just about everybody, served penance for a quarter of a century thereafter.
To be sure, most who speculated and lost never purchased another stock for the rest of their lives. Even today, the universal mental image of the era begins with the wealth-destroying stock market crash, followed by the demoralizing and seemingly endless economic depression—and culminating with the manifold uncertainties of World War II.
Fear and remorse sounded the death knell for investment in what everyone had come to believe was the riskiest of all asset classes: common stocks. That perception stubbornly clings to the collective psyche as one of the great investment myths when talk turns to the Depression and its aftermath.
Facts Tell a Dramatically Different Story
Using annual data from the beginning of 1930 until the end of 1954, here are the plain facts, presented dispassionately. For openers, if one includes reinvested dividends, as clearly one should, $1 invested on January 1, 1930, in the S&P 500 was made whole during 1936.
That’s less than seven years to break even, not the much-ballyhooed quarter of a century.
As for the so-called “lost generation” from January 1, 1930, to December 31, 1954, the average annual total return (including dividends) for the more broadly based S&P 500 was 8.1%. Starting three years later in the depths of the Depression, on January 1, 1933, the average annual total return jumped to 14% for the 22 years. Sadly, the greater loss for a generation was opportunity, not money.
-- Frank Martin, Martin Capital Management, 2008 Annual Report [via lethean46]
see also http://stockmarketeers.blogspot.com/2009/04/4-12-sounds-better-than-25.html
Four methodologies for valuing stocks
In the Appendix, Exhibits 2–5,17 you’ll find reasonably understandable explanations of four different methodologies for roughly valuing common stocks in the aggregate—and over many decades.
The first compares the total market value of all U.S.-domiciled companies annually with GDP. It has been featured in a number of earlier annual reports. The second, a model originated by Ben Graham and updated by Bob Shiller, traces the 10-year trailing deflated price-earnings ratio from the early 1920s. The third, Tobin’s q-ratio, compares the market value to the replacement value of corporate assets over the same time frame. Finally, a name out of the past, Edson Gould, attempts to use dividend yield as a measure of valuation. Gould’s work is more relevant to the case made below regarding dividends returning to prominence.
These four different ways of looking at the same thing provided not only similar conclusions as to when major market lows occurred but, with reasonable accuracy, how depressed valuations were on those occasions. Common stocks were most out of favor in the early 1920s, the early ’30s, and the early ’80s, the last episode being the only instance of double-digit inflation and interest rates. If the current malaise continues, and those same low valuations are eventually realized, the S&P 500 could decline farther to somewhere between 400 and 550, the Dow Jones industrial average, 4000 to 5500. From year-end prices the further erosion in total market value could range between 30% and 50%.
Exhibit 2: Market Capitalization-to-GDP
One useful measure of aggregate market value is the market capitalization of all publicly traded stocks as a percentage of gross domestic product (GDP). The November 24, 2008, Barron’s article, from which the graphic at right was taken, reveals that the capitalization of the stock market was 59% of GDP. This is below the long-term average of 79% but well above the lows, which, if achieved, would result in a 550 level on the S&P 500.
Exhibit 3: Shiller’s Graham P/E
When calculating price-to-earnings ratios (P/E), most investors divide the stock’s price by last year’s earnings per share (or estimated current-year earnings per share). Legendary investor Ben Graham, however, suggested that P/E ratios be calculated using the average earnings of the last 7–10 years as the denominator. Such a methodology smooths yearly earnings gyrations and gives the investor a better sense of price paid relative to a business’s earning power over a full business cycle.
As of the end of 2008, the market was trading at a “Graham P/E” of 15.5 times earnings, close to the long-term average of 16.3 times earnings. However, if we swing pendulum-like through the average and reach the lows of about 6.5 times as we did in ’21, ’32, and ’82, the S&P would fall to 350–400. Even a more reasonable downside of 9 times equates to a 500–550 level on the S&P 500.
Exhibit 4: Tobin’s Q-ratio
Tobin’s q-ratio, named for economist James Tobin, is conceptually a measure of the market price of a firm’s assets relative to their replacement value (market value of capital/replacement cost of assets). A q ratio greater than 1 means the market is valuing the firm’s assets for more than it costs to replace them. In other words, you can buy a business for less than you can build that business. The converse is true for q ratios below 1. Among the many versions and approximations of Tobin’s q is the equitymarket q—or the market value of publicly traded equities divided by their book value. The chart above shows that as of December, the market was valuing aggregate net assets at about 75 cents on the dollar, which is approximately the long-term average. However, it’s obviously a very volatile measure. In four previous bear markets (’21, ’32, ’49, and ’82) the q ratio dipped below 0.3, which, if revisited, would equate to a 400–450 level on the S&P 500.
Exhibit 5: Gould’s Senti-meter
Famed technician Edson Gould hypothesized that the market’s dividend yield was a reasonable indicator of investor psychology. His theory was that dividend yields less than 3% signified an optimistic bias in investor sentiment and portended a market decline, while a dividend yield greater than 6% foretold the opposite.
According to Mark Ungewitter, vice president and portfolio manager at Charter Trust Company, if dividend payout ratios remain unchanged, a 6% yield would equate to about 500 on the S&P 500.
[via Lethean]
The first compares the total market value of all U.S.-domiciled companies annually with GDP. It has been featured in a number of earlier annual reports. The second, a model originated by Ben Graham and updated by Bob Shiller, traces the 10-year trailing deflated price-earnings ratio from the early 1920s. The third, Tobin’s q-ratio, compares the market value to the replacement value of corporate assets over the same time frame. Finally, a name out of the past, Edson Gould, attempts to use dividend yield as a measure of valuation. Gould’s work is more relevant to the case made below regarding dividends returning to prominence.
These four different ways of looking at the same thing provided not only similar conclusions as to when major market lows occurred but, with reasonable accuracy, how depressed valuations were on those occasions. Common stocks were most out of favor in the early 1920s, the early ’30s, and the early ’80s, the last episode being the only instance of double-digit inflation and interest rates. If the current malaise continues, and those same low valuations are eventually realized, the S&P 500 could decline farther to somewhere between 400 and 550, the Dow Jones industrial average, 4000 to 5500. From year-end prices the further erosion in total market value could range between 30% and 50%.
Exhibit 2: Market Capitalization-to-GDP
One useful measure of aggregate market value is the market capitalization of all publicly traded stocks as a percentage of gross domestic product (GDP). The November 24, 2008, Barron’s article, from which the graphic at right was taken, reveals that the capitalization of the stock market was 59% of GDP. This is below the long-term average of 79% but well above the lows, which, if achieved, would result in a 550 level on the S&P 500.
Exhibit 3: Shiller’s Graham P/E
When calculating price-to-earnings ratios (P/E), most investors divide the stock’s price by last year’s earnings per share (or estimated current-year earnings per share). Legendary investor Ben Graham, however, suggested that P/E ratios be calculated using the average earnings of the last 7–10 years as the denominator. Such a methodology smooths yearly earnings gyrations and gives the investor a better sense of price paid relative to a business’s earning power over a full business cycle.
As of the end of 2008, the market was trading at a “Graham P/E” of 15.5 times earnings, close to the long-term average of 16.3 times earnings. However, if we swing pendulum-like through the average and reach the lows of about 6.5 times as we did in ’21, ’32, and ’82, the S&P would fall to 350–400. Even a more reasonable downside of 9 times equates to a 500–550 level on the S&P 500.
Exhibit 4: Tobin’s Q-ratio
Tobin’s q-ratio, named for economist James Tobin, is conceptually a measure of the market price of a firm’s assets relative to their replacement value (market value of capital/replacement cost of assets). A q ratio greater than 1 means the market is valuing the firm’s assets for more than it costs to replace them. In other words, you can buy a business for less than you can build that business. The converse is true for q ratios below 1. Among the many versions and approximations of Tobin’s q is the equitymarket q—or the market value of publicly traded equities divided by their book value. The chart above shows that as of December, the market was valuing aggregate net assets at about 75 cents on the dollar, which is approximately the long-term average. However, it’s obviously a very volatile measure. In four previous bear markets (’21, ’32, ’49, and ’82) the q ratio dipped below 0.3, which, if revisited, would equate to a 400–450 level on the S&P 500.
Exhibit 5: Gould’s Senti-meter
Famed technician Edson Gould hypothesized that the market’s dividend yield was a reasonable indicator of investor psychology. His theory was that dividend yields less than 3% signified an optimistic bias in investor sentiment and portended a market decline, while a dividend yield greater than 6% foretold the opposite.
According to Mark Ungewitter, vice president and portfolio manager at Charter Trust Company, if dividend payout ratios remain unchanged, a 6% yield would equate to about 500 on the S&P 500.
[via Lethean]
secular cycles
We can divide the 20th century into 88 twenty-year periods. Though most periods generated positive returns before dividends and transaction costs, half produced compounded returns of less than 4%. Less than 10% generated gains of more than 10%. The table below reflects that higher returns are associated with periods during which the P/E ratio increased, and lower or negative returns resulted from periods when the P/E declined.
There were only nine periods from 1900-2002 when 20-year returns were above 9.6%, and this chart shows all nine. What you will notice is that eight out of the nine times were associated with the stock market bubble of the late 1990s, and during all eight periods there was a doubling, tripling, or even quadrupling of P/E ratios. Prior to the bubble, there was no 20-year period which delivered 10% annual returns. Every period of above-9.6% market returns started with low P/E ratios. EVERY ONE.
Look at the following table from my friend Ed Easterling's web site at www.crestmontresearch.com (which is a wealth of statistical data like this!). You can find many 20-year periods where returns were less than 2-3%.
The higher the P/E ratio, the lower (in general) the subsequent 20-year average return. Where are we today? As I have made clear in my last two letters, we are well above 20. Today we are over 30, on our way to 45. In a nod to bulls, I agree you should look back over a number of years to average earnings and take out the highs and lows of a cycle. However, even "normalizing" earnings to an average over multiple years, we are still well above the long-term P/E average.
In terms of valuations, markets cycle up and down over long periods of time. These are called secular cycles. You have bull and bear secular cycles. In a period of a secular bull, the best style of investing is relative value. You are trying to beat the market. These periods start with low valuations, and you can ride the ups and downs with little real worry. Think of 1982 though 1999.
But in secular bear cycles, the best style of investing is absolute returns. Your benchmark is zero. You want positive numbers. It is much harder, and the longer-term returns are probably not going to be as good. But you are growing your capital against the day the secular bull returns. And, as bleak as it looks right now, I can assure you that bull will be back. Some time in the middle of the next decade, maybe a little sooner, we will see the launch of a new secular bull.
[I'm not sure, but I don't believe the above data takes into account dividends. If so, then I'd have to say the study is seriously misleading. -mc]
There were only nine periods from 1900-2002 when 20-year returns were above 9.6%, and this chart shows all nine. What you will notice is that eight out of the nine times were associated with the stock market bubble of the late 1990s, and during all eight periods there was a doubling, tripling, or even quadrupling of P/E ratios. Prior to the bubble, there was no 20-year period which delivered 10% annual returns. Every period of above-9.6% market returns started with low P/E ratios. EVERY ONE.
Look at the following table from my friend Ed Easterling's web site at www.crestmontresearch.com (which is a wealth of statistical data like this!). You can find many 20-year periods where returns were less than 2-3%.
The higher the P/E ratio, the lower (in general) the subsequent 20-year average return. Where are we today? As I have made clear in my last two letters, we are well above 20. Today we are over 30, on our way to 45. In a nod to bulls, I agree you should look back over a number of years to average earnings and take out the highs and lows of a cycle. However, even "normalizing" earnings to an average over multiple years, we are still well above the long-term P/E average.
In terms of valuations, markets cycle up and down over long periods of time. These are called secular cycles. You have bull and bear secular cycles. In a period of a secular bull, the best style of investing is relative value. You are trying to beat the market. These periods start with low valuations, and you can ride the ups and downs with little real worry. Think of 1982 though 1999.
But in secular bear cycles, the best style of investing is absolute returns. Your benchmark is zero. You want positive numbers. It is much harder, and the longer-term returns are probably not going to be as good. But you are growing your capital against the day the secular bull returns. And, as bleak as it looks right now, I can assure you that bull will be back. Some time in the middle of the next decade, maybe a little sooner, we will see the launch of a new secular bull.
[I'm not sure, but I don't believe the above data takes into account dividends. If so, then I'd have to say the study is seriously misleading. -mc]
Monday, February 23, 2009
2009 Has No Fire
If the global economy fails to recover in 2009, the housing bubble or credit crunch may not be to blame. It could be a lack of fire. Chinese fortunetellers say fire - one of the five elements mystics believe form the basis of the universe - is essential to financial well-being. And fire is nowhere to be found in the mythology of this coming Year of the Ox, the Chinese Lunar Year that has just began. “Fire is the driving force behind economic growth. Without it, the market lacks momentum,” said Raymond Lo, a Hong Kong Master of Feng Shui, the ancient Chinese practice of trying to achieve health, harmony and prosperity through building design, the placement of objects and auspicious dates and numbers.
Chinese soothsayers see a deepening recession, millions more losing their jobs, and stocks and home prices continuing to fall. That’s more or less in line with what some economists are predicting, but some fortunetellers are throwing in other dire predictions - massive earthquakes, rising U.S.-Russian tensions and trouble for President Barack Obama.
Obama, born in the Year of the Ox, is taking office in a particularly bad year for his Chinese astrological sign. The Ox sign is in direct conflict this year with a traditional Chinese divinity called the “God of Year,” considered a bad omen. Obama also is the 44th president, a number the Chinese deem extremely unlucky, because “4″ is pronounced the same as “death” in Chinese.
“The new U.S. president is not having good luck this year. His honeymoon will only be short-lived,” said fortuneteller Alion Yeo, predicting Obama may even face impeachment in his first year in office. “The Year of the Ox looks slightly better and less dire than last year, but it will still be bumpy.” Yeo also predicted that the U.S. mortgage crisis would worsen and the stock market would plunge to new lows.
But Malaysian numerologist Weng Shi Ming suggested Obama’s birth year would offset his bad luck. Weng said the symmetry of 1961 is “the perfect mix of ying and yang,” rendering Obama “immune to the effects of 44.”
The Ox, 1 of 12 animals in the Chinese zodiac, symbolizes calm, hard work, resolve and tenacity. According to legend, the Ox allowed the cunning Rat to ride on its head in a race to determine the animals’ order. Shortly before the Ox crossed the finish line, the Rat leaped off to claim victory. The Year of the Rat was marked in 2008.
Joey Yap, a Feng Shui expert in Malaysia, saw no economic recovery before 2010. “It will be a daunting year. We haven’t really reached the peak of the problems yet,” Yap said. “We haven’t tasted the main dish, and will most likely experience it during the second half of the year.”
But Feng Shui master Lo saw a glimmer of hope. The combination of two elements changes every lunar year, and this time it’s two earths, the element that represents harmony and peace. Not since 1949, when the world order was settling down after World War II, has an Ox Year seen 2 earth signs. “It is a year for healing … from the turbulent time the world has experienced,” Lo said.
