Thursday, December 29, 2011

Connect the Dots

Consumer confidence is up.  The rate of unemployment is down.  Today's weekly jobless claims have dropped below 400 thousand for four straight weeks.  The PMI shows manufacturing is up.  Now, pending home sales are at a 19-month high.

Make no mistake:  the U.S. economy is puny, but it is improving.  The greatest threat to our economic recovery remains Europe.  The "chattering class" of pundits say that German leader Angela Merkel will determine our presidential election.  If she fails to contain the European crisis, the U.S. economy goes back into recession, and Obama loses.  If she is successful, the U.S. economy continues to improve, and Obama is re-elected.

And, you thought your vote mattered . . .

The Joy of Flatness

The U.S. stock market has been pleasantly snoozing along over the holiday season, but was rudely awakened yesterday, and the Dow dropped 140 points.  You don't need to ask who woke up our market so rudely, as you already know all bad news comes from Europe.

Even though there was good European news that interest rates paid on Italian government bonds dropped significantly, the ECB also announced a large increase in deposits.  The market immediately assumed this indicated a lack of demand for loans in Europe, which suggests immediate recession.  The Euro promptly plummeted, taking gold with it.  (By the way, Europe is already in recession.)

Closer examination, however, suggests the large increase in deposits at the ECB is just an echo of the huge new three-year lending program of the ECB, which was heavily subscribed.  That tells me that European banks know a good thing when they see it and took advantage of the cheap funding; borrowing as much as the ECB would lend them.  As this just happened this month, they haven't removed all the funding the ECB provided from the ECB.  They're trying to figure out what to do with this windfall.  I'll bet next month's report will be much more sanguine. 

The fact that the Dow lost 140 points by selling before anybody even understood the report shows me just how "jumpy" the stock market is.  Sell first, ask questions later.  Europeans will return from holiday next week and will make some more bad news.  The European debt crisis ain't over yet . . . darn it!

Today, the Dow looks flat for now . . . enjoy that!  It beats the alternative, coming soon to a portfolio near you . . .

Tuesday, December 27, 2011

A Bored Santa Claus

One of the benefits (maybe the only benefit?) of having a childless Christmas is time to read, and I spent this one studying Currency Wars:  The Making of the Next Global Crisis by James Rickards.

It is not an easy read and is dense with historical detail.  We tend to think of WWI and WWII as the pivotal events of the last century.  Instead, Rickards takes us thru CWI and CWII, for Currency Wars I and II.  There are numerous examples of near-violence and bullying, especially by the U.S.  He also discusses the "game-playing" by governments to plan moves if another nation starts a currency war.  Make no mistake:  A currency war is a very bad thing!

Of course, the relationship with gold is an important factor in any discussion of currencies, but certainly not the whole story.  It is simplistic to say we can stabilize currencies simply with some direct linkage to gold.

The take-away for me is that Modern Portfolio Theory is fine as a risk-on/risk-off portfolio management tool but not as a "buy & hold" tool.  The alternative is more active market-timing, which introduces a whole new risk, i.e., how do you know when to pull-the-trigger to get in or get out of the market?

This week will be as boring as last week, with portfolio managers around the globe on vacation.  The weak Santa Claus rally doesn't reflect any news.  Indeed, it reflects a lack of news, especially out of Europe.  The market wants to rise.  Unfortunately, when Europe returns to work next week, there will be more headlines, and the U.S. stock market will suffer again.

Today's futures market suggests the Dow will lose 20-30 points at the open; no big deal.  However, this minor loss would break our string of four up days in a row, the first since September.  On Thursday, there is another sale of U.S. debt.  If the sale goes badly in this lazy market, we could see a significant sell-off.

My advice this week is to take the week off and enjoy some holiday beverages!  I'll bet Santa Claus is doing the same . . .

Friday, December 23, 2011

Republicans vs Whom?

The media hyped a contest over the payroll tax extension as a Herculean battle between Republicans and the President.  I saw it more as a struggle between the Republicans and the Tea Party.

And, did it really matter anyway?  This two-month extension is trivial in comparison to the battle this summer over the debt ceiling, which caused a loss of our AAA, a thousand point drop in the Dow, and the Fed to more actively manage interest rates.

Would the economy have been hurt without this extension?  Yes, but not much, and the Social Security Trust Fund would have actually been better off.

The market seems to have the same ho-hum attitude about it, as futures indicate the Dow will gain about 30 points this morning, no big deal.  (Could it be the Dow will have four consecutive positive days?)

The only lingering annoyance about this battle was the role uncertainty played.  Both sides argued the economy was crippled because of high uncertainty.  They make it sound like uncertainty is something we are not familiar with.  Business and individuals deal with uncertainty everyday.  That is part of life.  Of course, any modest increase in uncertainty is not good, but it is also not that crippling . . . or new.

Thursday, December 22, 2011

Today's Data Dump

Today's economic data was mixed but generally encouraging.  Weekly jobless claims were better than expected for the third straight week.  Even better, the number of workers on continuing claims dropped from 3.63 million to 3.55 million.  (Of course, that number could drop for the wrong reason, if the current legislative impasse is not broken by year-end.)  The jobs market is definitely improving, albeit s-l-o-w-l-y.

Also, inflation came in a little hotter than expected, 2.1% versus 2.0%.  Most economists worry about inflation.  I consider the creation of some inflation to be a moral imperative at this point.  It would be good for us!  Historically, stocks do best when inflation is running between 2% and 4%.

More worrisome is that the GDP growth for the third quarter was only 1.8%, lower than the expected 2.0%.  Of course, everybody knew Q3 was lousy, just not that lousy.  Expectations for the fourth quarter are 3-4%, which would be a great improvement.

One word of caution in the GDP growth estimate is that the decrease was almost entirely in the consumer consumption of services, which is much more difficult to measure than their consumption of products.

Nothing problematic today . . . now, go help the economy and buy some gifts for your family!!

Waiting for Santa . . .

Monday, the Dow was up over 300 points.  Yesterday, it was flat.  Today, it looks to gain about 40 points at the open.  Yea--the market has changed direction and will be moving back up??  No--as discussed last week, the trading volume or number of shares bought/sold is so low this week and next, that daily market movements are meaningless.  So--pay no attention this week or next week.

But, what about a "Santa Claus Rally?"  Normally, stocks do rise the last half of December.  This may be because the pessimists have gone on vacation.  More likely, it is because investors are positioning themselves for January, which is the market's best month historically.  This time, it all depends on Europe.

Jeremy Siegel taught me at Wharton and was economics advisor during John McCain's presidential run in 200.  He is a nice guy and one of my favorite thought leaders.  This morning, I watched him on CNBC and enjoyed learning that we have very similar forecasts, i.e., that the stock market is spring-loaded for a major bull rally, once the European fears subside.

