Comments: Reject the Gaussian curve. Know that it is less likely to apply now because the markets are still at the boundaries of non-linear patterns. Three things arise from Mauldin's points. First, correlations are no longer linear. Second, accept that markets do not operate under Efficient Market Hypothesis (yet know your enemy...the other traders...do believe in this which puts you at an advantage). Third, Modern Portfolio Theory is less likely to be a successful approach the next few years because of point one (correlation).
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John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
TIC flows have averaged $57.3 billion per month since January 2005. This latest estimate of $2.4 trillion for 2009 means that Treasury sales will have to increase more than 300% to foreigners to cover the gap or this shortfall will have to be made up through domestic sales.
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What does this mean for traders and investors? First, this is inflationary because if history is any guide, the government will print more money and employ more helicopters from which to throw it into the economy, a methodology euphemistically labeled “quantitative easing.” The next all-too predictable development will be strong upward pressure on interest rates as U.S. Treasury investors demand higher returns to offset their losses due to increasing inflation.
Comments: There is going to be extensive arguments about what will happen next: inflation or deflation. I argue that the world will necessarily need to have inflation. In fact, this is probably the best outcome. The alternative is massive deflation a la Japan 1990.
The truth of the matter is that my argument will not be known to be right or wrong right now. The best thing to do is to monitor what the market is telling us. Watch TLT - this ETF tracks the 30-year U.S. Treasury.
I have written numerous times on My Notes on the Stock Market to avoid financials and to avoid real estate stocks. Does it make sense to say it again? I think it does. Say something once, and you hear, say it a second and third time and then you listen.
In Ken Norquay's column in TimingtheMarket.ca, Ken advises investors to simply avoid the financial services sector. In fact, his team has not touched this sector for two years. That viewpoint does not change today.
Here are the highlights:
Comments: I don't complain about much, but did so after reading about allowances in the changes of accounting rules to reduce transparency. The logic is correct, but the means is not. After all, It was the lack of transparency that was one of the many reasons this sector landed itself in trouble.
Stability, though, as we were taught by Hyman Minsky, leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits, because we human beings learned to trade and invest by dodging lions and chasing antelopes on the African savannah. We now chase momentum and dodge bear markets. We are hard-wired to look around at our circumstances and predict trends far into the future.
We take the current trend and we project it forever. But the one thing we know about trends is that they are eventually going to end. The trend is only your friend until it ends. Trends are notoriously fickle. That stability breeds instability.
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We have two trillion dollars of actual cash propping up $50 trillion in credit. If we all decided to settle and pay off everything, we couldn't do it because there is not enough cash. There would be massive asset deflation. We, as a nation, are levered 25 to 1, or we were. Now, that $50 trillion is in a real sense the money supply because that is what we are all pretending is real money. I lend you money and you pretend you are going to pay me back. Then you pretend he [pointing at another attendee] is not going to call your debt for cash, and we are all going to keep the system going. Because if we all try to pay each other back at once, we are all collectively -- and this is a technical economic term -- screwed.
So we keep the system going. Now, where are we today? We are at the Great Deleveraging. We are seeing massive losses and destruction of assets, on a scale that is unprecedented. There was massive destruction of assets during the Great Depression, which caused a lot of problems, and we are seeing the same thing today.
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This is not just in the US, but all over the world. Because when you start adding European cash-to-credit, and Japanese cash-to-credit, and Indonesian and Chinese cash-to-credit, it becomes multiple tens of trillions, and we are watching a goodly portion of that credit be vaporized. So we -- individuals and businesses -- are trying to find that $2 trillion in real cash and get some of it to pay down our debts.
My Comments:
There is no better word to describe the situation. As Mauldin puts it...we are all screwed.
One best not lose sight of the sell-off proceeding the stock market recovery. The key word is de-leveraging. The money created may necessarily require stocks in finance and real estate to rise, but the real factors governing current economic health - employment and housing - will need to be priced in the market.