Source: Yahoo
Chinese soothsayers see a deepening recession, millions more losing their jobs, and stocks and home prices continuing to fall. That’s more or less in line with what some economists are predicting, but some fortunetellers are throwing in other dire predictions - massive earthquakes, rising U.S.-Russian tensions and trouble for President Barack Obama.
Obama, born in the Year of the Ox, is taking office in a particularly bad year for his Chinese astrological sign. The Ox sign is in direct conflict this year with a traditional Chinese divinity called the “God of Year,” considered a bad omen. Obama also is the 44th president, a number the Chinese deem extremely unlucky, because “4″ is pronounced the same as “death” in Chinese.
“The new U.S. president is not having good luck this year. His honeymoon will only be short-lived,” said fortuneteller Alion Yeo, predicting Obama may even face impeachment in his first year in office. “The Year of the Ox looks slightly better and less dire than last year, but it will still be bumpy.” Yeo also predicted that the U.S. mortgage crisis would worsen and the stock market would plunge to new lows.
But Malaysian numerologist Weng Shi Ming suggested Obama’s birth year would offset his bad luck. Weng said the symmetry of 1961 is “the perfect mix of ying and yang,” rendering Obama “immune to the effects of 44.”
The Ox, 1 of 12 animals in the Chinese zodiac, symbolizes calm, hard work, resolve and tenacity. According to legend, the Ox allowed the cunning Rat to ride on its head in a race to determine the animals’ order. Shortly before the Ox crossed the finish line, the Rat leaped off to claim victory. The Year of the Rat was marked in 2008.
Joey Yap, a Feng Shui expert in Malaysia, saw no economic recovery before 2010. “It will be a daunting year. We haven’t really reached the peak of the problems yet,” Yap said. “We haven’t tasted the main dish, and will most likely experience it during the second half of the year.”
But Feng Shui master Lo saw a glimmer of hope. The combination of two elements changes every lunar year, and this time it’s two earths, the element that represents harmony and peace. Not since 1949, when the world order was settling down after World War II, has an Ox Year seen 2 earth signs. “It is a year for healing … from the turbulent time the world has experienced,” Lo said.
Source: Yahoo
Friday, February 20, 2009
gold hits $1000
NEW YORK/LONDON (Reuters) - Gold rose above $1,000 an ounce on Friday for the first time since March last year as nervous investors piled into the yellow metal to preserve wealth amid a tumbling stock market.
Long-term inflation worries fanned by the massive U.S. economic stimulus package signed by President Barack Obama this week has driven investors into gold, which is perceived as the most likely asset to hold its value against economic head winds.
"I think there's a little bit of panic out there. Equities are setting new lows and gold is the place to run to. I don't think there's much more than that," said Robert MacIntosh, chief economist at Eaton Vance in Boston.
Bullion continued to appreciate against other asset classes and commodities on Friday amid renewed fears that the U.S. government could be forced to nationalize banks amid a worsening financial crisis.
A ratio of gold against the S&P 500 index rose to its highest level since September 1990, and gold/oil ratio was at its loftiest since December 1998, according to Reuters data.
Long-term inflation worries fanned by the massive U.S. economic stimulus package signed by President Barack Obama this week has driven investors into gold, which is perceived as the most likely asset to hold its value against economic head winds.
"I think there's a little bit of panic out there. Equities are setting new lows and gold is the place to run to. I don't think there's much more than that," said Robert MacIntosh, chief economist at Eaton Vance in Boston.
Bullion continued to appreciate against other asset classes and commodities on Friday amid renewed fears that the U.S. government could be forced to nationalize banks amid a worsening financial crisis.
A ratio of gold against the S&P 500 index rose to its highest level since September 1990, and gold/oil ratio was at its loftiest since December 1998, according to Reuters data.
Saturday, February 14, 2009
Distortions of the Dow
Off and on over the years [John Mauldin has] written about the distortions that the Dow Jones Industrials creates by using a price-based index rather than a market cap index. As an example, if Microsoft with a market cap of $153 billion went to a price of zero, all the Dow would lose would be 136 points, or less than 2%. If IBM with a market cap of $120 billion went to zero, the Dow would lose over 700 points! But it gets worse. David Kotok forwarded this note to me from our mutual friend Jim Bianco (www.biancoresearch.com), which Jim graciously allowed me to reproduce for your edification (prices quoted below are from a few days ago):
"Comment - The Dow Jones Industrial Average (DJIA) is a price-weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company's market capitalization.
"Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night's close (January 20), The DJIA had the following stocks less than $10 ...
Citi (C) = $2.80
GM (GM) = $3.50
B of A (BAC) = $5.10
Alcoa (AA) = $8.35
"If all four of these stocks went to zero on today's open, the DJIA would lose only 157.3 points.
"The financials in the DJIA are ...
Citi (C) = $2.80
B of A (BAC) = $5.10
Amex (AXP) = 15.60
JP Morgan (JPM) = $18.09
"If every financial stock in the DJIA went to zero on today's open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).
"If you want to add GE into the financial sector, a debatable proposition, then: GE (GE) = $12.93
"If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.
"The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks, and the financials are so beaten up that they cannot push the index much lower.
"So what is driving the index? The highest-priced stocks:
IBM (IBM) = $81.98
Exxon (XOM) = $76.29
Chevron (CHV) = $68.31
P&G (PG) = $57.34
McDonalds (MCD) = $57.07
J&J (JNJ) = $56.75
3M (MMM) = $53.92
Wal-Mart (WMT) = $50.56
"For instance, if all the sub-$10 stocks listed above, all the financials listed above, and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.
"If IBM opens at zero, it loses 652.95 points [IBM has risen since then – JM]. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE, and Alcoa combined.
"The DJIA is not normal as the index committee is not doing their job during this crisis, possibly because to the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos."
You could add Microsoft to the list Jim created and not be over where IBM is today in terms of the DJIA index.
Let's look at it another way. A 10% positive move for IBM would move the Dow up by over 60 points. A 10% move by Citigroup would increase the Dow by less than 3 points. Having stocks with low prices clearly prevents the Dow from declining as much as other market-cap-weighted indexes like the S&P 500.
"Comment - The Dow Jones Industrial Average (DJIA) is a price-weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company's market capitalization.
"Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night's close (January 20), The DJIA had the following stocks less than $10 ...
Citi (C) = $2.80
GM (GM) = $3.50
B of A (BAC) = $5.10
Alcoa (AA) = $8.35
"If all four of these stocks went to zero on today's open, the DJIA would lose only 157.3 points.
"The financials in the DJIA are ...
Citi (C) = $2.80
B of A (BAC) = $5.10
Amex (AXP) = 15.60
JP Morgan (JPM) = $18.09
"If every financial stock in the DJIA went to zero on today's open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).
"If you want to add GE into the financial sector, a debatable proposition, then: GE (GE) = $12.93
"If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.
"The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks, and the financials are so beaten up that they cannot push the index much lower.
"So what is driving the index? The highest-priced stocks:
IBM (IBM) = $81.98
Exxon (XOM) = $76.29
Chevron (CHV) = $68.31
P&G (PG) = $57.34
McDonalds (MCD) = $57.07
J&J (JNJ) = $56.75
3M (MMM) = $53.92
Wal-Mart (WMT) = $50.56
"For instance, if all the sub-$10 stocks listed above, all the financials listed above, and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.
"If IBM opens at zero, it loses 652.95 points [IBM has risen since then – JM]. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE, and Alcoa combined.
"The DJIA is not normal as the index committee is not doing their job during this crisis, possibly because to the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos."
You could add Microsoft to the list Jim created and not be over where IBM is today in terms of the DJIA index.
Let's look at it another way. A 10% positive move for IBM would move the Dow up by over 60 points. A 10% move by Citigroup would increase the Dow by less than 3 points. Having stocks with low prices clearly prevents the Dow from declining as much as other market-cap-weighted indexes like the S&P 500.
Wednesday, February 04, 2009
Time to buy U.S. stocks?
Is it time to buy U.S. stocks?
According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy - its GNP.
Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market"). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.
But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."
Well, that's where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."
[via iluvbabyb]
According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy - its GNP.
Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market"). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.
But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."
Well, that's where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."
[via iluvbabyb]
affordable housing?
One of the upsides of a crashing-and-burning housing market, as Edward Glaeser noted back in October, is that buying a home becomes more affordable.
And indeed, according to an index released by the National Association of Realtors, housing affordability was at an all-time high in December.
The Housing Affordability Index composite level for December was 158.8. A composite H.A.I. value of 158.8 means that a family earning the median income has 158.8 percent of the income needed to qualify for a mortgage on a median-priced home. The index had fallen during most of the housing bubble, when it became more and more expensive to buy a home. But December’s composite level was the highest the index has reached since the association began collecting this data in 1971.
[via libertarians_2000]
And indeed, according to an index released by the National Association of Realtors, housing affordability was at an all-time high in December.
The Housing Affordability Index composite level for December was 158.8. A composite H.A.I. value of 158.8 means that a family earning the median income has 158.8 percent of the income needed to qualify for a mortgage on a median-priced home. The index had fallen during most of the housing bubble, when it became more and more expensive to buy a home. But December’s composite level was the highest the index has reached since the association began collecting this data in 1971.
[via libertarians_2000]
Monday, February 02, 2009
two plus two
A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules]
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules]
Gideon Gono deals with inflation
Gideon Gono, widely regarded as the world’s most disastrous central banker, knocked another 12 zeros off the Zimbabwean dollar yesterday in an attempt to bring the national currency back from the realms of the fantastical.
In a stroke, the governor of Zimbabwe’s Reserve Bank slashed the street value of the Zimbabwean dollar from $250 trillion to one US dollar to 250, because the computers, calculators and people could no longer cope with all the zeros.
To counter an inflation rate that economists now estimate to be 5,000,000,000,000,000,000,000 (five sextillion) per cent, Mr Gono has now struck 25 zeros from the plunging national currency since August 2006. One American dollar would now buy Z$2,500,000,000,000,000,000,000, 000,000 (2.5 octillion) had he not done so.
Mr Gono’s announcement came just weeks after the introduction of a Z$100 trillion note, the latest and biggest of 35 denominations that he has brought in since January last year but only enough yesterday to buy half a loaf. “The zeros are too many for our machines to handle,” said Obert Sibanda, the chairman of the Zimbabwe National Chamber of Commerce.
Mr Gono is now ordering Zimbabwe’s red-hot printing presses to produce seven entirely new bank notes ranging from Z$1 to Z$500.
Economists poured scorn on Mr Gono’s announcement, pointing out that four months after he knocked ten noughts off last year they had all returned.
In a stroke, the governor of Zimbabwe’s Reserve Bank slashed the street value of the Zimbabwean dollar from $250 trillion to one US dollar to 250, because the computers, calculators and people could no longer cope with all the zeros.
To counter an inflation rate that economists now estimate to be 5,000,000,000,000,000,000,000 (five sextillion) per cent, Mr Gono has now struck 25 zeros from the plunging national currency since August 2006. One American dollar would now buy Z$2,500,000,000,000,000,000,000, 000,000 (2.5 octillion) had he not done so.
Mr Gono’s announcement came just weeks after the introduction of a Z$100 trillion note, the latest and biggest of 35 denominations that he has brought in since January last year but only enough yesterday to buy half a loaf. “The zeros are too many for our machines to handle,” said Obert Sibanda, the chairman of the Zimbabwe National Chamber of Commerce.
Mr Gono is now ordering Zimbabwe’s red-hot printing presses to produce seven entirely new bank notes ranging from Z$1 to Z$500.
Economists poured scorn on Mr Gono’s announcement, pointing out that four months after he knocked ten noughts off last year they had all returned.
The paradox of thrift
Americans are hunkering down and saving more. For a recession-battered economy, it couldn't be happening at a worse time.
Economists call it the "paradox of thrift." What's good for individuals -- spending less, saving more -- is bad for the economy when everyone does it.
On Friday, the government reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.
Today's consumers might even start to rival their penny-pinching, Depression-era grandparents.
"The generation that lived through the Great Depression was very conservative in their spending and aggressive in savings," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "I think we're going to have a set of consumers who are moving in that direction because they don't have that much faith in their assets."
[via chucks_angels]
Economists call it the "paradox of thrift." What's good for individuals -- spending less, saving more -- is bad for the economy when everyone does it.
On Friday, the government reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.
Today's consumers might even start to rival their penny-pinching, Depression-era grandparents.
"The generation that lived through the Great Depression was very conservative in their spending and aggressive in savings," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "I think we're going to have a set of consumers who are moving in that direction because they don't have that much faith in their assets."
[via chucks_angels]
George Soros and reflexivity
Soros’s experiences in 1944 laid the groundwork for the conceptual framework he would spend the rest of his life elaborating and which, he believes, has found its validation in the events of 2008. His core idea is “reflexivity”, which he defines as a “two-way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them, but on their perception or interpretation of the situation. Their decisions make an impact on the situation and changes in the situation are liable to change their perceptions.”
It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.
The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.
By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond.
It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.
The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.
By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond.
Sunday, February 01, 2009
grading the gurus
I reading a blurb by Martin Weiss and wondered just how good this guy is. Obviously this guy is smart, but they all are. So how does he compare?
I came across this website from the CXO Advisory Group called Guru Stock Market Forecasting Grades.
"Can experts, whether self-proclaimed or endorsed by others (publications), provide reliable stock market timing guidance? Do some experts clearly show better intuition about overall market direction than others?"
Here's what they said about Weiss based on 530 trades from November 2007 through November 2008 (that's a lot of trades). 47% of the trades were winning trades with an average return of -6.2% per trade. But the average return per calendar day invested was a positive 0.16%. They summarized Weiss' performance as unimpressive, but it beat the S&P 500's average return per calendar day of -0.11%. So I wouldn't say making money instead of losing money is unimpressive.
Other quick takes on the gurus.
Richard Band is a well below average market timer and apparently achieves results more by holding for the long term than by successfully timing entry and exit points.
Warren Buffett is an investor with superior stock-picking skill that allows him to identify undervalued securities and thus obtain risk-adjusted positive abnormal returns.
Jim Cramer's accuracy in forecasting overall stock market behavior is a little below average. More interesting to me was that Cramer bothered to respond to the evaluation.
The Fast Money experts as a group probably do not offer fast money with their stock picks, and their stock-picking ability as a group is unimpressive.
Ken Fisher is well above average in guiding his readers with respect to stock market timing.
Simple statistics indicate that the Hulbert Stock Newsletter Sentiment Index has little or no predictive power for stock returns over the short and intermediate terms.
The accuracy rate of John Hussman's stock market characterizations is a little above average.
Jim Jubak's record of forecasting the overall U.S. stock market is well below average.
Stephen Leeb's U.S. stock market forecasting record is tentatively above average.
John Mauldin's accuracy in forecasting stock market behavior is below average.
"The [S&P] Outlook" is a about average in forecasting market behavior, and its explicit timing recommendations are sometimes good and sometimes bad.
Robert Prechter has not been successful in applying the Elliott wave principle to time the U.S. stock market in recent years.