I'm also more confident that these European fears will subside, after reading an analysis of the Great Depression, which made the case there were two halves to the Great Depression.  The first half can be associated with the 1929 stock market crash and the U.S. economy.  However, that depression was made both deeper and longer by a European banking crisis, creating the second half.  Of course, that is so similar to our current situation. 

But, here is the difference . . . during the first European banking crisis, liquidity was allowed to dry up.  That is clearly not the case this time, with the Fed and ECB flooding the banking system with billions in liquidity.  No doubt--we avoided that fatal mistake!

Bottom Line:  Pay no attention this week or next.  Be prepared for big scares on Europe, but don't be afraid because this is NOT a repeat of the Great Depression!  I expect to see Santa Claus next year . . .

Wednesday, December 21, 2011

Information = Money

The Wall Street Journal ran a front-page article yesterday that is guaranteed to enrage both the "Occupy Wall Street" movement and the Tea Party.  It describes how hedge funds routinely prowl the hall of Congress to gain advance knowledge about the many thousands of new laws and regulations produced every year.  Based on what they learn during their prowling, they make investment decisions.

Of course, it can be argued that the making of sausage should be transparent and subject to public viewing.  Should my elected representative refuse to meet with me, just because I represent a hedge fund?  Of course not!  But, what information should be shared?  Sharing information is like giving away money.

Coming on the heels of the unbelievable revelation that members of Congress and their staff are immune from insider trading rule, one must ask the question of HOW will we know when our system of representative democracy needs to end?  What has to happen before it must be euthanized?

Tuesday, December 20, 2011

Building a Bazooka

Years ago in the Army, I can remember straddling my bunk, methodically taking apart my M-14 rifle and then re-assembling it . . . blind-folded . . . with a buddy counting off the seconds.  It was not unlike watching the Europeans wrestle with their financial crisis.  They are trying to fend off the bond vigilantes by assembling a bazooka, with no idea how to do it and with the clock ticking.

First, they prayed austerity programs in the PIIGS would be enough, but they were not.  Then, they prayed that the ECB would act more like the Fed, but they refused.  Next, they established the European Financial Stability Board (EFSF), which was not big enough.  So, they tried to increase it by leverage, but the Austrian economists torpedoed that plan.  Now, the ECB president has said they will backstop the individual banks that conduct quantitative easing in behalf of the ECB.  Lastly, they are developing a plan to increase the lending capacity of the IMF, which would act as an additional EFSF.

I have to give them credit.  They remained in denial for a long time but are now fully engaged.  If they can assemble the EFSF, with the IMF, QE and austerity . . . they may yet build a bazooka!

Monday, December 19, 2011

Hmmmmm . . .

In preparing my annual forecast for Inside Business, I predict the European Central Bank will be forced to engage in quantitative easing in order to end the crisis.  This means they will buy any and all bonds issued by European governments, just like our Fed bought all bonds issued by our Treasury.

The new head of the ECB, Mario Draghi, has said he will not do this, but I don't believe he will have a choice.  The bond vigilantes will force it.  However, he made an interesting statement this morning.

While the ECB will not buy all bonds, they will not object if the banks buy all the bonds.  So, the ECB loans the banks all the money they want, and the banks use it to buy all the government bonds they want . . . very interestng!  It would probably not work quite as well, because individual banks may come under pressure from both the government of their country and their own shareholders.  But, it shows that he sees the need for quantitative easing, whether carried out by themselves or the individual banks.

This is a hopefull sign.

Media Observation

It has been fashionable to malign the media for many years.  While generalizations are usually wrong, my perspective is different.  Ignoring the obvious extremes of Fox, MSNBC, and HDNet, I find the majority of media to be well-meaning but hapless in the face of increasing complexity.

As an example, last night about 10PM, I was watching the Asian markets on Bloomberg.  It was ugly, with most down 1.5-2.0%.  Then, there was the breaking news that the psychotic despot of North Korea had died.

When I got up this morning, the headlines were "Asian stocks fall on death of North Korean leader."  That is not true.  The markets were already down before the news broke.  In fact, the Asian markets had improved during the interim, curbing their losses.  In addition, Dow futures were down 47 when the news broke but up 48 this morning. 

Q -- What did I learn from the death of Kim Jong Il? 
A -- That the vast majority of media are indeed well-meaning but hapless.

Sunday, December 18, 2011

At a Christmas party last night, I was amused when a good friend and loyal reader reminded me that I once said that I expected a "rip-your-face-off" recovery, whenever it happens.  That comment does reflect my belief that the U.S. stock market has become entirely headline-driven and does not reflect the underlying U.S. economy, which is better that most people realize.  At some point, economics will matter again!

Of course, there is a bit of hyperbole in "rip-your-face-off."  Maybe, I should have described the coming market rally as "strong" or "muscular" or even "impressive" . . . but maybe I learned to use hyperbole from reading too much Ayd Rand . . . or just by listening to politicians, of both parties?

Friday, December 16, 2011

Checking on China

Last year, I made my second visit to China.  Readers will recall my interest in the very different cultural attitude toward disagreement.  We think it is shameful for a person to suffer-in-silence.  They think it is shameful for a person to disagree-in-public.

The greatest fear of the Chinese government is not the U.S. Their greatest fear is civil unrest.  Considering the vast numbers of people they must placate, you can understand why the government is quickly ramping up their entitlement programs.

Imagine their horror that a small coastal village is now in open revolt.  It seems like an opposition leader who was arrested and allegedly suffered a heart attack in jail also had three fractures in his skull.  The military has surrounded the town, cutting off both food and water.  They have vowed to "strike hard" against the villagers, and I believe they will.

As the economic growth engine of the world has slowed, unrest among the Chinese people has increased.  This is the worst fear of the government.  They just delayed the new capital requirements for banks, in order to keep the money flowing.  They are now less likely to their currency appreciate, as they have in past two years.

Freedom is a scary thing, indeed!

Green Lights at a Dead-End

Yesterday, the economic data suggested stronger-than-expected improvement in both jobs and manufacturing.  That should have been good for at least a hundread points on the Dow, and it was!  But then, Angela Merkel made a few despondent comments, and the Dow lost over half its gains.

It just reinforces my belief that the U.S. economy is doing better than realized, but the U.S. stock market is being "hammered" by Europe.  Solve Europe, and the U.S. stock market will roar.

The Dow looks like it will open up about 80 points this morning, but we are seeing very light trading volumes, which means an up market could turn into a down market in a matter of minutes.  We will not see any meaningful volumes until the holiday season is over . . . or there is a crisis.

