Money Illusionn or How the Government Really Gets In Your Pocket

Bill Gross of Pimco the manager of the largest bond fund in the world has recently ( and rightly) been ranting about Washington and the failure to deal with the US debt buildup. Most recently Pimco has discussed the stock market and "money illusion".  I wrote a short note on what he meant. Available here: 

money illusion  at  Scribd.com

E-Trade Baby Loses Everything Video

Nothing against E-Trade but the linked video is hysterical. Found at Zero hedge
Video link
http://www.youtube.com/watch?v=iDmJcDvaBGU&feature=player_embedded

James Montier Is Back!

This is really good news. Mr. Montier is one of the best behaviorist investors around and having him reactivate his blog will be a treat. Welcome back James.

try this one:  The Sources Of Value at Behavioural Investing

Bank Credit Analyst Conference

i have just returned from a few days in New York attending the annual Bank Credit Analyst Conference. Second one i have had a chance to attend and it was outstanding. Martin Barnes and the many Analysts and Editors have a really strong group of speakers and panelists and the discussion is terrific.
i am dead tired now but will try to convey some of the discussions ater I get some sleep and have digested the information.

Updated to fix typos. i would fire my typist, if I had one.

Don Coxe for Aug 13 2009

Mr. Coxe

The Boekh Investment Letter

China's Reflation Experiment :

Short Term Gain / Long Term Pain

Melt up?

Every once in a long while the market tone gets very bearish and individuals and institutions become so cautious they maintain a very defensive portfolio and carry lots of near cash positions rather than stay fully invested. Sometimes the market then begins to rise for no apparent reason. Usually descriptions like bear market rally, or correction, or pause are used to explain the action and not many jump on board the upward move. But the market keeps crawling upward and institutional fund managers find themselves underperforming the market for a quarter. Then for a part of a second quarter they still stay out they fall further behind and start to get a little nervous, but earnings season is coming and the market moves a little sideways. The fund managers are reassured the bear will resume or at least weak earnings will give them a sharp correction they can use to get on board.
But lo and behold the earnings period doesn't break the market and a crappy GDP number not only doesn't break the trend but buyers drive the market up sharply and a month in to the second quarter these fund managers really are way behin with less than 8 months to catch up and get ahead of the market. Now jobs are on the line. Soon the "Melt up" begins. An overbought overstretched rally turns into a frenzy as fund managers capitulate on their bearish ideas and buy in with waves of panicky buy orders. The market shoots far further than is justified in a fairly short period of time till the funds are more properly positioned for and up move. And just as suddenly the bull is over, vanished, gone like the wind. The bear resumes.
In 35 years in the market I have seen this once or twice. I think we may see it again very, very soon.
Be careful out there!

Head up, eyes forward, this too shall pass

This chart from Bloomberg is of the total value of world stock market capitalization. This means the value of each share of stock of every public company added all together. The high was 10/31/2007 at 62.6 Trillion dollars and the low on 03/09/2009 was 25.6 Trillion dollars. This is a loss of 37 Trillion dollars of value in a year and a half. Assuming roughly 5 billion people on the planet that is $7000 per person, a staggering sum of money and financial damage. The markets have to bounce back from the lows by 150% to get back to the highs. That isn't going to happen quickly. But it will happen if Obama and Congress can avoid throwing the baby out with the bathwater.

23% Bounce? Where?

Upon returning from vacation I find a 23% bounce off of the lows in the SPY. can anyone see it? This chart courtesy of CQG.

Tim Price:on "Dilbert, Dow and Gold Theory"

Very good article by Tim Price at the Price of Everything and I include this chart from that article.

Tim Price takes lessons from the 30's and Murray Rothbard

Tim Price of The Price Of Everything draws lessons from the great depression and Murray Rothbard in this post.

One exerpt:

But the savaging of fractional
reserve banking is only a small part of the message of Rothbard’s “America’s
Great Depression”. Contrary to the received wisdom that interventionist
government (under, Rothbard points out, the administration of Herbert Hoover
for some years before Roosevelt took the presidency) ameliorates and
foreshortens a dismal business depression, Rothbard suggests that the very
intervention so clamorously called for (both then and now) actually extends
and amplifies
it:

The Ouroboros, Deflation, and 2008

The Ouroboros, Deflation and 2008

2008 was disastrous but fascinating year in the financial trading marketplace. I recall no period with such widespread misunderstanding of market conditions and policy needs. The problems that devastated the markets began to reveal themselves in late 2007 when two Bear Stearns funds collapsed because securities they held could not be sold. Then Libor rates exploded as banks began to take a look at their own portfolios and became suspicious of the portfolios of other banks and stopped lending to one another. This was misinterpreted as tight money so the Fed responded with rate cuts.
But the real cause was a slow realization that bogus triple A rated mortgage securities based on mongrel pools of thousands of subprime mortgages mixed with prime mortgages were grossly mis-rated by ethically challenged, fee seeking, rating agencies. The asset class collapsed and thus seriously impaired bank capital ratios. But not until Bear Stearns failed was this widely recognized. Solvency was the problem not tight money, and that is why Fed rate cutting was not generating any result. They were treating a virus with an antibiotic.
The Ouroboros pictured above is a mythical creature that eats its own tail and is generally used to represent eternal recurrence. But it also represents a system consuming itself, and that is what we have. Inattentive regulation of new securities fed by greedy and over confident investment bankers led to a massive over leveraging aided by loose policies under the Greenspan Fed. Collapsing asset values in the huge mortgage backed securities market turned leverage ratios of 40-1 backward and bank and hedge fund equity consumed itself.
Fear began to spread and the 3 week period surrounding the seizure of Fannie and Freddie and the bankruptcy of Lehman set off panic in the public and in institutions. Margin calls triggered wave after wave of liquidation of positions and equities, commodities and corporate debt all plummeted. Game over.
The reason central banks always fear deflation more than inflation is deflation is self sustaining. Rational behavior by the individual to increase liquidity is a disaster for the economy which is losing systemic liquidity. The central banks are relatively powerless to stop the feedback cycle until the panic subsides and the fear begins to dissipate. The actions they can take are too slow to take effect for the results to dampen fear quickly and thus the Fed and Treasury appear inept. That was 2008.

2009 will be quite different. The panic has ended, though it could reignite, as positions were largely liquidated by leveraged funds and institutions before year end. Furthermore the natural optimism of a new year, the extraordinary optimism attached to the incoming Obama administration, and finally some effects of the massive monetary stimulus initiated by Fed and Treasury programs put in place beginning in August should coalesce to create a more positive psychological environment for investors. This will be a year where sentiment will be more important than ever.
At Infinium we have always believed personal psychology is the most important component in success. This year group psychology will be just as important. Three trillion plus dollars was pulled back in to money funds and probably equal amounts to bank accounts and other non market exposed mattresses. Will confidence or greed for yield be enough to start dragging that money back into the market? Or will continuing negative economic news and ballooning unemployment maintain a level of fear that continues to depress money velocity? That is the pivot point for the market and the economy. The positive in this for us is continued volatility and opportunity for intelligent risk taking and edge collection.

Big Themes
Reflation trades still good. The central banks will continue to fight deflation longer than necessary and now fiscal stimulus will be in place as well. Trading opportunities will exist in short versus long rates, spreads between treasury and investment grade and high yield bonds, forex crosses; also individual stocks and equities that benefit from or are harmed by specific pieces of stimulus legislation.
Country Indices outright or spread based on differentials in growth estimates or policy proposals and national financial solvency.
Commodity trades will be more differentiated than last years correlated boom in the first half and even more correlated crash in the second half. Examples are: precious metals as the only not currency specific trade, grains on weather and carryover. base metals and oil on rising demand from infrastructure projects fueled by government stimulus.
Politics will play a much bigger part of the action because of a new administration and one sided Congress rather than just bluster surrounding the election contest. Infrastructure companies, utilities, autos, healthcare and pharma are all likely to be heavily affected by legislation. Type and quality of fiscal stimulus proposals will push the debt markets around. Geopolitical policy will move currency, debt and country indices.

Specific Themes

Some I favor now.
Infrastructure stocks that operate worldwide based on stated stimulus plans in the US, China, Mexico, Brazil, and India, Europe likely.

Precious metal are the currency alternative in an era of competitive debasement of paper currency. Platinum is outperforming.

Strong balance sheets versus cash poor companies.

Fed will hold short rates low to press for shrinkage of quality risk spreads.

China relative strength

Long corporate and high yield bond funds outright ( these have had a big move during last week) and spreads of etfs of different underlying quality and maturity length

Conclusion

I do not expect nearly as much high correlation or so many enduring trends as 2008 because I believe positions are smaller and there will be more crosscurrents among trading instruments. I do expect significant opportunities for the alert. Surprises are likely to come from geopolitical conflict, legislative proposals after the first quarter, state and municipal finance, and crop failure, failure of large European banks tied to credit default swaps.