Richard Russell is well below average in predicting stock market behavior.
Dan Sullivan's stock market forecasting record is well above average.
Ben Zacks' focus on earnings analysis makes him only an average market forecaster.
[started looking 1/25]
I came across this website from the CXO Advisory Group called Guru Stock Market Forecasting Grades.
"Can experts, whether self-proclaimed or endorsed by others (publications), provide reliable stock market timing guidance? Do some experts clearly show better intuition about overall market direction than others?"
Here's what they said about Weiss based on 530 trades from November 2007 through November 2008 (that's a lot of trades). 47% of the trades were winning trades with an average return of -6.2% per trade. But the average return per calendar day invested was a positive 0.16%. They summarized Weiss' performance as unimpressive, but it beat the S&P 500's average return per calendar day of -0.11%. So I wouldn't say making money instead of losing money is unimpressive.
Other quick takes on the gurus.
Richard Band is a well below average market timer and apparently achieves results more by holding for the long term than by successfully timing entry and exit points.
Warren Buffett is an investor with superior stock-picking skill that allows him to identify undervalued securities and thus obtain risk-adjusted positive abnormal returns.
Jim Cramer's accuracy in forecasting overall stock market behavior is a little below average. More interesting to me was that Cramer bothered to respond to the evaluation.
The Fast Money experts as a group probably do not offer fast money with their stock picks, and their stock-picking ability as a group is unimpressive.
Ken Fisher is well above average in guiding his readers with respect to stock market timing.
Simple statistics indicate that the Hulbert Stock Newsletter Sentiment Index has little or no predictive power for stock returns over the short and intermediate terms.
The accuracy rate of John Hussman's stock market characterizations is a little above average.
Jim Jubak's record of forecasting the overall U.S. stock market is well below average.
Stephen Leeb's U.S. stock market forecasting record is tentatively above average.
John Mauldin's accuracy in forecasting stock market behavior is below average.
"The [S&P] Outlook" is a about average in forecasting market behavior, and its explicit timing recommendations are sometimes good and sometimes bad.
Robert Prechter has not been successful in applying the Elliott wave principle to time the U.S. stock market in recent years.
Richard Russell is well below average in predicting stock market behavior.
Dan Sullivan's stock market forecasting record is well above average.
Ben Zacks' focus on earnings analysis makes him only an average market forecaster.
[started looking 1/25]
Wednesday, January 28, 2009
Morningstar's 2008 Performance
Our performance through the midst of the historic events that shaped the past year was mixed. While our 5-star calls [marginally] outperformed the S&P 500, losses greater than 30% are still painful on an absolute basis.
What stands out in 2008 is the huge divergence between the performance of wide-moat stocks and no-moat stocks. Investors rewarded quality companies. Wide-moat stocks returned -22% in 2008 compared with -34% for narrow-moat stocks and -42% for no-moat stocks.
It's also helpful to look at the performance of our star "buckets," which are constructed similarly to our strategies shown on the previous page. For example, the 5-Star bucket can be thought of as a Buy at 5, Sell at 4, 3, 2, or 1 strategy. In 2008, stocks we rated at 5 stars significantly outperformed stocks we rated 1 star as well as the S&P 500, and the three intermediate buckets also lined up as we would hope. This holds true for our trailing five-year performance as well.
While our strategies and buckets may show outperformance, they are not what we would consider investable strategies (given the number of stocks involved). We run a number of actively managed portfolios, such as the Tortoise and Hare that appear in Morningstar StockInvestor, and the Dividend Builder and Dividend Harvest that appear in Morningstar DividendInvestor. These portfolios are real-world examples of our research in practice. In addition, our Wide Moat Focus Index $MWMFT tracks the 20 cheapest wide-moat stocks in our coverage universe. Each of these portfolios has outperformed over the past year, and they are all beating the S&P 500 over their available trailing two-, three-, four-, and five-year time periods as well.
What stands out in 2008 is the huge divergence between the performance of wide-moat stocks and no-moat stocks. Investors rewarded quality companies. Wide-moat stocks returned -22% in 2008 compared with -34% for narrow-moat stocks and -42% for no-moat stocks.
It's also helpful to look at the performance of our star "buckets," which are constructed similarly to our strategies shown on the previous page. For example, the 5-Star bucket can be thought of as a Buy at 5, Sell at 4, 3, 2, or 1 strategy. In 2008, stocks we rated at 5 stars significantly outperformed stocks we rated 1 star as well as the S&P 500, and the three intermediate buckets also lined up as we would hope. This holds true for our trailing five-year performance as well.
While our strategies and buckets may show outperformance, they are not what we would consider investable strategies (given the number of stocks involved). We run a number of actively managed portfolios, such as the Tortoise and Hare that appear in Morningstar StockInvestor, and the Dividend Builder and Dividend Harvest that appear in Morningstar DividendInvestor. These portfolios are real-world examples of our research in practice. In addition, our Wide Moat Focus Index $MWMFT tracks the 20 cheapest wide-moat stocks in our coverage universe. Each of these portfolios has outperformed over the past year, and they are all beating the S&P 500 over their available trailing two-, three-, four-, and five-year time periods as well.
Friday, January 23, 2009
The Trader's Finger
John Coates, a research fellow in neuroscience at Cambridge University, recruited 49 male traders from a London trading floor for his study. These were futures traders who trade at a frenetic pace -- their holding period is typically measured in minutes (and sometimes even seconds!).
Coates found that traders with a lower ratio of index-finger to ring-finger length were both successful financially and more likely to last in the business, after controlling for a number of other factors, including experience and level of risk-taking.
The explanation? In men, a longer ring finger indicates a higher exposure to masculinizing hormones in the womb. That, in turn, produces a host of characteristics that are beneficial in this type of trading: increased confidence, higher risk preference, faster reaction times, etc.
Coates found that traders with a lower ratio of index-finger to ring-finger length were both successful financially and more likely to last in the business, after controlling for a number of other factors, including experience and level of risk-taking.
The explanation? In men, a longer ring finger indicates a higher exposure to masculinizing hormones in the womb. That, in turn, produces a host of characteristics that are beneficial in this type of trading: increased confidence, higher risk preference, faster reaction times, etc.
Wednesday, January 21, 2009
On the road?
"Owners of capital will stimulate working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and State will have to take the road which will eventually lead to communism"
- Karl Marx, Das Kapital 1867
[via investwise]
[2/27 via Payam Ahdout] Actually that quote is a hoax.
- Karl Marx, Das Kapital 1867
[via investwise]
[2/27 via Payam Ahdout] Actually that quote is a hoax.
Friday, January 16, 2009
2007's winners
returned an average of 242% (compared to 4% for the S&P 500). In 2008, these same ten stocks returned -61% (compared to -38% for the S&500).
Wednesday, January 14, 2009
a protracted recession?
The American Consumer has been the engine of the last expansion. We have bought houses, cars, flat screens, beach condos, etc. and financed the purchases either by extracting the equity from our increasing home prices (home equity lines) or incurring additional debt through credit cards and other forms of consumer finance. In the average American's mind, as long as the bottom line of the balance sheet continued to increase (i.e., assets greater than liabilities) then all was well. But in 2008 something happened that had not happened to these Baby Boomers before: the value of all assets (stocks, houses, rental properties, etc.) declined. As a result the debt party began to unwind as the value of the assets declined while the debt (liabilities) remained, thereby shrinking the balance sheet. Americans are feeling poorer … much poorer.
If one considers that the average 401(k) is now a 201(k) and the average house (according to Case/Shiller) declined 26% from its peak value in 2006, then it's easy to understand why the Baby Boomer is feeling gut punched. The financial shock of watching the asset side of their balance sheets crumble while the debt side remained the same or actually grew has now forced the American consumer into a dilemma: How do I retire and live the same lifestyle that my parents enjoyed? Answer: I have to save money and reduce debt.
The consequence to the economy is, in my opinion, going to be a protracted, painful recession. Why? Because this recession is driven by asset devaluation, and that is different than a cyclical downturn. There is a need for institutions and households alike to reduce debt and restore equity to the balance sheet. For the consumer/individual this will only happen with an increase in his/her saving rate to reduce debt and fund future retirement. For example, if the average consumer goes from a 1.7% savings rate to a 5% savings rate, then that equates to $400 billion a year in either debt reduction or retirement funding. From the contra angle, that means there will be $400 billion less of American consumption. I label this the "Paradox of Thrift," in that we can't restore our balance sheets without additional savings, and our stock markets cannot recover without consumer spending and corporate profitability.
-- by Cliff Draughn
If one considers that the average 401(k) is now a 201(k) and the average house (according to Case/Shiller) declined 26% from its peak value in 2006, then it's easy to understand why the Baby Boomer is feeling gut punched. The financial shock of watching the asset side of their balance sheets crumble while the debt side remained the same or actually grew has now forced the American consumer into a dilemma: How do I retire and live the same lifestyle that my parents enjoyed? Answer: I have to save money and reduce debt.
The consequence to the economy is, in my opinion, going to be a protracted, painful recession. Why? Because this recession is driven by asset devaluation, and that is different than a cyclical downturn. There is a need for institutions and households alike to reduce debt and restore equity to the balance sheet. For the consumer/individual this will only happen with an increase in his/her saving rate to reduce debt and fund future retirement. For example, if the average consumer goes from a 1.7% savings rate to a 5% savings rate, then that equates to $400 billion a year in either debt reduction or retirement funding. From the contra angle, that means there will be $400 billion less of American consumption. I label this the "Paradox of Thrift," in that we can't restore our balance sheets without additional savings, and our stock markets cannot recover without consumer spending and corporate profitability.
-- by Cliff Draughn
Sunday, January 11, 2009
As the calendar turns
A rare event occurred as the calendar turned from 2008 to 2009: A single trading day when at least 75% of New York Stock Exchange (NYSE) stocks rise is uncommon (there have been only 65 such occurrences in the last 10 years), yet this happened on three consecutive trading days from December 30 through January 2 (79%, 83% and 82% of stocks, respectively).
According to Bespoke Investment Group (B.I.G.), the market has performed a feat like that only twice before—both times in 1938. In each case, the Dow Jones Industrial Average was positive during the following day, week and month.
Last year was the single worst for the S&P 500 since the Great Depression—1931 to be exact. Nothing escaped the carnage, with global equity, credit and commodity markets imploding, and only U.S. Treasuries saving the day.
I asked a number of my Wall Street friends the following question during the holiday break: There were 253 trading days in 2008. How many days was the market (S&P 500) up versus down? With no exception, the answers were heavily skewed to down days making up the majority. Nope. Remarkably, the market rose on 126 days, and the market fell on 126 days (with one flat day).
So then what drove the overall massive market decline? The skewing of the down days. The average up day increased 1.6%, but the average down day decreased 1.9%. In addition, there were 42 days (nearly 17%) when the market rose or fell by more than 3%: 19 days that were up and 23 days that were down.
Clearly, volatility was off the charts, particularly following the Lehman Brothers bankruptcy in September, with 18 single-day moves of at least 5%. There had only been 17 such moves in the prior 53 years! In October, stocks enjoyed two of the six biggest one-day percentage gains in history—but gave back all of the gains, and then some. Four of the 20 biggest daily percentage declines in history occurred during the last four months of 2008.
Reviewing the 10 worst calendar year total returns for the S&P 500, take comfort in knowing that the average subsequent five-year annualized total return was 10.8%, with all five-year periods in positive territory—even those that began with 1931's 43% drop and 1974's 27% fall.
NDR did an interesting study of "waterfall" declines, similar to what we experienced last fall. In waterfall declines, the Dow loses more than 20% in a short period, and near the end, the 10-day average of NYSE total volume rises to two times its average seen just a few months earlier. In the majority of cases, the end of the waterfall decline wasn't the end of the bear market.
However, in the composite average, the lows were tested but not broken, followed by a basing phase of up to three months before a breakout to a new bull market.
Three post-waterfall phases were designated, and it appears to us that we're currently in the second phase—bear-market bottom to recession end.
Given current cash hoarding, there's now $8.85 trillion held in cash, bank deposits and money market funds. That's equal to 74% of the market value of all U.S. companies—the highest ratio since 1990, according to Fed data compiled by Leuthold Group and Bloomberg. According to SentimenTrader.com, assets in money market funds alone are now enough to buy 42% of the entire S&P 500 index.
The latest asset allocation survey from the American Association of Individual Investors showed another push into safe investments. Individual investor allocations to the stock market dipped to 42%, the lowest since 1991. And these folks' investments in cash instruments moved up to 42%—the highest in the history of the data (November 1987).
Never before have these investors allocated as much or more to cash as they have to stocks. The only other times when the two allocations came close were in January 1991 (42% to stocks, 38% to cash) and October 2002 (43% to stocks, 39% to cash). Both turned out to be good times to be taking a long-term contrary stance against these investors.
According to Bespoke Investment Group (B.I.G.), the market has performed a feat like that only twice before—both times in 1938. In each case, the Dow Jones Industrial Average was positive during the following day, week and month.
Last year was the single worst for the S&P 500 since the Great Depression—1931 to be exact. Nothing escaped the carnage, with global equity, credit and commodity markets imploding, and only U.S. Treasuries saving the day.
I asked a number of my Wall Street friends the following question during the holiday break: There were 253 trading days in 2008. How many days was the market (S&P 500) up versus down? With no exception, the answers were heavily skewed to down days making up the majority. Nope. Remarkably, the market rose on 126 days, and the market fell on 126 days (with one flat day).
So then what drove the overall massive market decline? The skewing of the down days. The average up day increased 1.6%, but the average down day decreased 1.9%. In addition, there were 42 days (nearly 17%) when the market rose or fell by more than 3%: 19 days that were up and 23 days that were down.
Clearly, volatility was off the charts, particularly following the Lehman Brothers bankruptcy in September, with 18 single-day moves of at least 5%. There had only been 17 such moves in the prior 53 years! In October, stocks enjoyed two of the six biggest one-day percentage gains in history—but gave back all of the gains, and then some. Four of the 20 biggest daily percentage declines in history occurred during the last four months of 2008.
Reviewing the 10 worst calendar year total returns for the S&P 500, take comfort in knowing that the average subsequent five-year annualized total return was 10.8%, with all five-year periods in positive territory—even those that began with 1931's 43% drop and 1974's 27% fall.
NDR did an interesting study of "waterfall" declines, similar to what we experienced last fall. In waterfall declines, the Dow loses more than 20% in a short period, and near the end, the 10-day average of NYSE total volume rises to two times its average seen just a few months earlier. In the majority of cases, the end of the waterfall decline wasn't the end of the bear market.
However, in the composite average, the lows were tested but not broken, followed by a basing phase of up to three months before a breakout to a new bull market.
Three post-waterfall phases were designated, and it appears to us that we're currently in the second phase—bear-market bottom to recession end.
Given current cash hoarding, there's now $8.85 trillion held in cash, bank deposits and money market funds. That's equal to 74% of the market value of all U.S. companies—the highest ratio since 1990, according to Fed data compiled by Leuthold Group and Bloomberg. According to SentimenTrader.com, assets in money market funds alone are now enough to buy 42% of the entire S&P 500 index.