$300 billion is just a down payment on the "quantitative easing" they will eventually need to do. They can't announce what they are really going to do or the market would throw up. But we are going to get quarterly or semi-annual announcements, saying, we are going to do another $300 billion, another $500 billion.
When we first started out with TALF and everything, it was a couple hundred billion here and there, and now we throw the word trillions around and it just drips off of our tongues and we don't even think about it. A trillion is a lot. It's a big number. And the total guarantees and back-ups and all this stuff we are into -- I saw an estimate of $10-12 trillion. That's a lot of money.
Understand, the Fed is going to keep pumping money until we get inflation. You can count on it. I don't know what that number is, I'm guessing $2 trillion. I've seen some studies. Ray Dalio of Bridgewater thinks it's about $1.5 trillion. It's some big number, some number way beyond $300 billion, and they are going to keep at it until we get inflation.
My Comments:
Will it create an asset bubble in stocks again? I don't know, it could. Dennis [Gartman] talked about being nervous yesterday. I would be nervous about stock markets, both on the long side, as I think we are in a bear market rally, but also there is real risk in being short. Bill Fleckenstein will be here tonight. He is a very famous short trader. He closed a short fund a couple of months ago. He says he doesn't have as many good opportunities, and basically he's scared of being short with so much stimulus coming in. So it's going to work, at least in terms of reflation, but the question is when. A year? Two years?My Comments:
One note from today's data on deflation. The headline in the Wall Street Journal says China grew at 6.1% last quarter. That doesn't sound bad. But what was not in the story is that nominal growth was just 3.7%. The other 2.4% was because of deflation. To get real (after-inflation) growth you subtract inflation and/or add deflation. Growth in China is slowing down more than the headlines suggest.
But Goldman's report was not all positive. The bank said its net loss for common shareholders was $1.03 billion in December, prompting some to question whether the change in financial years had allowed Goldman to dump much of its bad news into that one-off period and start afresh in the first quarter.
That gain comes as the result of WFC’s controlling interest in a legacy joint venture with Prudential Financial; the joint venture was acquired when Wells took over Wachovia last fall. Prudential currently holds a 23 percent non-controlling interest in the venture, as well as a put option on its interest in the venture; according to government filings, Prudential intends to exercise such an option “at a date in the future.”
Analysts are aware of this change, but say that a lack of transparency from Wells is making it difficult to see just how much of the bank’s jump in quarterly earnings is due to this ‘liability into asset’ transformation. And, of course, this one-time non-cash event happens to occur in a quarter where Wells needs a boost in earnings in order to bring up its lagging stock price, and ostensibly to set up any future capital raises.
Source: http://www.chartoftheday.com/20090409.htm?T
Comments:
The chart above is illustrating the severity of the current earnings contraction in comparison to earnings betwen 1936 - 2006. It could also infer that a slow recovery pattern might take place, similar to the past. It would take at least two years before earnings stopped shrinking.
A more likely possibility could be that company earnings recover as quickly as it declined, due to the extreme and decisive actions taken by the government.
This does not inherently suggest that a prolonged recovery is sustainable.
(Still) Keep Your Eye on the Ball
Highlights From Matt Blackman's Newsletter:
Comments:
Look. You can play hot potato with the toxic assets all day long, and only outcome will be that the public will suffer the losses that would otherwise have been properly taken by the banks' own bondholders. You can tinker with the accounting rules all you want, and it won't make the banks solvent.
It may improve "reported" earnings for a spell, but as investors who care about the stream of future cash flows that will actually be delivered to us over time, it is clear that modifying the accounting rules doesn't create value. It simply increases the likelihood that financial institutions will quietly go insolvent.
I recognize that the accounting changes may reduce the immediate need for regulatory action, since banks will be able to pad their Tier 1 capital with false hope. But we have done nothing to abate foreclosures, and we are just about to begin a huge reset cycle for Alt-A's and option-ARMs. As the underlying mortgages go into foreclosure, it will ultimately become impossible to argue that the toxic assets would be worth much even in an "orderly transaction."
if I were to make a guess, it would be that the potential downside in the S&P 500 from these levels could approach 30-40%. That is not a typo, and it is not a possibility that should be ruled out.Source:
"I've been asked a thousand times, 'What's the secret of success in the advisory business?'