But, don't expect anything to happen in Europe anytime soon, as they are busy throwing holiday parties on the deck of the Titanic.  For decades, Americans have coveted the overly-generous vacation schedules in Europe, but our stock market is now paying a price for them to "rest".  Maybe, we should just declare Christmas over and celebrate New Year's Eve early??

Thursday, December 15, 2011

Regulation for Dummies??

In the aftermath of the Bernie Madoff scandal, investment advisors are being crushed with new, often-confusing regulations.  When I read the Obama Administration is killing the American economy with regulation, I tend to believe that.

The Wall Street Journal is required reading for investment advisors, but its editorial page is so predictable that I seldom read it.  However, something piqued my interest yesterday about excessive regulation.  It cited a study by a professor at George Mason University, who analyzed "major new regulations," i.e., rules that impose more than $100 million in new costs.  It found Obama has issued 84, compared to Bush at 62 and Clinton at  a mere 56.

Should I believe that?  Bloomberg News (which is also owned by a Republican) found that "the Obama Adminstration has not reviewed or issued significantly more rules than its predecessors."  In addition, the World Bank just published its report on "Doing Business," which ranked the U.S. as the 4th easiest market to do business in.  And, the annual analysis by the World Economic Forum ranked us in 5th place.  (Those nations ahead of us are smaller countries, like Singapore or Finland, that are largely irrelevant.)

Maybe, all the new regulations mentioned in The Wall Street Journal apply only to investment advisors . . . and the rest of the economy is doing just fine??

Wednesday, December 14, 2011

Keep The Faith

Since the stock market is obviously losing steam with the continuing European crisis, a client asked me if we should just sell everything and stay in cash until "it" is over. 

There have been numerous academic studies that show "market timing" is a poor strategy for investment managment, which requires perfect knowledge about the future.  Most investors prefer "buy and hold" as a strategy.  After all, America has seen worse problems many times and always succeeded in overcoming them.  However, I believe a far better strategy than either of those is to simply increase cash gradually as anxiety/fear increases. 

In addition, I don't think it is ever wise to be 100% out of stocks.  Nobody can assure me that the European heads of state might not walk onto a stage at any moment and announce "the" agreement, in which case the Dow would probably jump a thousand points, setting the stage for another bull market.  Besides, the U.S. economy is doing better than the U.S. stock market, stongly suggesting upside potential!

The European crisis is not going away anytime soon.  Like most parts of the Christian world, little will be accomplished in Europe for the rest of this month.   This looks like one of those rare years when we do not get a "Santa Claus Rally."  Still, January is historically the best month of the year for the stock market. 
Keep the faith!

Tuesday, December 13, 2011

The Vietnam Advantage

One of the few benefits to come out of that national nightmare known as Vietnam was a wariness with "escalation" or taking an incremental approach to solving difficult problems.  Fortunately, one young lieutenant with the name of Colin Powell developed the "Powell Doctrine," which he employed in the spectacular opening to the first war in Iraq.  It calls for "overwhelming force, suddenly applied."

Another example is when the Secretary of the Treasury Hank Paulson got on his knees and begged, literally, then-Speaker Nancy Pelosi for the $700 billion TARP to save the U.S. banking system.  When asked why he needed such a huge amount, he correctly explained he needed a "bazooka" to fight the bond vigilantes.

The Europeans lack this advantage, and the result is a long, drawn-out incremental approach to solving this difficult problem.  Admittedly, they have a huge problem of "herding cats," but they desperately need a bazooka, and they need it quickly.  Certainly, they are finally moving in the right direction . . . at the rate of a tortoise.

The irony is that the brake on progress is primarily the Germans, who know that "he who has the gold makes the rules."  Germany stands to benefit the most from any new power-sharing arrangement.  As stated many times in this space, this financial crisis will do for Germany what World War II could not.  Yet, they make the problem worse by dragging their feet . . . that's irony?

Monday, December 12, 2011

The Sky Is Now Less Cloudy . . . Too Bad About the Stock Market

The market has spoken.  The verdict is in.  Last Friday's agreement to resolve the European credit crisis is just another disappointment, kicking the can down the road . . again!  At this hour, the Dow appears ready to lose about 80 points at the open.  Investors are fleeing the Euro, driving up the value of the dollar, which temporarily drives down the value of gold.

Well . . . duh??  Did anybody expect a silver bullet, where 27 nations agree on every detail upfront?  The good news is that the nose-dive has ended.  On Friday, those nations who use the Euro began the long process of surrendering their fiscal sovereignty.  That does not mean financial disaster is no longer possible, but the arc has been changed.

If nothing else was accomplished, Friday's agreement gives political cover for the ECB to begin quantitative easing, which would help Europe at this point.

The sky may still fall, but at least it is more blue . . . the macro-environment has indeed improved!

Sunday, December 11, 2011

Learning From Others . . .

Art Cashin came to work at the New York Stock Exchange in 1959.  That's correct, he has worked there for 52 years and is now the chief floor trader for giant UBS.  Self-made and even self-educated, he has become one of Wall Street thought leaders, especially on market behavior.

As no hint of scandal has ever tarnished his reputation, he is a folk hero to me, and it was an honor to shake his hand last week in New York.

He was asked what he would do if he was given a $1 million bonus right now, whether he would put into stocks, bonds, or what . . . until next March.  I was a little surprised but quite pleased when he said he would hold the whole thing in cash.  (I was pleased because I have been holding relatively large positions in cash and short term bonds.)

His logic was that his worry about the European debt crisis, which was not surprising, and the "Arab Spring," which was surprising.  The question was posed to him on Thursday, when anxiety over Europe was the highest, before they signed the tepid agreement for the first steps in resolving the crisis.  I wonder how his thinking may have changed, since the agreement was signed but suspect he might be willing to increase his stock exposure only a small amount now.

I was more surprised that he was so worried about a collapse of the Mid-East as we know it; taking away our desperately needed energy supplies.  Certainly, a religious takeover of Egypt would be bad, and failure to remove the Syrian despot would be bad . . . but the world would go on.  I suspect his fear is that Iran will explode.  If somebody I respect is that worried, I will have to re-think my exposure to the energy sector and probably increase it.

Thank you, Art!

Saturday, December 10, 2011

The Tragedy of MF Global

It would have been hard to spend any time on Wall Street this week without over-hearing conversations on the tragedy of MF Global and it's famous CEO, former U.S. Senator Jon Corzine.  While I overheard mere conjecture and speculation, I do have a suspicion about what happened.

For my clients, their cash is kept separate from mine, and they receive any income earned from their cash balances.  For MF Global clients, their cash was also kept separate (although there is a report this was not the case), but MF Global received the income earned from the client cash deposit.  In other words, the clients could not receive income earned on their cash balances.