The latest asset allocation survey from the American Association of Individual Investors showed another push into safe investments. Individual investor allocations to the stock market dipped to 42%, the lowest since 1991. And these folks' investments in cash instruments moved up to 42%—the highest in the history of the data (November 1987).
Never before have these investors allocated as much or more to cash as they have to stocks. The only other times when the two allocations came close were in January 1991 (42% to stocks, 38% to cash) and October 2002 (43% to stocks, 39% to cash). Both turned out to be good times to be taking a long-term contrary stance against these investors.
2009 Predictions
An article published on Bloomberg.com contains a table summarizing the predictions of Wall Street strategists for the performance of the S&P 500 in 2009. They’re a pretty optimistic bunch, predicting an average increase of 17% this year (with a range between negative 3.2% and positive 44%!).
Even if they’re right, the S&P 500 would end 2009 at 1,056, 28 percent below where the benchmark index for American equities started in 2008 and 35 percent lower than where the analysts said it would be now, based on the consensus of 11 strategists surveyed by Bloomberg News. Some of the biggest investors are growing more optimistic as the S&P 500 advanced 24 percent since reaching an 11-year low on Nov. 20.
* * *
Mauldin chimes in:
Ten out of ten analysts in the recent Barron's forecast saw stock prices rising 10-20% this year. For reasons I outlined last week, I think we could see a tradable rally in the next few months, but at the very least test the lows this summer, if not set new lows. Earnings are going to be far worse than any analyst's projections I have seen. And earnings drive stock prices.
Further, this recession is going to be the longest in anyone's memory. It is going to seem like it is never going to end (it will, I promise), and more and more investors are just going to give up on stocks. The buy and hold for the long run mantra is wearing thin. In inflation-adjusted terms, the stock market is about where it was in 1973! If you reinvested dividends, that gets you to 1991 (again, inflation-adjusted). It takes a lot of buying to make a bull market. It only takes an absence of buying to make a bear market.
Could we get a rally after the summer or fall lows? Sure. And it could be a good one. A lot depends on how fast the stimulus kicks in and whether it really has an effect.
* * *
Liz Ann Sonders says the conditions are right for a rebound, though it may (or may not) be too early.
Even if they’re right, the S&P 500 would end 2009 at 1,056, 28 percent below where the benchmark index for American equities started in 2008 and 35 percent lower than where the analysts said it would be now, based on the consensus of 11 strategists surveyed by Bloomberg News. Some of the biggest investors are growing more optimistic as the S&P 500 advanced 24 percent since reaching an 11-year low on Nov. 20.
* * *
Mauldin chimes in:
Ten out of ten analysts in the recent Barron's forecast saw stock prices rising 10-20% this year. For reasons I outlined last week, I think we could see a tradable rally in the next few months, but at the very least test the lows this summer, if not set new lows. Earnings are going to be far worse than any analyst's projections I have seen. And earnings drive stock prices.
Further, this recession is going to be the longest in anyone's memory. It is going to seem like it is never going to end (it will, I promise), and more and more investors are just going to give up on stocks. The buy and hold for the long run mantra is wearing thin. In inflation-adjusted terms, the stock market is about where it was in 1973! If you reinvested dividends, that gets you to 1991 (again, inflation-adjusted). It takes a lot of buying to make a bull market. It only takes an absence of buying to make a bear market.
Could we get a rally after the summer or fall lows? Sure. And it could be a good one. A lot depends on how fast the stimulus kicks in and whether it really has an effect.
* * *
Liz Ann Sonders says the conditions are right for a rebound, though it may (or may not) be too early.
Wednesday, January 07, 2009
you just missed the bull market
While no one is calling it that, we are technically in a new cyclical bull market and have been since December 8th. Since the 11/20 lows, the S&P 500 is up 24%, which meets the standard bull market definition of a 20% rally that was preceded by at least a 20% decline. But the unwillingness for the majority to call it a bull market is what bulls should be thankful for, since the market typically climbs a wall of worry where investors are full of doubt throughout the rally.
Regardless of what you call it, some of the performance numbers since the 11/20 lows are downright crazy. Even though the S&P 500 is up 24% since 11/20, the average stock in the index is up 41.25%. This means the smaller cap names in the index are up much more than their larger cap brethren. And the stocks that were down the most during the 10/9/07-11/20/08 bear are up much more than the ones that were down the least. As shown below, the average performance since 11/20 of the 50 stocks that were down the most during the bear market is 112%!
[via paraguay2es]
Regardless of what you call it, some of the performance numbers since the 11/20 lows are downright crazy. Even though the S&P 500 is up 24% since 11/20, the average stock in the index is up 41.25%. This means the smaller cap names in the index are up much more than their larger cap brethren. And the stocks that were down the most during the 10/9/07-11/20/08 bear are up much more than the ones that were down the least. As shown below, the average performance since 11/20 of the 50 stocks that were down the most during the bear market is 112%!
[via paraguay2es]
Tuesday, January 06, 2009
German billionaire commits suicide
German billionaire Adolf Merckle has committed suicide, in despair over the huge losses suffered by his business empire during the financial crisis, his family said on Tuesday.
The media-shy billionaire, whose family controls some of Germany's best-known companies, was hit by a train on Monday evening, local officials said.
"The desperate situation of his companies caused by the financial crisis, the uncertainties of the last few weeks and his powerlessness to act, have broken the passionate family entrepreneur and he took his own life," a family statement said.
State prosecutors from the southern city of Ulm said Merckle, 74, left work on Monday and died after being hit by a train near the town of Blaubeuren. He left behind a suicide note to his family, they added.
Merckle, a father of four, inherited the basis of his fortune from his Bohemian grandfather, but went on to build up the chemical wholesale company into Germany's largest drugs wholesaler.
The passionate skiier and mountain climber assembled a business conglomerate with about 100,000 employees and 30 billion euros ($40.45 billion) in annual sales.
His family controls a number of German companies including cement maker HeidelbergCement and generic drug company Ratiopharm.
But the empire was rocked last year by wrong-way bets made on shares in Volkswagen after a surprise stakeholding announcement from Porsche sent the VW share price rocketing as short sellers scrambled to cover their positions.
Banking sources had told Reuters the family lost hundreds of millions of euros on investments, with about 400 million euros lost on Volkswagen shares alone.
Since then the family has been in talks for weeks with banks to renegotiate loans. Banking sources said on Tuesday his death was not expected to affect loan agreements with the family.
[via paraguay2es @ chucks_angels]
The media-shy billionaire, whose family controls some of Germany's best-known companies, was hit by a train on Monday evening, local officials said.
"The desperate situation of his companies caused by the financial crisis, the uncertainties of the last few weeks and his powerlessness to act, have broken the passionate family entrepreneur and he took his own life," a family statement said.
State prosecutors from the southern city of Ulm said Merckle, 74, left work on Monday and died after being hit by a train near the town of Blaubeuren. He left behind a suicide note to his family, they added.
Merckle, a father of four, inherited the basis of his fortune from his Bohemian grandfather, but went on to build up the chemical wholesale company into Germany's largest drugs wholesaler.
The passionate skiier and mountain climber assembled a business conglomerate with about 100,000 employees and 30 billion euros ($40.45 billion) in annual sales.
His family controls a number of German companies including cement maker HeidelbergCement and generic drug company Ratiopharm.
But the empire was rocked last year by wrong-way bets made on shares in Volkswagen after a surprise stakeholding announcement from Porsche sent the VW share price rocketing as short sellers scrambled to cover their positions.
Banking sources had told Reuters the family lost hundreds of millions of euros on investments, with about 400 million euros lost on Volkswagen shares alone.
Since then the family has been in talks for weeks with banks to renegotiate loans. Banking sources said on Tuesday his death was not expected to affect loan agreements with the family.
[via paraguay2es @ chucks_angels]
Monday, January 05, 2009
how cheap are stocks?
Unless you are in your late 80s and were an adult as World War II ended, stocks are cheaper, adjusted for tax rates and interest rates, than they've been at any time in your adult life. That's a simply stunning statement looking forward. You're walking forward. Stop myopically looking at your feet and focus on the horizon. Just buy great franchises at cheap prices now and be patient.
Friday, January 02, 2009
yes, we are in a recession
[12/1/08]
The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy.
The NBER is a private group of leading economists charged with dating the start and end of economic downturns. It typically takes a long time after the start of a recession to declare its start because of the need to look at final readings of various economic measures.
Many people erroneously believe that a recession is defined by two consecutive quarters of economic activity declining. That has yet to take place during this recession.
The current recession is one of the longest downturns since the Great Depression of the 1930's.
The last two recessions (1990-1991 and 2001) lasted eight months each, and only two of the 10 previous post-Depression downturns lasted as long as a full year, according to the NBER.
several economists said the real concern is that there is no end in sight for the downturn.
Some suggested that the best case scenario for the economy is that it would reach bottom in the second quarter of 2009. And even if that happens, that would still make this recession the longest since the Great Depression.
The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy.
The NBER is a private group of leading economists charged with dating the start and end of economic downturns. It typically takes a long time after the start of a recession to declare its start because of the need to look at final readings of various economic measures.
Many people erroneously believe that a recession is defined by two consecutive quarters of economic activity declining. That has yet to take place during this recession.
The current recession is one of the longest downturns since the Great Depression of the 1930's.
The last two recessions (1990-1991 and 2001) lasted eight months each, and only two of the 10 previous post-Depression downturns lasted as long as a full year, according to the NBER.
several economists said the real concern is that there is no end in sight for the downturn.
Some suggested that the best case scenario for the economy is that it would reach bottom in the second quarter of 2009. And even if that happens, that would still make this recession the longest since the Great Depression.
Thursday, January 01, 2009
Recessions and stock market performance
[1/1/09] To better understand how recessions typically work, note these four important trends:
1. On average, the S&P 500 has started to lose ground approximately seven months before recessions began.
2. Recessions have lasted an average of 10 months.
3. On average, the stock market has started to recover six months into the recession or four months before it ended.
4. It took approximately 13 months for the stock market to traverse from its peak to its trough.
These averages might not apply to the current recession, but we believe there's a strong chance that some trends could repeat. For example, the stock market could anticipate the beginning and end of the recession before the economic data reflects it.
[6/3/08] Ned Davis Research (NDR), an investment research firm, recently analyzed market performance before, during, and after the 10 recessions since 1945. These have had a median duration of about 10 months. The stock market has generally been a good indicator of these economic slumps.
In past recessions, the broad market began declining several months beforehand, as investors anticipated weaker corporate profits, and continued to drop over the five to six months after the start of the recession, the NDR study shows. From pre-recession bull market peak to recession low, the S&P 500 Index of large-cap stocks fell an average of 23.6%, NDR calculates.
But just as the stock market has anticipated economic downturns, it also has looked ahead to the economic recovery and an earnings rebound. The market historically began rising about midway through these past recessions. On average, the S&P 500 gained 24% six months after reaching a recession low and skyrocketed an average of 32% a year after the recession low.
However, it has taken an average of 20 months for the index to recover to its pre-recession peak after hitting its recession low. (It took the index more than five years, though, to recover from the severe 1973–74 and 2000–2002 bear markets, both of which were accompanied by recessions.)
NDR observes that each of the 10 postwar recessions was accompanied by a bear market, as defined by the firm. In each of these cases, the stock market’s low during the recession was also the bottom of the bear market. (Unlike recessions, there is no official definition of a bear market. The firm notes that 10 of the past 18 bear markets were accompanied by a recession.)
Small-cap stocks tend to underperform those of larger companies leading into and during the early stage of a recession. However, NDR says, just as the S&P 500 Index starts its recovery about six months into a recession on average, small-cap stocks tend to significantly begin outperforming large-cap stocks at about the same time and typically continue leading for at least a year after the recession has ended. For the 12-month period following the end of the last nine recessions, small-cap stocks on average provided a 24% gain compared with 17.6% for the S&P 500.
In terms of market sectors during recessions, NDR found that health care and consumer staples (such as food, household products, and beverage firms) were the bestperforming sectors on average six and 12 months after the start of the last five recessions, dating back to 1973. In fact, health care led in each of these five recessions.
-- T. Rowe Price Report, Spring 2008
1. On average, the S&P 500 has started to lose ground approximately seven months before recessions began.
2. Recessions have lasted an average of 10 months.
3. On average, the stock market has started to recover six months into the recession or four months before it ended.
4. It took approximately 13 months for the stock market to traverse from its peak to its trough.
These averages might not apply to the current recession, but we believe there's a strong chance that some trends could repeat. For example, the stock market could anticipate the beginning and end of the recession before the economic data reflects it.
[6/3/08] Ned Davis Research (NDR), an investment research firm, recently analyzed market performance before, during, and after the 10 recessions since 1945. These have had a median duration of about 10 months. The stock market has generally been a good indicator of these economic slumps.
In past recessions, the broad market began declining several months beforehand, as investors anticipated weaker corporate profits, and continued to drop over the five to six months after the start of the recession, the NDR study shows. From pre-recession bull market peak to recession low, the S&P 500 Index of large-cap stocks fell an average of 23.6%, NDR calculates.
But just as the stock market has anticipated economic downturns, it also has looked ahead to the economic recovery and an earnings rebound. The market historically began rising about midway through these past recessions. On average, the S&P 500 gained 24% six months after reaching a recession low and skyrocketed an average of 32% a year after the recession low.
However, it has taken an average of 20 months for the index to recover to its pre-recession peak after hitting its recession low. (It took the index more than five years, though, to recover from the severe 1973–74 and 2000–2002 bear markets, both of which were accompanied by recessions.)
NDR observes that each of the 10 postwar recessions was accompanied by a bear market, as defined by the firm. In each of these cases, the stock market’s low during the recession was also the bottom of the bear market. (Unlike recessions, there is no official definition of a bear market. The firm notes that 10 of the past 18 bear markets were accompanied by a recession.)
Small-cap stocks tend to underperform those of larger companies leading into and during the early stage of a recession. However, NDR says, just as the S&P 500 Index starts its recovery about six months into a recession on average, small-cap stocks tend to significantly begin outperforming large-cap stocks at about the same time and typically continue leading for at least a year after the recession has ended. For the 12-month period following the end of the last nine recessions, small-cap stocks on average provided a 24% gain compared with 17.6% for the S&P 500.
In terms of market sectors during recessions, NDR found that health care and consumer staples (such as food, household products, and beverage firms) were the bestperforming sectors on average six and 12 months after the start of the last five recessions, dating back to 1973. In fact, health care led in each of these five recessions.
-- T. Rowe Price Report, Spring 2008
Wednesday, December 31, 2008
Worst Year Since 1931
Few investors will mourn the passing of 2008. For good reason.
The Dow Jones Industrial Average fell 33.8%, it's worst drubbing since 1931 and its third-worst year ever. The Dow's loss has been exceeded only by a 53% loss in 1931 and a 38% loss in 1907. It was slightly worse than its loss in 1930.
The Standard & Poor's 500 Index fell 38.6%, its worst performance since 1937 and third-worst loss.