Fire away criticism is welcome. (except about my weight)

Bespoke looks at world markets and anemic bounce

thanks to Bespoke who have a short article explaining the chart.

Russell Napier and Tobin's Q Ratio

from Bloomberg:

By Patrick Rial

Dec. 10 (Bloomberg) -- The 2008 slump in global equities
has further to go if Tobin’s Q ratio is any guide, according to
CLSA Ltd. strategist Russell Napier.

The ratio, a method of valuing U.S. companies developed by
Nobel Prize laureate economist James Tobin, indicates that the
Standard & Poor’s 500 Index, set for its worst year since 1931,
may sink by another 55 percent to 400 when the market bottoms
around 2014, London-based Napier said. The ratio divides total
market capitalization by the cost of replacing assets.

click here for the rest of the article.

Update:
Henry Blodgett references the same article but he has a chart! I won't steal it so you better click through.

Unchartd territory? Not so much.

Blodgett and Hussman on "uncharted Territory".

Market In "Uncharted Territory"? Only If You're An Idiot

Fund manager John Hussman takes aim at one of the ludicrous excuses that is making its way around Wall Street: All past losses and future uncertainty can be forgiven because the market is in "uncharted territory." Please.

Go to both links, they cover it better than I would.

Barrons: Sum Micro trading less than cash

Eric Savitz at Barrons:

For Sun Microsystems (JAVA), it has come down to this: the stock is now trading for the net value of the cash and investments on its balance sheet.

As of September 30, the company had $2.63 billion in short-term cash and investments. Add in $490 million in long-term investments, and back out $694 million in long-term debt, and you get net cash of $2.486 billion.

JAVA shares today have dropped another 34 cents, or 9.2%, to $3.38. It’s current market cap: $2.49 billion. Since announcing the headcount reduction plan, the stock is down 17%. Ergo, you in theory could buy Sun today, pay off holders and the debt with the existing cash, and get the entire company for nothing.

Now, I know, I know, that does not include the costs of the company’s plan to cut 5,000-6,000 jobs. So there’s actually less cash to go around than meets the eye. Nonetheless, the stock’s ongoing swoon is a startling reminder that any stock not trading at zero can always go lower.

Shooting At Paulson

Listening to CNBC today and over the past few days I am struck by the frequency of attacks on Hank Paulson. I don't know how the efforts of the Treasury Secretary are going to work out, nor does anyone else I would bet. But if you read Mr. Paulson's resume it will give you some comfort that he as at least as qualified as anyone available.
The critics, most of whom are not qualified to carry Paulson's brief case, are all over him because the problems are not over yet. After all the TARP was passed way back on October 2nd and we still have problems. I mean really, what is he dawdling over ? As far as they can see it is only the biggest financial collapse in 50 years. Jeesh!

Fullermoney today points out a terrific letter by Tim Price that reminds us to step back from the emotion of the moment and put this extraordinary situation we have into long term perspective and judge it against history before making ad lib decisions. Link here and very highly reccommended.

Another perspective of Mauboussin‟s that seems, at face value, to be bad news but which is almost certainly extremely positive for current investors is the paucity of returns over the recent past. He charts the rolling 10 year returns for large cap 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 on a dollar-weighted basis, the average investor has been down substantially in the US stock market in the past decade. That is very psychologically damaging.

Why stocks maybe are not cheap

from Clusterstock an interesting blog run by the once infamous Henry Blodgett.

Jeremy Siegel's Mistake: Why Stocks Are NOT "Dirt Cheap"

Henry Blodget | Nov 7, 08 10:48 AM

Yesterday, we noted that Wharton professor Jeremy Siegel's "fair value" estimate for the S&P 500 is a startling 1380, which is about 40% higher than most other estimates (Robert Shiller, Jeremy Grantham, Andrew Smithers, John Hussman, et al). Prof Siegel, who is now a pitch man for WisdomTree funds, uses this estimate to conclude that stocks are "dirt cheap."

The other experts, meanwhile, who use a consistent, historically predictive, and fully explained methology, estimate that fair value is around 900-1000, about where we are now. In their view, stocks are just fairly valued.

So who's right?

It comes down to apples to oranges but I much prefer the oranges to Professor Siegel's apples because he uses forward earnings estimates and they are notoriously unreliable.

A very interesting chart from one of the Fullermoney subscribers.

Volkswagon!!!

chart from Fullermoney