Apparently, this worked fine for MF Global as long they could invest the cash into U.S. Treasury instruments and earn a decent rate of interest.  When the Fed drove down the interest rate earned on Treasury debt, income to MF Global dropped.  With regulatory approval, they were then permitted to invest in sovereign debt of other nations, like Canada and Switzerland.  Unfortunately, I suspect MF Global invested in sovereign debt of nations like Greece and Italy, whose bonds quickly became worth less than invested.  When everything had to be sold, there was a loss of $1.2 billion, all borne by the clients.

If this is the case, it would mean MF Global and Jon Corzine were toweringly stupid or imprudent but NOT criminals.  The tragedy is that they may have followed the law, but they did not act in their client's best interest.  This is yet another example where brokers are different from Registered Investment Advisors, who are held to a higher standard, i.e., to act in a fiduciary manner with all client funds.  Stated another way, we are required to act in the client's best interest, not our own.  This is not true for stockbrokers!

I doubt more regulations would help, except requiring anybody holding client funds to act only in the best interest of the clients.  But, the army of stockbrokers is opposed to this!

Caveat:  This is my best guess of what happened at MF Global under Jon Corzine but is mere conjecture.

Friday, December 9, 2011

Motherly Advice

Yesterday, a very famous economist from Switzerland made some cutting comments about Fed Chairman Ben Bernanke.  Being educated in Europe, it is not surprising that he belongs to the Austrian or "Tough Love" school of economics.  Like all economists, he was judgmental and intellectually intolerant, as well as bombastic.

For the record, my thought is that Bernanke did a great job keeping the U.S. out of a depression.  He is innovative, pragmatic, and well-intentioned.

When the famous Swiss economist was asked what he would do if he was Bernanke, he responded flippantly that he would resign.  Later, he admitted he would have let the banks fail and the U.S. financial system freeze.  The Austrian view is that a quick depression is better in the long run than a long, slow-speed recession.

Yet, it reminded me of the George Allen fundraiser I attended recently, where a different candidate was asked how he would fix a particularly difficult problem and responded he would simply get rid of Obama.  When pressed what he would do after he got rid of Obama, he said he would appoint Republican policy-makers.  Otherwise, he had no ideas.

I understand why it is necessary to pick a fight sometimes in order to get attention or sell books, but at some point, it certainly becomes a tedious time-waster.  My mother always told me "if you can't say something nice about somebody else, then shut your mouth!"  That's good if quaint advice for politicians and economists.

Slow Motion Train Wreck?

No, the world is not coming to an end!  Besides, that can only happen once, and there is no way to prepare for it.

However, the European Union may be coming to an end.  With the latest agreement, it appears that the Euro will survive among the 17 nations that use it, which would be great news.  However, it is not clear what will happen to the ten nations that are members of the EU but do not use the Euro, such as England.

When I woke up at 4AM, I was expecting chaos in the European markets, with the value of the Euro plummeting.  (That would mean gold would be falling further, and I was expecting to buy some today.)  Sure enough, Asia was down sharply, but Europe is mixed at this hour, apparently more focused on the downgrade of three French banks by Moody's.  The fact that Europe is not collapsing this morning comes as a pleasant surprise.

It looks like Europe will now work on the next Grand Plan.  You'll remember the first one, i.e., that austerity programs in the PIIGS would stop the contagion.  Then, there was Grand Plan 2.0 to establish the EFSF (European Financial Stability Fund), which will morph into the ESM (European Stability Mechanism) next year.  I think Grand Plan 3.0 was for the ECB (European Central Bank) to issue Eurobonds, guaranteed by all 27 member nations.  Then Grand Plan 4.0 was to create an alternative union of the members willing to submit their fiscal policy to Brussels.  A version of this, call it 4.1, is the latest tenuous agreement.   It calls for automatic measures to be taken when any of the 17 nations using the Euro violate their deficit covenants.  The previous agreement contained similar sanctions, but they were not automatic and were never implemented.

Don't ask me what Grand Plan 5.0 is, because nobody knows.  I just know it is out there.  The Europeans desperately want to keep it together.  Helpfully, they are no longer in denial and are really working to prevent this train wreck and save the EU.  I'm beginning to believe there will be no Eureka moment, when we know the EU will survive.  And, the agreement last night may be the subtle change in momentum, which will finally liberate the U.S. stock market.

Thursday, December 8, 2011

The Big City . . . In a Little World

Today, I'm attending a conference in the New York Stock Exchange on the rapidly changing commodities markets and looking forward to it.  I haven't been inside the NYSE in almost 8 years and expect to see major changes.

But, I don't expect to see any major changes in the stock market today.  The world continues to watch the incredibly high stakes drama in Europe.  The European Central Bank meets today and is expected to cut interest rates again, which is no big deal.  A big deal would be if the ECB announced a round of real quantitative easing. 

This morning, the futures indicate little change in the stock market and low trading volumes.

Tomorrow will be a different story . . . so, stay tuned!

Wednesday, December 7, 2011

Suspended Agony

When jumping out of airplanes, it is advisable to be wearing a parachute.  The only problem is that parachutes require two large straps to go between your legs.  However, when the parachute opens and the rate of fall slows suddenly, there are certain anatomical challenges for males.

To prepare paratroopers for this sensation, there is a building in Jump School known as "suspended agony," where each trooper hangs from the ceiling with all his weight on the two strategically placed straps between his legs.  The minutes tick by like hours.

The wait until the European summit this Friday has become a form of suspended agony.  The world stock markets need relief from the spectre of financial collapse in Europe, followed by a break-up of the Euro.  The world was already emotionally over-invested in the outcome of this summit, but the over-investment increased dramatically with  S&P's announcement that 15 EU nations, as well as the all-important EFSF, may possibly lose their triple-A credit rating very soon.  Since then, the stock markets have drifted, with a slight positive bias.

Dow futures suggest it will gain about 20 points at the open.  I expect little volatility in the market until Friday, which is already the most volatile day of the week.  That afternoon could be exciting or terrifying but certainly interesting.   The minutes will tick by like hours for investors!

Frankly, I expect the "can to be kicked down the road" but only a short distance.  That delay will be disappointing to the market, and it is not nice to disappoint the market.

Tuesday, December 6, 2011

No Pressure . . . NOT!

Yesterday, the Dow was cruising along, having gained 156 points.  Suddenly and without warning, Standard & Poor's (S&P), who did so much to create the last crisis, announced that the individual nations of Europe, including mighty Germany, were being put on "credit-watch" for a downgrade from AAA to AA, pending the outcome of Friday's political summit.

The stock market immediately started losing steam but held onto about half of that gain.  Asia was negative overnight on that news.  Europe is mixed this morning, and the Dow looks like it may gain about 20 points at the open.  The powerful momentum of the past week was clearly broken.