The Nasdaq Composite Index, established in 1971, lost 40.5%, its worst year ever -- even worse than after the dot-com bust.
Next year may not be anything like 2008 and could even see a rebound. But there are enough minefields facing both the economy and investors that deep caution will be the watchword.
The housing industry still hasn't bottomed, and the year-old recession is likely to be the worst since the 1970s. Meanwhile the fates of General Motors (GM, news, msgs), Ford Motor (F, news, msgs) and Chrysler are problematic.
Yet a new administration takes over in three weeks, with promises of a big stimulus package to jump-start the economy. An administration's first year is often good for stocks.
The Dow Jones Industrial Average fell 33.8%, it's worst drubbing since 1931 and its third-worst year ever. The Dow's loss has been exceeded only by a 53% loss in 1931 and a 38% loss in 1907. It was slightly worse than its loss in 1930.
The Standard & Poor's 500 Index fell 38.6%, its worst performance since 1937 and third-worst loss.
The Nasdaq Composite Index, established in 1971, lost 40.5%, its worst year ever -- even worse than after the dot-com bust.
Next year may not be anything like 2008 and could even see a rebound. But there are enough minefields facing both the economy and investors that deep caution will be the watchword.
The housing industry still hasn't bottomed, and the year-old recession is likely to be the worst since the 1970s. Meanwhile the fates of General Motors (GM, news, msgs), Ford Motor (F, news, msgs) and Chrysler are problematic.
Yet a new administration takes over in three weeks, with promises of a big stimulus package to jump-start the economy. An administration's first year is often good for stocks.
Thursday, December 25, 2008
investing books
Vitaliy Katsenelson, author of Active Value Investing, writes:
We find ourselves glued to the computer screens or CNBC waiting to find out what the Dow’s next tick is going to be. Unfortunately, we are left with only a headache and wasted time. OK, what’s next? Here is my advice –- read. Read books that will bring you sanity, the ones that will snap you back into the shell of investor and out of the sorry shell of nervous observer of the daily stock market melodrama. The following books are excellent choices and will come with plenty of sanity and sage advice.
We find ourselves glued to the computer screens or CNBC waiting to find out what the Dow’s next tick is going to be. Unfortunately, we are left with only a headache and wasted time. OK, what’s next? Here is my advice –- read. Read books that will bring you sanity, the ones that will snap you back into the shell of investor and out of the sorry shell of nervous observer of the daily stock market melodrama. The following books are excellent choices and will come with plenty of sanity and sage advice.
Sunday, December 21, 2008
Dividend All-Stars
I'm looking at dividendinvestors.com (from an article in the paper).
One neat feature is that they tell you how many consecutive years the company has increased their dividends. For example, JNJ had increased their dividend for 45 years in a row. MMM for 49 years. PG for 54 years.
Maybe I'll actually sign up to see more.
* * *
According to this article there are high dividend achievers and high dividend aristocrats. The Achievers are those who have increased dividends 10 or more years. The aristocrats have increased 25 or more years. There are 312 achievers, but only 59 aristocrats.
Well, looking now, there are only 52 (five financial companies have cut their dividend). Among them are XOM, GE, LOW, PFE, TGT, WAG.
One neat feature is that they tell you how many consecutive years the company has increased their dividends. For example, JNJ had increased their dividend for 45 years in a row. MMM for 49 years. PG for 54 years.
Maybe I'll actually sign up to see more.
* * *
According to this article there are high dividend achievers and high dividend aristocrats. The Achievers are those who have increased dividends 10 or more years. The aristocrats have increased 25 or more years. There are 312 achievers, but only 59 aristocrats.
Well, looking now, there are only 52 (five financial companies have cut their dividend). Among them are XOM, GE, LOW, PFE, TGT, WAG.
Tuesday, December 16, 2008
time to buy?
The 2007-08 bear market has been the worst since the Great Depression, more savage than that of 1973-74, which most of us remember only dimly, if at all, and 2000-02, which we remember all too well.
What's more, the combination of two deep bears in less than a decade has poisoned many people against common stocks. The Standard & Poor's 500 Index ($INX) has gone down an average of 0.9% a year over the past 10 years, from November 1998 through November 2008.
Since this bear market began 14 months ago, virtually every asset class, from foreign and domestic stocks to commodities to real estate, has been driven down at least 50%. Even among bonds, only U.S. Treasurys have held up well. The benefits of diversification, in short, have proved to be illusory.
"Today, in my view, the stock market is presenting you with one of the great buying opportunities of your lifetime -- perhaps the greatest," says Steve Leuthold, the manager of the Leuthold Core Investment (LCORX) fund, which ranks in the top 2% of similar funds over the past 10 years. "Buy 'em when they hate 'em."
Having pointed out the negative returns of stocks over the past 10 years, Leuthold tracked the history of stock performance in every 10-year period in which the market averaged an annual gain of 1% or less. Then he looked at the succeeding 10 years. The worst performance in those periods was a gain of 101% between 1938 and 1948. The best was a surge of 325% between 1974 and 1984. The average was 183%.
What's more, the combination of two deep bears in less than a decade has poisoned many people against common stocks. The Standard & Poor's 500 Index ($INX) has gone down an average of 0.9% a year over the past 10 years, from November 1998 through November 2008.
Since this bear market began 14 months ago, virtually every asset class, from foreign and domestic stocks to commodities to real estate, has been driven down at least 50%. Even among bonds, only U.S. Treasurys have held up well. The benefits of diversification, in short, have proved to be illusory.
"Today, in my view, the stock market is presenting you with one of the great buying opportunities of your lifetime -- perhaps the greatest," says Steve Leuthold, the manager of the Leuthold Core Investment (LCORX) fund, which ranks in the top 2% of similar funds over the past 10 years. "Buy 'em when they hate 'em."
Having pointed out the negative returns of stocks over the past 10 years, Leuthold tracked the history of stock performance in every 10-year period in which the market averaged an annual gain of 1% or less. Then he looked at the succeeding 10 years. The worst performance in those periods was a gain of 101% between 1938 and 1948. The best was a surge of 325% between 1974 and 1984. The average was 183%.
Monday, December 15, 2008
Saturday, December 13, 2008
rebounds follow drops (usually)
Through the end of November, we experienced a very rare event, with the S&P 500 down 30% during three straight months of declines. Looking at the history of the market since its inception, there were only five prior cases where returns were this weak—four during the Great Depression. As you can see in "Market physics: rebounds have typically followed sharp drops" below, the market was higher during subsequent periods the vast majority of the time.
Bernard Madoff
NEW YORK (AP) — They had known him for years as a golf partner, a family friend. Some were neighbors or fellow members of country clubs on Long Island and in Florida.
Many had begun investing with 70-year-old Bernard L. Madoff decades ago, often after being referred by a friend or relative who had known the Wall Street veteran even longer.
There had been some warnings: Financial consultants had been suspicious for years about his astounding run of success.
They couldn't figure out how he managed to produce steady returns, month after month, even when everyone else was losing money — and leave almost no footprint while moving billions of dollars in and out of the markets.
"People would come to me with their statements and I couldn't make heads or tails of them," said Charles Gradante, co-founder of the Hennessee Group and advisor to hedge fund investors.
"He only had five down months since 1996," Gradante said. "There's no strategy in the world that can generate that kind of performance. But when people would come to him and say, 'How did I make money this month?' he didn't like it. He would get upset with people who probed too much."
Those investors were scrambling Friday to learn whether they had been wiped out by what prosecutors described as a multibillion-dollar Ponzi scheme. The assets of Madoff's investment company were frozen Friday in a deal with federal regulators and a receiver was appointed to manage the firm's financial affairs.
According to the criminal complaint, Madoff estimates he lost as much as $50 billion over many years. If true, it could be one of the largest fraud schemes in Wall Street history.
* * *
[12/24/08] PARIS - A French investment fund manager badly hit by the multi-billion-dollar Madoff scandal committed suicide in his New York office on Tuesday, a French newspaper reported.
Thierry de la Villehuchet, 65, was the co-founder of Access International, a company that raised funds on the European markets to plough into Bernard Madoff's fraud-hit investment scheme.
Villehuchet "could not cope with the pressure following the outbreak of the scandal. He took his own life, this morning, in his office in New York," the website of la Tribune business daily quoted his relatives as saying.
"This is a farewell from someone who had done nothing wrong," they said.
"For the past week, he had tried day and night to find a way to recoup his investors' money and had begun legal action in the United States against US authorities," his relatives said.
***
[10/13/09 via libertarians_2000] Madoff wins one
Many had begun investing with 70-year-old Bernard L. Madoff decades ago, often after being referred by a friend or relative who had known the Wall Street veteran even longer.
There had been some warnings: Financial consultants had been suspicious for years about his astounding run of success.
They couldn't figure out how he managed to produce steady returns, month after month, even when everyone else was losing money — and leave almost no footprint while moving billions of dollars in and out of the markets.
"People would come to me with their statements and I couldn't make heads or tails of them," said Charles Gradante, co-founder of the Hennessee Group and advisor to hedge fund investors.
"He only had five down months since 1996," Gradante said. "There's no strategy in the world that can generate that kind of performance. But when people would come to him and say, 'How did I make money this month?' he didn't like it. He would get upset with people who probed too much."
Those investors were scrambling Friday to learn whether they had been wiped out by what prosecutors described as a multibillion-dollar Ponzi scheme. The assets of Madoff's investment company were frozen Friday in a deal with federal regulators and a receiver was appointed to manage the firm's financial affairs.
According to the criminal complaint, Madoff estimates he lost as much as $50 billion over many years. If true, it could be one of the largest fraud schemes in Wall Street history.
* * *
[12/24/08] PARIS - A French investment fund manager badly hit by the multi-billion-dollar Madoff scandal committed suicide in his New York office on Tuesday, a French newspaper reported.
Thierry de la Villehuchet, 65, was the co-founder of Access International, a company that raised funds on the European markets to plough into Bernard Madoff's fraud-hit investment scheme.
Villehuchet "could not cope with the pressure following the outbreak of the scandal. He took his own life, this morning, in his office in New York," the website of la Tribune business daily quoted his relatives as saying.
"This is a farewell from someone who had done nothing wrong," they said.
"For the past week, he had tried day and night to find a way to recoup his investors' money and had begun legal action in the United States against US authorities," his relatives said.
***
[10/13/09 via libertarians_2000] Madoff wins one
Wednesday, December 10, 2008
negative interest on t-bills
Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.
The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.
Thursday, December 04, 2008
buying in a meltdown
In our 30 plus years of investing, we have rarely seen opportunities the likes of which we are seeing today. In times such as this, we are comforted by the fact that we have survived and prospered through many other crises over the years. Not to be flip, but we are reminded of the time back in 1962 when Russian missiles were on their way to Cuba to confront the U.S. blockade. Joe Reilly, a former partner of Tweedy, Browne, was in our trading room feverishly buying stocks in one of the biggest market meltdowns in stock market history. When asked by Howard Browne how he could be so confident in the face of such impending doom, Joe remarked, “Either this is going to turn out OK and the markets will turn around, or the world is going to come to an end. In either event, I’ll be fine as long as God doesn’t require cash.”
[Tweedy Browne Investment Adviser's Letter via iluvbabyb]
[Tweedy Browne Investment Adviser's Letter via iluvbabyb]
Saturday, November 29, 2008
dividend yields top treasury yields
[11/19/08] U.S. stocks’ dividend yields were lower than the yield on 10-year Treasury notes for half a century. Not any more.
Dividends paid by Standard & Poor’s 500 Index companies in the past 12 months amounted to 3.51 percent of the benchmark’s closing value yesterday. In early trading today, the 10-year yield fell as low as 3.42 percent.
The CHART OF THE DAY tracks the yields, and the difference between them, on a quarterly basis since 1953. S&P provided the dividend yields. The data on the Treasury’s yield, holding the maturity constant at 10 years, comes from the Federal Reserve Bank of St. Louis.
[via brknews]
Dividends paid by Standard & Poor’s 500 Index companies in the past 12 months amounted to 3.51 percent of the benchmark’s closing value yesterday. In early trading today, the 10-year yield fell as low as 3.42 percent.
The CHART OF THE DAY tracks the yields, and the difference between them, on a quarterly basis since 1953. S&P provided the dividend yields. The data on the Treasury’s yield, holding the maturity constant at 10 years, comes from the Federal Reserve Bank of St. Louis.
[via brknews]
Thursday, November 27, 2008
The Day Trader's Aptitude Test
Stranger than fiction
Imagine that we were sharing a cup of coffee a bit more than a year ago and I told you that in a year that Bear Stearns, Lehman Brothers, Merrill Lynch, Freddie Mac, Fannie Mae, and AIG would be out of business or a fraction of their current size. I’m sure you would have been more than a tad skeptical. In fact, I’m sure you would have considered it outrageous given the strength of those companies at the time. To be quite honest, I would have found it hard to believe too, even if someone had given me today’s newspaper (via time machine) one year ago. But in this case fact is stranger than fiction.
Wednesday, November 26, 2008
The Five Dive
Have any of your stocks recently tumbled below $5 a share? If you own Citigroup (NYSE: C) stock, then you know that it is among the former blue chips like General Motors Corp. (NYSE: GM) and Ford Motor Co. (NYSE: F) that have breached that $5 limit. They currently trade at $3.88, $2.84, and $1.45 a share respectively. And there's a good chance that if that company has breached $5 a share -- it will drop further.
How so? It turns out that under some circumstances, big institutional investors such as pension funds, endowments, and asset managers must sell a stock when it drops below $5. I have not been able to find out exactly why, however it's likely that these institutional investors owe their shareholders a fiduciary duty to act prudently to protect their investments.
[from a comment by veryearly1]
How so? It turns out that under some circumstances, big institutional investors such as pension funds, endowments, and asset managers must sell a stock when it drops below $5. I have not been able to find out exactly why, however it's likely that these institutional investors owe their shareholders a fiduciary duty to act prudently to protect their investments.
[from a comment by veryearly1]
Tuesday, November 25, 2008
Money Personalities
Every year, The Phoenix Companies Inc., surveys wealthy people to see how they feel about the economy, their financial goals and the like. The survey ultimately is aimed at selling them financial products, but when the Phoenix folks toss all the data in the hopper, it spits out some interesting information on demographics, attitude and tendencies -- a wealth personality of sorts.
The survey came up with six wealth personalities: Satisfied Savers, Status Chasers, Altruistic Achievers, Secret Succeeders, Disengaged Inheritors and Deal Masters. Most of the personalities share some positive characteristics: They work hard, live below their means and they know how to make their money work for them. On the other hand, some of them are so worried about losing money that it's a source of daily concern.
[via aquarian]
* * *
For most of us, money and our feelings toward it are dynamic and intense. We love money or we hate it, we fear it or we worship it - but we certainly never ignore it. And yet, we know so little about why we experience these emotions.
