Wednesday, May 20, 2009

The Problem with Averages

I was reading a marketing piece from one of the mass market financial advisors. His argument was that since the average recession since the Great Depression has been 21 months and since the stock market has been up an average of 45% twelve months later and since this recession is now officially 19 months old, then it must be time to get fully invested in stocks. Averages can be so misleading!

Over the same period, recessions have ranged from 3 months (twice) to 62 months. Credit-driven recessions, like this one, tend to be longer than inventory-driven or trauma-driven recessions. Also, the average bounce-back of 45% twelve months later has been declining markedly. The first 3 recessions bounced-back an average of 72% while the last 3 only bounced back 25% on average.

Averages can be so misleading! Like every investor, every recession is unique and should be evaluated individually!

Friday, May 15, 2009

A Sainted Businessman

In the early 1990s, I was appointed by the Governor of Texas to the State Depository Board, where I served with the State Treasurer, State Banking Commissioner, and State Controller. We wrestled with the collapsing Texas Savings & Loan Associations, which had wrecked the Texas economy so badly. I was there when the legendary Bill Seidman arrived with the federal Resolution Trust Corporation. It was like Moses parting the sea. It was an experience I’ll never forget. Bill Seidman was a man I’ll never forget. America has lost one of those great businessmen, who made the life of every American even better, even though they’ll never know.

R.I.P. Bill Seidman

Monday, May 11, 2009

The Un-Stressful Stress Test

After all the stressful suspense, the "Stress Test" results were released last Thursday, and it wasn't as bad as I feared. Still, there are two lingering issues. First, the assumptions were 10.3% unemployment, GDP dropping 3.3% in 2009 and rising 0.5% next year, and home prices falling another 27%. I'll be surprised if unemployment doesn't exceed 10.3% by the first quarter of next year. I suspect GDP growth will not be as good this year nor as bad next year. And, with record low home mortgage rates, it is hard to forecast another 27% drop in home prices. Overall, the government did a good job.

The second lingering issue is that the Stress Test only looked at nineteen banks, but what about the thousands of other banks, many of which are heavily exposed to local commercial real estate loans? Many analysts believe that is the next big shoe to fall.

As always, the things we know that we don't know worry us the most!