There is a strong sense of deja vu.  It was S&P who downgraded the U.S. because of our inability to deal with the deficit politically.  That had minimal impact on our borrowing costs because the Fed will buy everything the Treasury wants to sell.  However, the ECB has not promised to do the same for Europe, making a credit downgrade potentially more damaging to Europe.

My first thought was that this action by S&P greatly increased the pressure on European leaders for Friday's summit, increasing the probability of finally putting this crisis behind us.  My second thought was that S&P did the same thing to the U.S. prior to the disgusting debt negotiations in Congress in August, and it made absolutely no difference.  The elected children in Congress, who prefer purity to productivity, did nothing, and S&P promptly downgraded our credit.

The hardest part in making economic predictions is knowing which of the myriad economic variables are controlling the outcome.  I feel comfortable making those predictions.  The hardest part in making political predictions is knowing whose bundle of emotions will control the emotions of others.  I feel clueless making those predictions.

Tell me what happens Friday at the European summit on the financial crisis, and I'll tell you how the stock market will close that day.

Monday, December 5, 2011

For What It May Be Worth

I just listened to the chief U.S. economist for Barclay's Capital.  He is predicting the S&P, which is now 1244 will drift down to 1150 by next summer but end the year at 1330, which would be a dramatic turnaround indeed.

Earlier this morning, I listened to the chief European economist for Barclays in Europe saying they do not expect a "bazooka" approach to calming their financial crisis.  Without that, I think Europe has no chance of resolving the crisis. 

Although he didn't say it, maybe the U.S. economist expects the S&P to drop almost a thousand points because the Europeans will not take a bazooka approach??

A Coalition of the Willing . . .

Overnight, Asian markets were mixed but generally up.  The European markets are decidedly positive.  The futures indicate the Dow will gain about 90 points at the 9:30AM opening.  After a record-breaking week, it is encouraging to see investors are buying risk, before the European summit this week.  You will recall the European leaders promised resolution of their financial crisis this week.  If they don't . . . there could be a dramatic reversal.

At the same time, notice the bond market is telling us something different.  Widely considered more wise and less emotional, the bond market is telling us to beware.  Interest rates on European bonds have increased, even on German bonds, as bond buyers are buying bonds in the U.S. and Asia instead of Europe.  Sarkozy correctly believes this problem could be solved by the ECB issuing Eurobonds, which would obligate all nations of the EU, not just one.

Merkel says the problem with the ECB issuing Eurobonds is that the rich nations like Germany could be paying for profligate nations like Greece and Italy.  I don't see how they can negotiate such differences by Friday.  While Germany and France are the loud voices in this debate, don't forget there are 25 other nations in the European Union, fifteen of which use the Euro as their currency.

Sarkozy wants to create a parallel universe of European nations to bypass the long EU approval process, a sort of economic "coalition of the willing."  We shall see . . .

The Little Russian Girl Who Changed America

1957 was an important year for investment analysts.  That was the year that Harry Markowitz published his Modern Portfolio Theory and later won the Nobel prize.  It was also the year that Ayn Rand published Atlas Shrugged and changed America.  Perhaps, that was a hyperbolic over-statement but Ms. Rand would have loved it, as she often used them.

Fifty years ago, in 1961, I read Atlas Shrugged for the first time and became a fan.  It is a story of America in 2016 where the most successful businessmen keep disappearing, only to find they had gone "on strike" to protest the ever increasing corruption and over-reach of the government.

It became the intellectual basis for conservative Republican politics and helped launch the Libertarian Party in 1971, the survivalist movement in the late 1970s, and the Tea Party in 2008.  For a brief time in the very early 70's, I even considered using my Special Forces training as a survivalist to combat the government takeover that I presumed was imminent. 

I realized how much her writing has influenced America when it was pointed out to me that every supply-side economist was an ardent fan of Ayn Rand.

In 1992, the film rights for this book were sold, but the film didn't get released until April 15th of this year.  Unfortunately, the film promptly bombed, and theaters stopped showing it almost immediately.  I was finally able to buy a copy on DVD and watched it last night.

One explanation for the poor performance of the movie was that it only covered the first half of the book, and the viewer is left hanging; a not very satisfactory ending to any story.  Another explanation is the increasing disdain for partisan issues among the wider population, which is understandable.  Of course, serious Ayn Rand fans allege a government plot to release other movies at the same time, that were better than this one, which I consider ridiculous. 

I thought the film was technically great, with good acting and great imagery.  Yet, it showed government not as an oppressive force, which was Rand's belief, but more as a tool for corrupt business leaders to use against other business leaders.

As much as I appreciate her work and the thoughts she gave me decades ago, I drifted away from her philosophy when I watched it being hijacked for political purposes.  Ayn Rand was a small girl when her wealthy family fled Communist Russia for the United States, carrying the memory of an oppressive Communist dictatorship.  She saw the rise of unions in this country as analogous.  She could foresee America going the route of Russia.  But, don't we all know that Russia and Communism have both failed?  The chances of that happening in the birthplace of Capitalism is zero.

The philosophy of Ayn Rand is called objectivism and is similar to existentialism in that it places great emphasis on the individual, whose path to greatness is not possible without maximum freedom from government control.  But, she wrote with hyperbolic over-statements for dramatic purposes, not for political purposes?

A hammer is a tool.  It is neither good nor bad.  It is just a tool; sometimes useful, sometimes dead-weight, but just a tool.  Governement is just a tool.  It is neither good nor bad, just a tool.  It deserves neither love nor hate.  It just needs to be controlled, like a hammer.  And, Ayn would agree! 

Friday, December 2, 2011

Drum Roll, Please . . . Ho Hum

The monthly Jobs Report issued by the Department of Labor is the most closely watched economic report every month.  It is issued the first Friday of each month, i.e., Today!

Before the Report was announced, the futures market indicated the Dow would gain about 130 points at the open.

Economists were expecting 125 thousand jobs were created in November, and it was 120 thousand instead.  Dow futures dropped ten points to 120 points at the open.  Then, it was announced the unemployment report dropped from 9.0% to 8.6%.  Also, it was announced that September and October produced 72 thousand more jobs than earlier reported.  Then, the Dow futures jumped to 155.  Then, we figured out the drop in the unemployment rate to 8.6% was not meaningful, because the labor participation rate dropped.

After the Report was announced, the futures market indicated the Dow would still gain about 130 points at the open.

Still, it was a good report . . . the U.S. is not going into a recession . . . unless Europe drags us kicking & screaming into one!

Thursday, December 1, 2011

Happy December

Yesterday, the market closed out a very volatile November with a roaring 490 point gain in the Dow.  Today, we start the month of December, which is historically kind to the market.  In fact, December is positive 80% of the time.  The average gain is an impressive 2%.  The last time we had a negative December was in 2007.  Often called the "Santa Claus Rally," behavioral psychologists attribute the increase to investors appreciating more important things and therefore NOT listening to investment analysts.