As a psychologist who specializes in money related matters, I have confronted these money emotions every day of my practice. I have worked with hundreds of men and women from all kinds of backgrounds and income levels. I've learned that not only do we have a physical self, an emotional self and a social self, but we have a financial or money self. This money self is an integral part of our behavioral repertoire. Most of us fail to realize the extent to which it affects our financial habits and affects the degree of satisfaction we get from what money we have.
Understanding your money style will help you gain insight into how and why you react emotionally to money - why you have those reactions and how they affect your financial success or lack of success.
* * *
Mind Over Money: What's Your Money Personality?
The survey came up with six wealth personalities: Satisfied Savers, Status Chasers, Altruistic Achievers, Secret Succeeders, Disengaged Inheritors and Deal Masters. Most of the personalities share some positive characteristics: They work hard, live below their means and they know how to make their money work for them. On the other hand, some of them are so worried about losing money that it's a source of daily concern.
[via aquarian]
* * *
For most of us, money and our feelings toward it are dynamic and intense. We love money or we hate it, we fear it or we worship it - but we certainly never ignore it. And yet, we know so little about why we experience these emotions.
As a psychologist who specializes in money related matters, I have confronted these money emotions every day of my practice. I have worked with hundreds of men and women from all kinds of backgrounds and income levels. I've learned that not only do we have a physical self, an emotional self and a social self, but we have a financial or money self. This money self is an integral part of our behavioral repertoire. Most of us fail to realize the extent to which it affects our financial habits and affects the degree of satisfaction we get from what money we have.
Understanding your money style will help you gain insight into how and why you react emotionally to money - why you have those reactions and how they affect your financial success or lack of success.
* * *
Mind Over Money: What's Your Money Personality?
booms and busts
if we look at 10-year returns for the Dow Jones Industrial Average over the past 100 years, a pattern emerges:
10-Year Dow Jones Industrial
Period Average Return
1998-2008 (9%)
1988-1998 331%
1978-1988 165%
1968-1978 (19%)
1958-1968 77%
1948-1958 226%
1938-1948 14%
1928-1938 (49%)
1918-1928 254%
1908-1918 60%
After booms come busts, after busts come booms. That's how markets work.
10-Year Dow Jones Industrial
Period Average Return
1998-2008 (9%)
1988-1998 331%
1978-1988 165%
1968-1978 (19%)
1958-1968 77%
1948-1958 226%
1938-1948 14%
1928-1938 (49%)
1918-1928 254%
1908-1918 60%
After booms come busts, after busts come booms. That's how markets work.
Bear Market Rally?
Before we are all swept away into total despair, let's take a step back and imagine what could get stocks round the world going up for a while.
First, let me point out that by definition the bottom of a bear market has to be the point of maximum bearishness. Thus sentiment becomes a crucial indicator. The systematic work that we do on measuring sentiment (and we monitor about 20 indicators for the US and a dozen or so for other equity markets) show very extreme and in many cases record levels of bearishness.
Second, valuations are cheap. There's no point in going into an elaborate dissertation; it's an inexact science. Using the best historic measures, normalised earnings, book value, and free cash flow, stocks are very cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom. Nevertheless, the 4 per cent dividend return on the S&P 500 exceeds the yield on the 10 and 30-year Treasury bonds for the first time in 50 years. If emerging market equities, where the growth is, at six to eight times earnings are not cheap I don't know what is.
Third, stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the 1930s, and the spread between the price and the 200-day moving average at 34 per cent is the greatest since July 19, 1932. The US market is down almost 50 per cent from its highs, Europe is off 55 per cent, and emerging markets 65 per cent with some unfortunates, such as Russia, off 70 per cent. History shows that even in enduring, secular bear markets there are not just 20 per cent bounces but usually one 30-50 per cent rally. We should be due.
If I'm bullish why am I not in there now? Because I would like to see the credit markets unclog and spreads come in more. At the bottom of a panic, the news doesn't have to be good for stocks to rally, it just has to be less bad than what has already been discounted. I want the markets to stop going down on bad corporate and macro-economic news.
The fact that it still does shows the bad news has not yet been fully discounted. I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.
-- by Barton Biggs [via veryearly1]
First, let me point out that by definition the bottom of a bear market has to be the point of maximum bearishness. Thus sentiment becomes a crucial indicator. The systematic work that we do on measuring sentiment (and we monitor about 20 indicators for the US and a dozen or so for other equity markets) show very extreme and in many cases record levels of bearishness.
Second, valuations are cheap. There's no point in going into an elaborate dissertation; it's an inexact science. Using the best historic measures, normalised earnings, book value, and free cash flow, stocks are very cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom. Nevertheless, the 4 per cent dividend return on the S&P 500 exceeds the yield on the 10 and 30-year Treasury bonds for the first time in 50 years. If emerging market equities, where the growth is, at six to eight times earnings are not cheap I don't know what is.
Third, stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the 1930s, and the spread between the price and the 200-day moving average at 34 per cent is the greatest since July 19, 1932. The US market is down almost 50 per cent from its highs, Europe is off 55 per cent, and emerging markets 65 per cent with some unfortunates, such as Russia, off 70 per cent. History shows that even in enduring, secular bear markets there are not just 20 per cent bounces but usually one 30-50 per cent rally. We should be due.
If I'm bullish why am I not in there now? Because I would like to see the credit markets unclog and spreads come in more. At the bottom of a panic, the news doesn't have to be good for stocks to rally, it just has to be less bad than what has already been discounted. I want the markets to stop going down on bad corporate and macro-economic news.
The fact that it still does shows the bad news has not yet been fully discounted. I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.
-- by Barton Biggs [via veryearly1]
Monday, November 24, 2008
Obama unveils economic team, stocks surge
With the financial crisis looming as a priority of his term, President-elect Barack Obama sought to put his imprint on efforts to stem the turmoil as he introduced his economic team on Monday, nominating Timothy F. Geithner as Treasury secretary and Lawrence H. Summers to head the White House Economic Council.
By naming a team deeply experienced in dealing with financial crises — Mr. Geithner was heavily involved over the weekend in the efforts to stabilize Citigroup — Mr. Obama underscored his determination to assure Americans and foreign investors that he would aggressively step into a leadership vacuum in Washington during the transition.
Moreover, by pledging that his economic team would begin work “today” on recommendations to help middle-class families as well as the financial markets, the president-elect sought to convey an impression of continuity and coordination, so that his administration can “hit the ground running.”
The president-elect also announced that he had chosen Christina D. Romer to head his Council of Economic Advisers and Melody Barnes as director of his White House Domestic Policy Council. Ms. Romer is an economics professor at the University of California, Berkeley, while Ms. Barnes is a longtime aide to Senator Edward M. Kennedy of Massachusetts.
The recent economic news, capped by the Citigroup effort, “has made it even more clear that we are facing an economic crisis of historic proportions,” Mr. Obama said at a news conference. He listed the drop in new home purchases, the surge in unemployment claims to an 18-year high and the likelihood of up to a million further job losses in the coming year.
“While we can’t underestimate the challenges we face,” he said, “we also can’t underestimate our capacity to overcome them to summon that spirit of determination and optimism that has always defined us, and move forward in a new direction to create new jobs, reform our financial system and fuel long-term economic growth.”
* * *
Stocks surged Monday in a broad rally as Citigroup's massive rescue package and President-elect Obama's picks for his economic team pushed investors off the sidelines.
The Dow Jones industrial average (INDU) gained 397 points, or 4.9%, after having been up 552 points earlier in the afternoon. The Standard & Poor's 500 (SPX) index rose 6.4% and the Nasdaq composite (COMP) gained 6.3%.
The market also rallied Friday. The two-session gain of 891.10 points was the biggest two-session gain ever, according to Dow Jones. The percentage gain of 11.8% was the biggest two-session percentage gain since Oct. 1987.
The S&P 500 also saw its biggest two-session percentage gain since Oct. 1987, rising 13.2%. Its point gain was not significant statistically.
By naming a team deeply experienced in dealing with financial crises — Mr. Geithner was heavily involved over the weekend in the efforts to stabilize Citigroup — Mr. Obama underscored his determination to assure Americans and foreign investors that he would aggressively step into a leadership vacuum in Washington during the transition.
Moreover, by pledging that his economic team would begin work “today” on recommendations to help middle-class families as well as the financial markets, the president-elect sought to convey an impression of continuity and coordination, so that his administration can “hit the ground running.”
The president-elect also announced that he had chosen Christina D. Romer to head his Council of Economic Advisers and Melody Barnes as director of his White House Domestic Policy Council. Ms. Romer is an economics professor at the University of California, Berkeley, while Ms. Barnes is a longtime aide to Senator Edward M. Kennedy of Massachusetts.
The recent economic news, capped by the Citigroup effort, “has made it even more clear that we are facing an economic crisis of historic proportions,” Mr. Obama said at a news conference. He listed the drop in new home purchases, the surge in unemployment claims to an 18-year high and the likelihood of up to a million further job losses in the coming year.
“While we can’t underestimate the challenges we face,” he said, “we also can’t underestimate our capacity to overcome them to summon that spirit of determination and optimism that has always defined us, and move forward in a new direction to create new jobs, reform our financial system and fuel long-term economic growth.”
* * *
Stocks surged Monday in a broad rally as Citigroup's massive rescue package and President-elect Obama's picks for his economic team pushed investors off the sidelines.
The Dow Jones industrial average (INDU) gained 397 points, or 4.9%, after having been up 552 points earlier in the afternoon. The Standard & Poor's 500 (SPX) index rose 6.4% and the Nasdaq composite (COMP) gained 6.3%.
The market also rallied Friday. The two-session gain of 891.10 points was the biggest two-session gain ever, according to Dow Jones. The percentage gain of 11.8% was the biggest two-session percentage gain since Oct. 1987.
The S&P 500 also saw its biggest two-session percentage gain since Oct. 1987, rising 13.2%. Its point gain was not significant statistically.
Sunday, November 23, 2008
bury it
The day the Dow fell 777 points, David Latham, a 45-year-old Alabama cattle farmer and electrician, was busy doing errands. Driving his Chevy pickup into Montgomery, he dropped by the hardware store, then stopped into the bank, where he withdrew $8,000 from his CD account, all in 20s. Back home, he slipped the four inch-thick bundles into a Ziploc bag, popped them into a waterproof PVC tube and set out for a remote location on his 300-acre property, where he dug a deep hole with a post digger. And then he buried his money.
Is there an American alive who hasn’t considered burying his savings—or at least stashing it in the mattress — as this financial crisis has deepened? Latham assumes the Federal Deposit Insurance Corp. will step in if his bank collapses, but he figures it might take a few weeks to get his money. Now, he says, “I can get my hands on cold, hard cash anytime I want.” But beyond that, there’s the nagging fear that the world isn’t as secure as we’d like to believe. Latham says the $8,000 is an insurance policy against, well, who knows? “I’m hedging my bets,” he says.
[via scalenet]
Is there an American alive who hasn’t considered burying his savings—or at least stashing it in the mattress — as this financial crisis has deepened? Latham assumes the Federal Deposit Insurance Corp. will step in if his bank collapses, but he figures it might take a few weeks to get his money. Now, he says, “I can get my hands on cold, hard cash anytime I want.” But beyond that, there’s the nagging fear that the world isn’t as secure as we’d like to believe. Latham says the $8,000 is an insurance policy against, well, who knows? “I’m hedging my bets,” he says.
[via scalenet]
Saturday, November 22, 2008
The missteps of the Great Depression
Wall Street's struggle to recover from this month's devastating drop is coinciding with the anniversary of another dark period for the stock market — the crash of 1929.
The dramatic selling of Oct. 28-29 of that year sparked widespread panic and helped trigger the Great Depression largely because the government, wary of meddling in the economy, failed to take many of the steps that the Treasury and Federal Reserve are now using to try to prop up the hammered financial system.
But there are also parallels with today's crisis on the Street — including missed warning signs before the crash and faltering investor confidence in the aftermath.
In the 79 years since the Great Crash, history hasn't been kind to U.S. policymakers' response back then, which financial expert now say reads like a blueprint of what not to do during a similar debacle.
Among the missteps: The government shrank the supply of credit through high interest rates, raised import tariffs in a botched attempt to protect American industry and hiked income taxes in the 1930s to balance the budget.
"Basically, the government did exactly the opposite of what they should have been doing," said Sung Won Sohn, an economics professor at California State University, Channel Islands. "When we think about these things today, it's almost ridiculous and comical what we did back then."
The government also failed to recognize the importance of a crucial role in today's crisis: credit. After the 1929 crash, one out of five U.S. banks failed, causing a massive contraction of the available money supply and turning "a recession into a depression," said Vincent R. Reinhart, former director of the Federal Reserve's monetary affairs division.
"The Fed just sat by and watched thousands of depository institutions fail," Reinhart said. "That's a major difference from the current policy. Now we understand of the role of credit, and policymakers feel a responsibility for stabilizing that activity."
And just like the rash of foreclosures that presaged today's housing crisis, there were warning signs back then.
After the rough years following World War I, the unprecedented growth of the Roaring Twenties sent the stock market soaring a staggering 667 percent, launching a wave of speculative-driven euphoria that experts say was clearly unsustainable. Along with stocks, a burgeoning middle class snapped up bonds, real estate and commodities like oil and coal.
But as Wall Street began crumbling and fear replaced the frenzy, investors rushed to yank their money out of one holding or another to cover mounting losses, along the way driving down the value of all of their assets.
Individual investors weren't the only ones panicking.
Large holding companies and investment trusts — entities that existed only to hold stock in other companies — began buying up shares in their own company in a desperate bid to survive — a move economist J.K. Galbraith later described as an act of "fiscal self-immolation" in his book, "The Great Crash of 1929."
Experts have largely praised the government's reaction this time around, and say it should keep the economy from falling into another depression.
For starters, Federal Reserve Chairman Ben Bernanke, a former academic and expert on the Great Depression, has aggressively cut interest rates and pumped billions of dollars in liquidity into the financial system to keep the supply of money from drying up.
The tactic, known as a "helicopter drop," is borrowed from famed economist Milton Friedman. Bernanke touted the practice in a famous 2002 speech, leading critics to sometimes refer to him as "Helicopter Ben."
"The idea is that if people have access to extra liquidity, some portion of that will be spent," stimulating the wider economy, Sohn said.
Another decision that may have averted catastrophe was the Treasury's $700 billion emergency plan to remove banks' troubled mortgage-related assets as well as taking equity stakes in banks in a move designed to get stagnant lending going again. That, experts say, has so far helped avoid the wave of bank failures that preceded the Great Depression and has helped keep credit available if not easy to obtain.
But as these uncertain times show, the government can't fix everything.
Even with the sweeping government rescue plans, stock markets around the globe have continued to tumble, including a worldwide plunge on Friday from Tokyo to New York. Experts say the persistent fear in markets is a reflection of the limitations of American economic power in an increasingly globalized world.
"Today you have the Federal Reserve sending good signals to the market, but there are lots of other types of bad news out there that is hard to control," said Eugene White, an economics professor at Rutgers University and an expert on the 1929 crash.
As an example, he mentioned the banking collapse earlier this month in Iceland, which wiped out investors across Europe and sent waves of worry around the globe.