(1) You've got to be an obsessive nut to start with.
(2) You have to be able to write in a way that people understand and like to read.
(3) You can't come across as a phony who knows it all. Readers know that nobody knows it all.
(4) It helps if you have a long life and don't want to retire.
(5) You need a wife who can put up with a husband whose head is full of the markets 24 hours, day and night.
(6) Woody Allen said the 90% of success in life is just showing up. If you can show up for the markets 250 days a year, you're ready to start an advisory service (but I wouldn't wish this business on my worst enemy -- it's the closest thing to absolute madness. No wonder nobody else has lasted in the business 50 years).
(7) This is a lonely business. So be prepared. Need a friend? Get a dog. Need two friends? Get two dogs.
(8) One last thing -- you must have thick skin, because no matter what you write, some subscriber will send an e-mail calling you a moron or brain-damaged, and the scary thing is, that makes you think, because they may be right."
Source: John Mauldin's Newsletter
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
To subscribe to John Mauldin's E-Letter please click here:
http://www.frontlinethoughts.com/subscribe.asp
The rapid reversal in sentiment in the past month is breathtaking.
It is really difficult to keep your head about you, when everyone around you is losing theirs and blaming it on you. Rudyard Kipling may not have referred to the stock market in his poem, “If,” but those who still doubt the sustainability of the market will not have been loudly heard in March.
The S&P rose almost 20% in March. This, by historical standards, is the biggest 4-week rally since 1933. Note the key word in this sentence is "historical." Yet unemployment grew at levels not ever recorded since being tracked. The Intelligent Investor is a value investor. Historical events and market patterns play little to no role in the valuation of a company. In effect, "Efficient Market Hypothesis" would need to be rejected, and the work involved to value a company is "bottom up" not "top down."
I have written and analyzed the market from a top-down perspective. Why? The broken banking system (failure of banks to lend) has affected companies in their ability to finance. This means that companies that were running on weak balance sheets will rally along with the other good companies investors should be holding.
Beware of those companies. It is still possible that the banking system is not fixed, and these companies will ultimately fail. Notice that HSBC sold 18 Billion dollars worth of “rights." This will improve the company’s balance sheet, but the buyers of this issue will probably suffer a paper loss if the market reverses in the weeks ahead.
Highlights from Matt Blackman’s newsletter
(http://tradesystemguru.com/content/blogcategory/34/68/) , there are a number of factors that remain troubling:
Companies will start reporting earnings this week. It would not make sense that they would be reporting strong earnings, given the continued economic weakness between January and March of this year. I do suspect some technology stocks will do well this quarter. RIMM, for example, already reported very good earnings.
My True Colors:
When does one's true colors reveal themselves? When under duress? When one is at his/her most calm state? That is, in good times or in bad?
I have been reviewing my investment strategy in light of viewing the recent events made by Congress. Keeping a high cash position when the market rallies 20% is a difficult thing to do. However, the phrase "easy come, easy go" comes to mind. it is preferable to position a portfolio to take advantage of real opportunities: one based on fundamentals and not based merely on market fluctuations.
It has been my experience that anything - not just stocks - built on a solid foundation will last longer than profits that come easily.
The same cannot be said for triggering losses.
When the dust settles, companies with solid fundamentals will be the ones left standing.
Two amazing readings that I would strongly recommended are Seth Klarman’s “Margin of Safety” and Nicolas Taleb’s “The Black Swan.”
Nassim Taleb Says Geithner’s Bank Plan Will Fail
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... The changes approved today to fair-value, also known as mark-to-market, allow companies to use “significant” judgment in valuing assets to reduce writedowns on certain investments, including mortgage-backed securities. Accounting analysts say the measure, which can be applied to first-quarter results, may boost banks’ net income by 20 percent or more. FASB approved the changes during a meeting in Norwalk, Connecticut.