Now, start preparing for a December gain by saying . . . "HO . . . HO . . . HO"

Wednesday, November 30, 2011

Enjoy the Euphoria

Earlier this morning, the Dow looked to gain 85 points at the open.  Now, it looks to gain 285 points.  It has been getting better all morning.  In addition to the ten-day deadline on resolving the European crisis, the primary central banks of the world just announced a huge new liquidity measure.  This should reduce the liquidity risk if not the credit risk, which still reduces overall risk.

Is it time to deploy cash?  No!

Today is euphoria.  So, just enjoy the good feeling.  If this is the real bottom, there will be time to catch up tomorrow or Friday or even next week.  There will be some sort of bad news out of Europe that will catch the market by surprise.  Ten days is a very long time!

While you're enjoying the good news in Europe, savor this morning's ADP report, which indicated 206 thousand jobs were created in the U.S. by the private sector last month, much more than expected.  After netting out government layoffs, Friday's all-important Jobs Report by the Department of Labor might be less unpleasant, for a change.

A Change of Pace . . . or a Change?

At 5AM, the futures market indicated the Dow would lose about 25 points.  By 6:30AM, it looks like it will gain 85 points at the open.  Why was there a turnaround of 110 points?  Some of the talking heads out of Europe said the crisis would be resolved, one way or the other, within the next ten days.  Coming on the heels of the announcement that the EFSF would be leveraged to become more bazooka-like (although they haven't announced how much it would be leveraged), this new time "certainty" was refreshing.  I have no idea if it is true but doubt that European pontificators, I mean politicians, could agree on lunch within a mere ten days.

Another hopeful sign is that the summit on December 9th (ten days from now) will develop rules of the new Stability Pact.  Make no mistake -- members of this pact will surrender a huge degree of sovereignty, i.e., fiscal policy.  When EU nations surrendered their monetary policy with the Maastricht Treaty signing almost 19 years ago, it was joked it would take a crisis before they surrendered fiscal policy.  They didn't say it would take such a big crisis!

In addition, China just annouced they would cut their bank reserve requirements for the first time in three years.  During this time, they have been more concerned with inflation and have been restraining growth.  Today's announcement to pump up growth is a very bullish sign.

In the U.S., we will be getting job data over the next three days.  If today's data at 8:15AM is better than expectations, we will have received bullish data from three continents, and it should be a very strongly bullish day in the market.

Enjoy all the good news today . . . but keep watching!

Tuesday, November 29, 2011

Apologize to your kids?

Because I see the world thru the prism of economics, it is helpful for me to be around investment advisors who see the world thru the prism of financial planning.  Every month or two, a group of 8-10 of us do just that, which we did this morning.

Given the world investment markets, there was an over-arching sense of gloom, which shouldn't be surprising.  However, there was also a sad agreement that America's standard of living MUST decrease, i.e., that our kids will not have as good a world as we have enjoyed.  The reason is that they must reduce the debt incurred to pay entitlements to The Greatest Generation and, to some extent, the Boomers as well.

The only hope for our kids is for the economy to grow so fast . . . that the U.S. standard of living can be maintained, but how is that possible without real political courage among our elected leaders?  Entitlements MUST be controlled now, and our leaders are too afraid to admit that.  So, the problem grows . . .

I think I'll call my daughter tonight and apologize to her!

The Deaf Coach

Everybody has seen a football movie where the young player keeps begging to "send me in, coach!"  That is how I see the U.S. stock market.  It wants to reflect the underlying U.S. economy but is over-shadowed by European headlines.

Yesterday, the rumors out of Europe suggested an alternative universe of European nations could save the Union and the Euro.  That allowed the U.S. market to notice that retail sales for the four-day opening to holiday season were up 16% over last year.  And, the Dow gained 291 points.,

Today, the rumors out of Europe are that European Financial Stability Fund (EFSF) can be leveraged, to give it some "bazooka" strength.  Plus, nobody is denying conversations about an alternative universe.  The futures market at this hour indicates the Dow will gain another 85 points when it opens, for a two-day rally.

The U.S. economy is doing better than expected and keeps begging the U.S. stock market to pay attention.  When it does, there will be a great rally . . . if the quarterback doesn't get sacked by the European team!

Monday, November 28, 2011

What a Difference a Weekend Makes

After the worst Thanksgiving week since 1932, the futures market indicates the Dow will gain about 230 points at the open.  This impressive turnaround is due to several things.  First, holiday sales in the U.S. appear to be remarkably strong.  Second, Sarkozy and Merkel are talking about a "second European Union" that can coordinate fiscal policy and move more quickly.  Third, there was an unconfirmed rumor that the IMF was bailing out Italy, which made absolutely no sense and was subsequently denied by the IMF.

Once again, it illustrates that the U.S. economy is trying to dig its way out of the last recession and that we will go back into recession only if Europe pulls us into it.

Our stock market is reflecting hope out of Europe, which I expect will be temporary.  The only way to kill bond vigilantes is with a bazooka, and this piecemeal approach just irritates them.  The more we isolate our economy from Europe the better.

The big news this week will be the monthly Jobs Report on Friday, when we expect to see about 125 thousand jobs were created, after a continued loss in government jobs.  Anything better than 125 thousand will move the market higher.  Keep your fingers crossed!

Sunday, November 27, 2011

Good Foolish Advice

The Motley Fool column in today's newspaper deserves emphasis as we sweat out the financial crisis in Europe.  It asks the question "What should I do if the stock market crashes?"

It answers with "Above all, don't panic.  Remember that the market always goes up and down, and sometimes it moves sharply . . . In the near term, anything can happen, including a crash.  Over the long run, the market has recovered from all its crashes and has gone to set new highs . . . Market crashes have a big upside:  They can offer terrific bargains.  Remember Warren Buffett's advice:  Be fearful when others are greedy and greedy when others are fearful."

The next time you read a frightening headline about the European financial crisis or the impotent U.S. Congress, remember this good advice from a Fool . . . The Motley Fool.

Time to be right?

Although I have been a member of the National Association of Business Economics (NABE) for many years, I usually pay little attention to their economic forecasts, which invariably tend to see the future as a mere continuation of the past.  Most economists just extrapolate the present into the future . . . it is always "more of the same."

This time, I agree with the majority of economists.

They predict the odds of a second recession are low, that GDP will grow 2.4% next year, that unemployment will improve very slowly, consumer spending will remain weak while business spending remains strong, and that housing starts will improve about 10% next year.