In the old days, "who would have thought that would be a problem?," White said.
The dramatic selling of Oct. 28-29 of that year sparked widespread panic and helped trigger the Great Depression largely because the government, wary of meddling in the economy, failed to take many of the steps that the Treasury and Federal Reserve are now using to try to prop up the hammered financial system.
But there are also parallels with today's crisis on the Street — including missed warning signs before the crash and faltering investor confidence in the aftermath.
In the 79 years since the Great Crash, history hasn't been kind to U.S. policymakers' response back then, which financial expert now say reads like a blueprint of what not to do during a similar debacle.
Among the missteps: The government shrank the supply of credit through high interest rates, raised import tariffs in a botched attempt to protect American industry and hiked income taxes in the 1930s to balance the budget.
"Basically, the government did exactly the opposite of what they should have been doing," said Sung Won Sohn, an economics professor at California State University, Channel Islands. "When we think about these things today, it's almost ridiculous and comical what we did back then."
The government also failed to recognize the importance of a crucial role in today's crisis: credit. After the 1929 crash, one out of five U.S. banks failed, causing a massive contraction of the available money supply and turning "a recession into a depression," said Vincent R. Reinhart, former director of the Federal Reserve's monetary affairs division.
"The Fed just sat by and watched thousands of depository institutions fail," Reinhart said. "That's a major difference from the current policy. Now we understand of the role of credit, and policymakers feel a responsibility for stabilizing that activity."
And just like the rash of foreclosures that presaged today's housing crisis, there were warning signs back then.
After the rough years following World War I, the unprecedented growth of the Roaring Twenties sent the stock market soaring a staggering 667 percent, launching a wave of speculative-driven euphoria that experts say was clearly unsustainable. Along with stocks, a burgeoning middle class snapped up bonds, real estate and commodities like oil and coal.
But as Wall Street began crumbling and fear replaced the frenzy, investors rushed to yank their money out of one holding or another to cover mounting losses, along the way driving down the value of all of their assets.
Individual investors weren't the only ones panicking.
Large holding companies and investment trusts — entities that existed only to hold stock in other companies — began buying up shares in their own company in a desperate bid to survive — a move economist J.K. Galbraith later described as an act of "fiscal self-immolation" in his book, "The Great Crash of 1929."
Experts have largely praised the government's reaction this time around, and say it should keep the economy from falling into another depression.
For starters, Federal Reserve Chairman Ben Bernanke, a former academic and expert on the Great Depression, has aggressively cut interest rates and pumped billions of dollars in liquidity into the financial system to keep the supply of money from drying up.
The tactic, known as a "helicopter drop," is borrowed from famed economist Milton Friedman. Bernanke touted the practice in a famous 2002 speech, leading critics to sometimes refer to him as "Helicopter Ben."
"The idea is that if people have access to extra liquidity, some portion of that will be spent," stimulating the wider economy, Sohn said.
Another decision that may have averted catastrophe was the Treasury's $700 billion emergency plan to remove banks' troubled mortgage-related assets as well as taking equity stakes in banks in a move designed to get stagnant lending going again. That, experts say, has so far helped avoid the wave of bank failures that preceded the Great Depression and has helped keep credit available if not easy to obtain.
But as these uncertain times show, the government can't fix everything.
Even with the sweeping government rescue plans, stock markets around the globe have continued to tumble, including a worldwide plunge on Friday from Tokyo to New York. Experts say the persistent fear in markets is a reflection of the limitations of American economic power in an increasingly globalized world.
"Today you have the Federal Reserve sending good signals to the market, but there are lots of other types of bad news out there that is hard to control," said Eugene White, an economics professor at Rutgers University and an expert on the 1929 crash.
As an example, he mentioned the banking collapse earlier this month in Iceland, which wiped out investors across Europe and sent waves of worry around the globe.
In the old days, "who would have thought that would be a problem?," White said.
capitulation is not a bottom
In a declining market, traders often speak of the need to have capitulation, or a selling climax, in order to find a low in the market. I believe selling climaxes or capitulatory moves that end a decline are bull-market phenomena; they are not how a bear market ends.
Panic selling is what occurs when investors get scared out of the market during a bull market. But while we have a tendency to look for such selling in a bear market, it doesn’t occur very often in my view. We tend to get a series of panic-selling lows, but none leads to more than a short-term rally.
In a bear market, the news that comes out is almost always awful and just keeps getting worse. The general feeling is that there is no reason for hope. In other words, there is no panic at the lows—there is simply doom and gloom and disgust with the market.
In a typical bear market, doom and gloom persist. We tend to get a series of panic-selling lows but none leads to more than a short-term rally. Panic selling occurred several times in the 2000–2002 bear market, yet in each instance the market continued lower. The final low of the 2000–2002 bear market was a case of sellers going out with more of a whimper than a bang, which in my view is indicative of the nature of true bottoms.
So when you hear the talking heads call for capitulation this time around, please understand that I think a capitulation low only leads to a short-term rally, not a long-lasting bottom. I believe if we manage to go sideways for many months, or even a year or more, we have a better chance at making a bottom that is long-lasting, since we might have the beginning of some base-building.
Panic selling is what occurs when investors get scared out of the market during a bull market. But while we have a tendency to look for such selling in a bear market, it doesn’t occur very often in my view. We tend to get a series of panic-selling lows, but none leads to more than a short-term rally.
In a bear market, the news that comes out is almost always awful and just keeps getting worse. The general feeling is that there is no reason for hope. In other words, there is no panic at the lows—there is simply doom and gloom and disgust with the market.
In a typical bear market, doom and gloom persist. We tend to get a series of panic-selling lows but none leads to more than a short-term rally. Panic selling occurred several times in the 2000–2002 bear market, yet in each instance the market continued lower. The final low of the 2000–2002 bear market was a case of sellers going out with more of a whimper than a bang, which in my view is indicative of the nature of true bottoms.
So when you hear the talking heads call for capitulation this time around, please understand that I think a capitulation low only leads to a short-term rally, not a long-lasting bottom. I believe if we manage to go sideways for many months, or even a year or more, we have a better chance at making a bottom that is long-lasting, since we might have the beginning of some base-building.
CPI decline biggest ever
In October, the Consumer Price Index [CPI] fell 1.0%, its largest decline ever (since the stats started being kept in 1947), although prices are still 3.7% higher than a year ago. Inflation is, like, so last summer, as an economic concern.
The decline in prices was led by a 8.6% decline in energy costs, which follows declines of 1.9% in September and 3.1% in August. Food prices rose just 0.3%, but are still up 6.1% year over year.
In addition to energy, prices also fell for apparel (retailers desperate to get customers in the door) and prices for both new and used autos also fell. But even stripping out food and energy prices, the core CPI fell 0.1%.
Under normal conditions, this would be a huge green light for the Fed to cut the Fed funds rate. However, these are not normal conditions. The Fed funds official target rate is just 1.0%, and even that overstates things since the effective Fed funds rate is just 0.37%. Thus, even if the Fed were to cut by another 50 basis points in December, it would still be behind the curve with the market. On the official target rate, there are just four 25 basis-point bullets left in the gun, and it is not clear just how effective those bullets would be.
The velocity of money is slowing like it never has before, or at least since the 1930's. "Velocity" is the technical term for people just sitting on their wallets and banks just stuffing every spare dollar into 3-month T-bills. This is very important since nominal GDP is equal to the amount of money in circulation times the velocity of that money.
The decline in prices was led by a 8.6% decline in energy costs, which follows declines of 1.9% in September and 3.1% in August. Food prices rose just 0.3%, but are still up 6.1% year over year.
In addition to energy, prices also fell for apparel (retailers desperate to get customers in the door) and prices for both new and used autos also fell. But even stripping out food and energy prices, the core CPI fell 0.1%.
Under normal conditions, this would be a huge green light for the Fed to cut the Fed funds rate. However, these are not normal conditions. The Fed funds official target rate is just 1.0%, and even that overstates things since the effective Fed funds rate is just 0.37%. Thus, even if the Fed were to cut by another 50 basis points in December, it would still be behind the curve with the market. On the official target rate, there are just four 25 basis-point bullets left in the gun, and it is not clear just how effective those bullets would be.
The velocity of money is slowing like it never has before, or at least since the 1930's. "Velocity" is the technical term for people just sitting on their wallets and banks just stuffing every spare dollar into 3-month T-bills. This is very important since nominal GDP is equal to the amount of money in circulation times the velocity of that money.
uncharted territory?
One of the fallacies about the recent financial turbulence is that the markets are in “uncharted territory” and that there are no historical precedents for the volatility, panic, or economic uncertainty that we've observed. To make statements like this is to admit that one has not examined historical evidence prior to the 1990's. The fact is that we've observed similar panics throughout market history. This decline has been deeper and more rapid than most, but that is largely a reflection of the rich valuation and overbought condition that characterized the market in 2007.
If we seriously deem it necessary to talk about the Great Depression, fine. Even the Great Depression can be adequately used as a precedent for current conditions provided that one recognizes that the market's valuation during the Depression didn't fall to the levels we currently observe until 1931 when the rate of unemployment was already 15%. Sure, if U.S. unemployment is headed to 25%, as it did in the Great Depression, then stock prices might fall in half even from here, as they did by 1932. But this is important – even if stock prices were to fall further, it would not be because of earnings losses that would permanently impair the fundamental value of U.S. companies. Rather, if further losses emerge, it will be because of increases in risk premiums that will be associated with extremely high subsequent returns. Indeed, even though unemployment shot to 25% in 1932, the S&P 500 more than doubled in the year following the 1932 Depression low, and tripled off of that low within less than three years.
The handful of historical instances when stocks fell to 7 times prior record earnings were also points that were accompanied by 15-25% unemployment, 12% yields on commercial paper (as at the 1974 lows), or 15% Treasury yields (as at the 1982 lows). Similar data is unlikely in this instance – and even if conditions deteriorate to that point, it will involve months and months of ebb and flow in the economic reports. We can be virtually certain that stocks would experience enormous rallies, not simply continuous decline, while the evidence accumulates. Meanwhile, it is notable that data that measure investor panic, such as risk-premiums and intra-day market volatility, already match historical extremes (1932, 1974, 1982, and 2002) – points where stock prices were not far from their lows even though negative economic news persisted for a longer period.
That's not to say that I believe stocks have “hit their lows.” We always have to allow for the market to move significantly and unexpectedly, and there is plausible downside risk from here. Our activity as investors is not to try to identify tops and bottoms – it is to constantly align our exposure to risk in proportion to the return that we can expect from that risk, given prevailing evidence.
Investors can get a good understanding of market history by examining a great deal of data, or by living through a lot of market cycles and learning something along the way. Only investors who have done neither believe that current conditions are “uncharted territory.” Veterans like Warren Buffett and Jeremy Grantham have a good handle on both historical data, and on the concept that stocks are a claim to a very long-term stream of future cash flows. They recognize that even wiping out a year or two of earnings does no major damage to the intrinsic value of companies with good balance sheets and strong competitive positions. Most importantly, these guys never changed their standards of value even when other investors were bubbling and gurgling about a new era of productivity where knowledge-based companies would make the business cycle obsolete, and where profit margins would never mean-revert. They knew to ignore the reckless optimism then, because they understood that stocks were claims on a very long-term stream of cash flows. They know to ignore the paralyzing fear now, because they still understand that stocks are a claim on a very long-term stream of cash flows.
If we seriously need to talk about the Great Depression (I personally believe that it is an outrageously dire comparison), we should recognize that even during that prolonged decline, it rarely made sense to sell into a major break of a previous low, because investors invariably had a chance to sell on a later recovery to the prior level of support. Below is a chart of the Dow Jones Industrial Average during the Depression. Even if one hung on after the enormous rally of nearly 50% that followed the initial 1929 low, the market's initial break of that low (the first horizontal bar) was followed several months later by a rebound to that prior level of support. The break of the second intermediate low of early 1931 (the second horizontal bar) was followed by a rebound later in the year to that same level. Third break, same story.
It is a typical market dynamic to have massive rallies toward prior levels of support, even within ongoing market declines. Once valuations are favorable, that tendency is even stronger, even in a weakening economy. Only the final panic decline of a bear market offers investors virtually no chance to get out on rebounds, but it is precisely that final decline that is recovered almost immediately in the subsequent bull market.
Even if the U.S. economy experiences a much deeper recession, I believe that the 1000-1100 level on the S&P represents a reasonable estimate of “fair value” for the S&P 500. That estimate is somewhat conservative since I am adjusting for the fact that earnings in recent years have been based on very wide profit margins, but could be too conservative given that long-term interest rates are very low. Long-duration instruments like stocks should not be priced off of short-duration instruments like 10-year Treasury bonds, or even 30-year Treasuries, so low interest rates shouldn't make investors recklessly optimistic about their valuation estimates. In any event, I do believe that current levels represent value from the standpoint of long-term investment prospects.
As for extreme and less likely benchmarks, the 780 level on the S&P 500 would represent a 50% loss from the market's peak, and would put the market in the lowest 20% of all historical valuations. I would expect heavy demand from value-conscious investors about that level if the market were to decline further, and a decline below that level could be expected to reverse back toward 780 fairly quickly. Further down, but very unlikely at this point from my perspective, the 700 level on the S&P 500 would represent the lowest 10% of historical valuations, 625 would put the market in the lowest 5% of valuations, and anywhere at 600 or below would put the market in the lowest 1% of historical valuations. I don't expect to see such a level, but there it is. Note that these estimates are unaffected by how low earnings might go next quarter or next year. Stocks are not a claim on next quarter's or next year's earnings – they are a claim on an indefinite stream of future cash flows.
Recent market conditions seem like they have no precedent only because so many investment professionals know only the data they've lived through. If one actually examines market data from the Great Depression, 1907, and other less extreme panics, one realizes how much the recent decline has already discounted potential economic negatives. At this point, further declines in stock prices simply increase the long-term returns that investors can expect over time. We can't rule out the possibility that investors could get more frightened, or that they might abandon their stocks at prices that would offer extremely high long-term returns to the buyers. It is important to establish exposure slowly, but long-term investors who ignore attractive valuations are not investors at all.
[via playstennis]
If we seriously deem it necessary to talk about the Great Depression, fine. Even the Great Depression can be adequately used as a precedent for current conditions provided that one recognizes that the market's valuation during the Depression didn't fall to the levels we currently observe until 1931 when the rate of unemployment was already 15%. Sure, if U.S. unemployment is headed to 25%, as it did in the Great Depression, then stock prices might fall in half even from here, as they did by 1932. But this is important – even if stock prices were to fall further, it would not be because of earnings losses that would permanently impair the fundamental value of U.S. companies. Rather, if further losses emerge, it will be because of increases in risk premiums that will be associated with extremely high subsequent returns. Indeed, even though unemployment shot to 25% in 1932, the S&P 500 more than doubled in the year following the 1932 Depression low, and tripled off of that low within less than three years.