This is a typical recovery from a financial crisis.  While a recovery from a normal recession can be rapid, it takes a longer time to recover from a financial crisis because debt is reduced over a longer period.  Consumers are spending less because they are reducing debt and saving more, which is good for the overall economy in the long-run but bad in the short-run. 

The NABE forecast was silent, however, on the most pressing issue of our time, i.e., the financial crisis in Europe.  That could change everything, plunging the U.S. back into recession but unlikely to plunge us back into another financial crisis.  That is an important distinction, because we would recover more rapidly from that recession than Europe would from their financial crisis.

I think the majority of economists are right this time, just like a broken clock is right twice a day.

Friday, November 25, 2011

Black Friday

Today will be boring . . . be thankful!

Trading volumes have been low all month and minuscule this week.  Both Asian and Europe were down somewhat overnight.  The news out of Europe is disappointment that the meeting between Sarkozy and Merkel produced nothing, except an agreement not to disagree in public.  Ominously, interest rates continue to rise in Europe.  The futures market indicate the Dow will lose about 70 points at the open.

I confess to being very worried about a European collapse.  It will take real political courage to connect their common monetary policy with their individual fiscal policies, and political courage is a rarity among elected politicians everywhere.

It is tempting to ignore the tax consequences and sell everything, to remain in cash until there is greater clarity.  Yet, at any time, Sarkozy and Merkel, as well as the heads the EU and IMF and ECB might walk onto a stage to announce their "bazooka" agreement, and the stock market would roar.  Cash levels should be high now but certainly not 100%.

The U.S. stock market will close early today, at 1PM . . . be thankful and then go shopping!

Thursday, November 24, 2011

A Day of Thanksgiving

Yes, I am thankful today . . . thankful for my good health and good fortune.  I'm very thankful for both my blood-related and business-related families.  They show me the reason for my work everyday!  I'm also thankful to live in such a great country, where freedom of religion is guaranteed.

(I am especially thankful this particular morning that the European stock markets have stabilized and are not crashing, when the U.S. stock market is closed!)

But, thankfulness and forgiveness are not the same thing.  Since there is no Day of Forgiveness, we should do both today.  Therefore, I forgive all those who did hurtful things this year . . . except those elected children who serve in Congress, especially those who failed us on the SuperCommittee. 

And, thank you for taking your time to read my thoughts!

Wednesday, November 23, 2011

Free Floating Anxiety . . . or Thankfulness

I hate to be a scrooge as the holidays begin, but I do wish we could postpone Thanksgiving tomorrow.

The European financial crisis smouldered in Iceland and Ireland before igniting in Greece.  Then, the first "too big to save" country (Italy) came under attack from the bond vigilantes.  Last week, Spainish interest rates rose dangerously, and France barely held onto its AAA rating.  Most worrisome, the German bond auction nearly failed today, with their rates rising.  The German AAA bonds are paying higher interest rates than our AA bonds.

I will be thankful for many things tomorrow . . . but not that the stock market in America is closed when Europe's market is open.

The market is down about 170 points as I write this, reflecting continuing anxiety about Europe, as well as the desire of day-traders not to hold stock over the long weekend, especially when Europe is open . . .

Historically, the market is up 70% of the time during Thanksgiving week.  Welcome to the 30%!  This too will pass . . .

Does the Euro Matter?

In this column and many others, there has been much gnashing of teeth over the break-up of the Euro.  Yesterday, a friend and client sent me an interesting blog by Charles Hugh Smith, which makes the important point that a nation's currency is an important throttle on that nation.  Without that throttle, the nation will easily get out of control.

He said it well:  "The euro supporters forgot or ignored the primary purpose of national currencies:to account for differences in transparency, productivity, trust, money creation and risk between nations' economies and their Central Banks/States.  If you remove this means of accounting for these fundamental differences, then you have removed a feedback loop from a dynamic system, and thus removed an absolutely essential flow of information and transparency."

He was arguing that the world will survive the loss of the Euro, as it should have never been created in the first place.  While I expect the Euro to survive, I do agree the world would survive losing it, ignoring the immense pain of getting rid of it.

But, what makes the Euro unsustainable was never expected to be sustained.  Creation of the Euro, along with a common monetary policy, was expected to be the first step in a long process of both fiscal and political integration.  Unfortunately, the politicians predictably waited on the second and third steps until there was a crisis.

We are already seeing calls for greater fiscal integration.  To issue Eurobonds (the silver bullet to solve this crisis), Germany has already made clear that EU headquarters in Brussels would have to approve all national budgets, which is a huge loss of sovereign power and national identity by each nation.

My prediction remains that the Euro will survive and that this crisis will do for Germany what the two World Wars could not.  Since I see that as inevitable, I wish it would happen today and permit the U.S. stock market to once again reflect the U.S. economy.

Tuesday, November 22, 2011

Investors have been steadily moving assets from stockbrokers to Registered Investment Advisors (RIAs) over the last six years.  This is despite the fact that most of those people cannot repeat the advantages of dealing with an RIA instead of a stockbroker.  Here is a handy little video from YouTube that helps . . . enjoy!

"Bottom Fishing?"

A longtime investing principle is that only a fool invests his money based on market-timing.  The number of unknowables is infinite.  A market-timer cannot know what he doesn't know that will ruin his expectation.

That said, why does everybody keep asking if "this" is the bottom?  In a word . . . No!

I cannot say it often enough -- a financial crisis is much worse than a recession.  Europe is having a financial crisis that may push the U.S. into a recession, but that is still unclear.  The U.S. had a financial crisis in 2008 with the fall of Lehman, and subsequently went into a deep recession.

Even though the U.S. economy shows signs of life, the U.S. stock market is weakened by the European financial crisis.  So, when will the financial crisis in Europe end?  Of course, nobody knows, but here is my best guess:  when the ECB commences quantitative easing on the scale of the Fed.

That is not the best solution.  Here is the best solution:  Give the EU authority to coordinate the fiscal policies of all 27 member nations, plus give it authority to issue Euro-bonds, backed by the full faith & credit of all 27 nations.  Then, make huge cuts in entitlement spending, i.e., make drastic cuts in retirement and health care, which takes more courage than is reasonable to expect from elected decision-makers.  Since this is not going to happen, only the ECB can save Europe.  (Maybe, the ECB should hire Ben Bernanke?)

When that announcement is made, it will be time to get aggressive again.

But, what about the failure of the elected children on the SuperCommittee?  The market was expecting it and is not that big a deal.  However, that is based on the expectation that the draconian budget cuts scheduled for the first of next year (2013) are postponed.  President Obama wants to keep the pressure on Congress to compromise and promised to veto any postponement of those draconian cuts.  That is a hollow threat!  The prospect of pending budget cuts will slow the economic recovery and keep unemployment high in an election year.  The cuts will be postponed.