The handful of historical instances when stocks fell to 7 times prior record earnings were also points that were accompanied by 15-25% unemployment, 12% yields on commercial paper (as at the 1974 lows), or 15% Treasury yields (as at the 1982 lows). Similar data is unlikely in this instance – and even if conditions deteriorate to that point, it will involve months and months of ebb and flow in the economic reports. We can be virtually certain that stocks would experience enormous rallies, not simply continuous decline, while the evidence accumulates. Meanwhile, it is notable that data that measure investor panic, such as risk-premiums and intra-day market volatility, already match historical extremes (1932, 1974, 1982, and 2002) – points where stock prices were not far from their lows even though negative economic news persisted for a longer period.
That's not to say that I believe stocks have “hit their lows.” We always have to allow for the market to move significantly and unexpectedly, and there is plausible downside risk from here. Our activity as investors is not to try to identify tops and bottoms – it is to constantly align our exposure to risk in proportion to the return that we can expect from that risk, given prevailing evidence.
Investors can get a good understanding of market history by examining a great deal of data, or by living through a lot of market cycles and learning something along the way. Only investors who have done neither believe that current conditions are “uncharted territory.” Veterans like Warren Buffett and Jeremy Grantham have a good handle on both historical data, and on the concept that stocks are a claim to a very long-term stream of future cash flows. They recognize that even wiping out a year or two of earnings does no major damage to the intrinsic value of companies with good balance sheets and strong competitive positions. Most importantly, these guys never changed their standards of value even when other investors were bubbling and gurgling about a new era of productivity where knowledge-based companies would make the business cycle obsolete, and where profit margins would never mean-revert. They knew to ignore the reckless optimism then, because they understood that stocks were claims on a very long-term stream of cash flows. They know to ignore the paralyzing fear now, because they still understand that stocks are a claim on a very long-term stream of cash flows.
If we seriously need to talk about the Great Depression (I personally believe that it is an outrageously dire comparison), we should recognize that even during that prolonged decline, it rarely made sense to sell into a major break of a previous low, because investors invariably had a chance to sell on a later recovery to the prior level of support. Below is a chart of the Dow Jones Industrial Average during the Depression. Even if one hung on after the enormous rally of nearly 50% that followed the initial 1929 low, the market's initial break of that low (the first horizontal bar) was followed several months later by a rebound to that prior level of support. The break of the second intermediate low of early 1931 (the second horizontal bar) was followed by a rebound later in the year to that same level. Third break, same story.
It is a typical market dynamic to have massive rallies toward prior levels of support, even within ongoing market declines. Once valuations are favorable, that tendency is even stronger, even in a weakening economy. Only the final panic decline of a bear market offers investors virtually no chance to get out on rebounds, but it is precisely that final decline that is recovered almost immediately in the subsequent bull market.
Even if the U.S. economy experiences a much deeper recession, I believe that the 1000-1100 level on the S&P represents a reasonable estimate of “fair value” for the S&P 500. That estimate is somewhat conservative since I am adjusting for the fact that earnings in recent years have been based on very wide profit margins, but could be too conservative given that long-term interest rates are very low. Long-duration instruments like stocks should not be priced off of short-duration instruments like 10-year Treasury bonds, or even 30-year Treasuries, so low interest rates shouldn't make investors recklessly optimistic about their valuation estimates. In any event, I do believe that current levels represent value from the standpoint of long-term investment prospects.
As for extreme and less likely benchmarks, the 780 level on the S&P 500 would represent a 50% loss from the market's peak, and would put the market in the lowest 20% of all historical valuations. I would expect heavy demand from value-conscious investors about that level if the market were to decline further, and a decline below that level could be expected to reverse back toward 780 fairly quickly. Further down, but very unlikely at this point from my perspective, the 700 level on the S&P 500 would represent the lowest 10% of historical valuations, 625 would put the market in the lowest 5% of valuations, and anywhere at 600 or below would put the market in the lowest 1% of historical valuations. I don't expect to see such a level, but there it is. Note that these estimates are unaffected by how low earnings might go next quarter or next year. Stocks are not a claim on next quarter's or next year's earnings – they are a claim on an indefinite stream of future cash flows.
Recent market conditions seem like they have no precedent only because so many investment professionals know only the data they've lived through. If one actually examines market data from the Great Depression, 1907, and other less extreme panics, one realizes how much the recent decline has already discounted potential economic negatives. At this point, further declines in stock prices simply increase the long-term returns that investors can expect over time. We can't rule out the possibility that investors could get more frightened, or that they might abandon their stocks at prices that would offer extremely high long-term returns to the buyers. It is important to establish exposure slowly, but long-term investors who ignore attractive valuations are not investors at all.
[via playstennis]
collateral crisis
... we believe this will prove to be a good time—and maybe even a great time—to invest for people with time horizons beyond a year or two. While there’s no way to know where the market will be in the short term, many conditions are in place for better performance. More directly, we believe the market at these levels represents substantial value for long-term investors.
Let’s start at the top with a brief take on recent events. Clearly, there’s been no lack of commentary on what’s happened over the last 15 months or so. The way we would characterize it, in the mid 2000s the world enjoyed a strong growth phase led by global expansion, simultaneous with relatively low volatility. The low volatility and higher asset prices encouraged investors (including financial institutions) and consumers to get comfortable with greater leverage. Increasing leverage in a low-volatility environment makes sense on some levels—for example, it helps boost returns for investors and increases affordability for consumers.
The problem comes when the system overreaches, which started happening in 2006 and for sure in 2007. This overreaching was most pronounced with the U.S. housing market.
So we are now in a substantial unwinding process. And this unwinding process means we have a collateral-based, not a liquidity-based, crisis. Specifically, a collateral-based crisis is marked by a very devastating positive feedback loop: an asset price drops, leading to a margin call, leading to asset sales, leading to a further drop, leading to another margin call, and so on. What’s key is governments can solve liquidity-based crises with injections of liquidity, as we saw in 1987 and 1998. Collateral crises, in contrast, require more action.
Collateral crises are much more damaging and prolonged than liquidity crises, and require substantial natural deleveraging and government action to encourage lending again. The good news is that governments around the world are on the case. And while there have been missteps, and there will be unintended consequences we have yet to recognize, the global government mobilizations suggest this downturn will be more akin to the early 1970s, early 1980s, or early 1990s than to the Great Depression.
... we looked at the distribution of stock market returns since 1926. In that time, the arithmetic mean return has been a shade under 12 percent and the standard deviation about 20 percent. So if the market finished 2008 at current levels, it’ll be well over a two standard deviation event—something you’d expect once every 40 or 50 years. Indeed, the year-to-date 2008 returns rank it among the worst in the past 85 years, behind only 1931.
And just to put a finer point on this volatility, October 13 and October 15 represented two of the five largest absolute changes in the market since World War II. In other words, of the prior 17,000 trading sessions, two of the biggest five days happened within three days during the week of October 13, 2008. It would not be unreasonable to expect more large moves, akin to earthquakes aftershocks.
... where might we go from here? The first thing to recognize is the stock market is a discounting mechanism. In times of extremes, it is important to carefully distinguish between fundamentals—which will be challenging for the foreseeable future—and the expectations built into asset prices. Dwelling solely on fundamentals, a natural tendency, encourages investors to overlook the way to make money: finding gaps between price and value.
... you can make a decent case for the market based on dividends alone. The current dividend yield on the S&P 500 is only about 80 basis points below the yield on the 10-year Treasury note (see Exhibit 3). You have to go back to the early 1960s to find a similar relationship. 6 If you add in share buybacks, the yield is over 300 basis points above the 10-year note yield, and that’s with buybacks down sharply this year.
... One of the ways to think about environments like today is to step back and take a normalized view of things. Exhibit 5 shows the rolling 10-year returns for large-capitalization stocks. Over the past century-plus, the market has tended to bottom out around zero percent rolling ten-year returns. That happened in the 1930s and 1970s, and that is where we are today. The rolling 10-year figure is worth examining for psychological reasons, too. If the average investor is in a mutual fund, they have lost money after taking fees into consideration. Further, most investors lose an additional 200 basis points due to bad timing. So the bottom line is on a dollar-weighted basis, the average investor has been down substantially in the U.S. stock market in the past decade. That is very psychologically damaging.
We also place significance on Warren Buffett’s actions and comments.
what appears most significant is the juxtaposition of his November 22, 1999, Fortune article and his October 17, 2008, New York Times commentary. Buffett very rarely takes the initiative to comment on the overall market, but he did so in these articles. In the 1999 article, within four months of the market’s top, he suggested that real returns from the market going forward were likely to be about four percent, and if he was wrong, he thought his number was likely too high. In the past decade, we’ve been very close to a zero real return.
In October 2008, he wrote that “the market will move higher, perhaps substantially so, well before either economic sentiment or the economy turns up.” He also added that he’s buying U.S. stocks in his personal account. His partner, Charlie Munger, echoed these thoughts separately. Exhibit 6 plots Buffett’s market calls on the rolling 10-year returns. He has proven to be reliably prescient.
... To finish, here are a couple of observations from behavioral finance. The first relates to a great piece of research that is very relevant today. In this study, normal people were pitted against people with brain damage in a contest. The brain damage had nothing to do with mathematical or logical abilities, but dealt with the emotional seat—ability to feel fear, greed, anxiety and so forth.
The contest was simple. Each participant was given 20 dollars, and for 20 rounds had a choice to do one of two things: they could either keep their dollar or hand the dollar to the researcher who then flipped a coin and paid $2.50 for a win and zero for a loss. So the expected value of handing over the dollar was $1.25.
The bottom line is the brain-damaged participants ended up with 13 percent more money than the normal players. The reason is how frequently people were willing to gamble. Everyone understood that playing made sense, and almost all players started off handing over their dollars. But when the normal people lost a round or two, they often chose to hold on to their dollars in the next round. In other words, normal people forgo explicitly net present value positive bets after they have lost.
This is very akin to today’s environment: most people recognize there is value in the market, but they would rather hold their cash than risk losing again. To state the obvious, the way to end up with the most money is to participate in net present value positive investments, even when your emotions tell you not to.
Let’s start at the top with a brief take on recent events. Clearly, there’s been no lack of commentary on what’s happened over the last 15 months or so. The way we would characterize it, in the mid 2000s the world enjoyed a strong growth phase led by global expansion, simultaneous with relatively low volatility. The low volatility and higher asset prices encouraged investors (including financial institutions) and consumers to get comfortable with greater leverage. Increasing leverage in a low-volatility environment makes sense on some levels—for example, it helps boost returns for investors and increases affordability for consumers.
The problem comes when the system overreaches, which started happening in 2006 and for sure in 2007. This overreaching was most pronounced with the U.S. housing market.
So we are now in a substantial unwinding process. And this unwinding process means we have a collateral-based, not a liquidity-based, crisis. Specifically, a collateral-based crisis is marked by a very devastating positive feedback loop: an asset price drops, leading to a margin call, leading to asset sales, leading to a further drop, leading to another margin call, and so on. What’s key is governments can solve liquidity-based crises with injections of liquidity, as we saw in 1987 and 1998. Collateral crises, in contrast, require more action.
Collateral crises are much more damaging and prolonged than liquidity crises, and require substantial natural deleveraging and government action to encourage lending again. The good news is that governments around the world are on the case. And while there have been missteps, and there will be unintended consequences we have yet to recognize, the global government mobilizations suggest this downturn will be more akin to the early 1970s, early 1980s, or early 1990s than to the Great Depression.
... we looked at the distribution of stock market returns since 1926. In that time, the arithmetic mean return has been a shade under 12 percent and the standard deviation about 20 percent. So if the market finished 2008 at current levels, it’ll be well over a two standard deviation event—something you’d expect once every 40 or 50 years. Indeed, the year-to-date 2008 returns rank it among the worst in the past 85 years, behind only 1931.
And just to put a finer point on this volatility, October 13 and October 15 represented two of the five largest absolute changes in the market since World War II. In other words, of the prior 17,000 trading sessions, two of the biggest five days happened within three days during the week of October 13, 2008. It would not be unreasonable to expect more large moves, akin to earthquakes aftershocks.
... where might we go from here? The first thing to recognize is the stock market is a discounting mechanism. In times of extremes, it is important to carefully distinguish between fundamentals—which will be challenging for the foreseeable future—and the expectations built into asset prices. Dwelling solely on fundamentals, a natural tendency, encourages investors to overlook the way to make money: finding gaps between price and value.
... you can make a decent case for the market based on dividends alone. The current dividend yield on the S&P 500 is only about 80 basis points below the yield on the 10-year Treasury note (see Exhibit 3). You have to go back to the early 1960s to find a similar relationship. 6 If you add in share buybacks, the yield is over 300 basis points above the 10-year note yield, and that’s with buybacks down sharply this year.
... One of the ways to think about environments like today is to step back and take a normalized view of things. Exhibit 5 shows the rolling 10-year returns for large-capitalization stocks. Over the past century-plus, the market has tended to bottom out around zero percent rolling ten-year returns. That happened in the 1930s and 1970s, and that is where we are today. The rolling 10-year figure is worth examining for psychological reasons, too. If the average investor is in a mutual fund, they have lost money after taking fees into consideration. Further, most investors lose an additional 200 basis points due to bad timing. So the bottom line is on a dollar-weighted basis, the average investor has been down substantially in the U.S. stock market in the past decade. That is very psychologically damaging.
We also place significance on Warren Buffett’s actions and comments.
what appears most significant is the juxtaposition of his November 22, 1999, Fortune article and his October 17, 2008, New York Times commentary. Buffett very rarely takes the initiative to comment on the overall market, but he did so in these articles. In the 1999 article, within four months of the market’s top, he suggested that real returns from the market going forward were likely to be about four percent, and if he was wrong, he thought his number was likely too high. In the past decade, we’ve been very close to a zero real return.
In October 2008, he wrote that “the market will move higher, perhaps substantially so, well before either economic sentiment or the economy turns up.” He also added that he’s buying U.S. stocks in his personal account. His partner, Charlie Munger, echoed these thoughts separately. Exhibit 6 plots Buffett’s market calls on the rolling 10-year returns. He has proven to be reliably prescient.
... To finish, here are a couple of observations from behavioral finance. The first relates to a great piece of research that is very relevant today. In this study, normal people were pitted against people with brain damage in a contest. The brain damage had nothing to do with mathematical or logical abilities, but dealt with the emotional seat—ability to feel fear, greed, anxiety and so forth.
The contest was simple. Each participant was given 20 dollars, and for 20 rounds had a choice to do one of two things: they could either keep their dollar or hand the dollar to the researcher who then flipped a coin and paid $2.50 for a win and zero for a loss. So the expected value of handing over the dollar was $1.25.
The bottom line is the brain-damaged participants ended up with 13 percent more money than the normal players. The reason is how frequently people were willing to gamble. Everyone understood that playing made sense, and almost all players started off handing over their dollars. But when the normal people lost a round or two, they often chose to hold on to their dollars in the next round. In other words, normal people forgo explicitly net present value positive bets after they have lost.
This is very akin to today’s environment: most people recognize there is value in the market, but they would rather hold their cash than risk losing again. To state the obvious, the way to end up with the most money is to participate in net present value positive investments, even when your emotions tell you not to.