At 4AM, Dow futures indicated a minor loss at the open.  Now, it indicates a gain of about 55 points.  No, this is not the bottom . . . be patient.

Monday, November 21, 2011

Thanksgiving Week

As I look out the window from my hotel and see the dreary weather in Dallas this morning, I suspect it looks just as dreary on Wall Street, as well as all-across Europe, regardless of the weather. 

In Europe, five governments have now fallen as a result of their debt crisis, with Spain being the latest.  The bond vigilantes are busy circling Italy and have started circling Spain.  France seems likely to lose their AAA credit rating soon.  Their best hope would be for the EU to issue real euro-bonds, but Germany is dead-set against this.  (They remember their pain a decade ago from bailing out just East Germany alone.)

In the U.S., the remaining investors who clung to hope of a SuperCommittee compromise are giving up and selling.  The Dow is expected to lose over 160 points when it opens.  I expect the U.S. to be down-graded by at least another of the three credit rating agencies soon.  We won't be paying the price until the Fed stops buying bonds from the Treasury, but delayed pain is the same as instant gratification, isn't it?

The stock market will be very volatile this week, as trading volumes are low during the Thanksgiving week, which amplifies price movement.  Still, it is a time for Thanksgiving, even on Wall Street and in Europe.

I came to Dallas to help a widow deal with her financial issues.  That has a way of making you realize there is much to be thankful for . . .

Thursday, November 17, 2011


Losing a client is bad enough, but losing a friend hurts far worse.  I lost one last month in Dallas.  His widow asked that I skip his funeral, in order to help her with all the estate issues later.  Early tomorrow, I will leave to help her, returning late Monday.

I have been thinking about his life quite a bit.  He lived life on his own terms and died young (age 69) as a result.  He loved his family, completely and unconditionally.  He was the original macho-man on the outside but a warm-nosed puppy on the inside.  I will miss him!

So, this blog may run dry for a few days, and I apologize . . .

Wednesday, November 16, 2011

Between the Devil and the Deep Blue Sea

Who worries about running off a cliff . . . when a grizzly bear is breathing down your neck?

At a meeting yesterday, I was asked why I was not more concerned about America running off a cliff if the SuperCommittee doesn't produce a deal one week from today and Congress doesn't approve it by Christmas before draconian cuts in government are made New Year's Day?

The stock market is busy fleeing the European grizzly bear and starting to accept that the SuperCommittee will fail, and that the U.S. credit rating will be reduced again, but the draconian cuts which are a creature of Congress will be postponed by Congress.  This explains much of the slow leakage we've been seeing in the stock market.

A pure financial crisis is much more scary than a pure fiscal crisis.

Suppose the SuperCommittee does produce a workable plan, the market will rally strongly.  But, if Congress continues to confuse intransigence with courage instead of stupidity, the leakage will resume.  Of course, none of this matters in the short run if Europe self-destructs. 

Tuesday, November 15, 2011

Protecting the Investor?

It was three years ago that Bernie Madoff was exposed and sentenced to 150 years in jail.  That only took a few months.  However, it has taken the Securities and Exchange Commission three YEARS to investigate themselves and discipline eight of its employees for lousy work in auditing Madoff, despite having proof delivered to them by Harry Markopolos.

Does  anybody see a problem here? 

Thank God for the Tea Party and "Occupy Wall Street"

Yesterday, the Dow dropped about 76 points.  The futures market suggests it will lose another 70 points this morning, following the pattern of Europe, where Germany and France are both down about 2%. 

It is easy to think the world is just waiting to hit the SELL button as soon as the market opens.  Actually, there are very few active players in the market now, mostly the automated high-frequency traders that I distrust.  The total trading volumes are remarkably low.  This is the primary reason the markets have been so volatile recently.

Most human investors are sitting on a large amount of cash right now.  Many of us can predict the economy reasonably well, but nobody can predict the next breaking headline out of Europe.  As the economy matters again and as earnings matter again, I'll reduce the cash levels.

Frankly, I think Wall Street is more interested in "Occupy Wall Street" than Wall Street right now.  I have not seen the resentment against the demonstrators that I expected on Wall Street but cannot explain it.  They were also indifferent to the Tea Party demonstrations as well.  Perhaps, both have entertainment value when the stock market is too volatile to trade prudently.

Monday, November 14, 2011

Thoughts on Veterans Day

I participated in a Veteran's Day Parade this weekend and found it a little hollow.  As society has tried to overcome its shameful treatment of Vietnam veterans, it has now become almost too effusive.  I listened to a lot of pretty words about service and protecting families back home and making the world "safe for democracy," whatever that means.  It was all very well-meaning, and I'm very appreciative of the effort it took and the sincerity of the words.  But, I decided there will be no more parades in my future.

Yet, when I returned home to Virginia Beach, I read that 4,243 people become entrepreneurs.  In the face of the worst recession since the Great Depression, over four thousand people decided to start a business in this city last year.  It is not fair to say they were entirely people who couldn't find a job, so they started a business.  The fact is that it is down only 22% from four years ago.  So far this year, over 3,400 people became entrepreneurs.

That is the America I'm proud of and love!  Fearful but fearless people who take chances . . . God bless'em!

The incredibly important intellectual god-mother behind Republican ideology is Ayn Rand, who extolled the virtue of supermen who were entrepreneurs that changed industries but were persecuted by government.  While the mega-wealthy don't look persecuted to me, I do share her great respect for entrepreneurs.

Veterans of all countries fight for the wives and children back home.  Maybe, it is only the American veteran who fights for the entrepreneurs back home.  And, I think that is worth fighting for.  Maybe, I will go to another parade one day, but I don't know.

"Smart Money" and Interest Rates

U.S. banks are required to have a certain amount of capital for each investment.  European banks are not required to have capital in order to hold certain investments, such as sovereign bonds of European governments.  That means a European bank can take in funds from depositors and buy bonds of some European government.  They pay the depositor next to nothing for the funds to buy the bonds and receive the higher interest paid on the government bonds.  Since there is no capital requirement there is no limit on the amount of government bonds they can purchase, as long as depositors continue to deposit money.  This policy was designed to hold down borrowing costs of European government but  actually increases the amount of leverage in the banking system, which is a big part of the current problem.

To protect themselves, banks and other holders of the bonds can buy protection or "insurance" called credit default swaps (CDS).  As the market perceives a particular government to be more risky, the cost of buying a CDS goes up.  Take a look at

The cost of insuring Greek debt is astronomical.  Judging from the news, one would expect Italy to be the second highest.  However, the "smart money" thinks Portugal, Ireland, and Hungary are worse credit risks than Italy.  While a bankruptcy for any of those nations would hurt investors around the world, Italy is different because it is so big.

Italy has the third largest economy in Europe and could destroy those banks across Europe who have loaded up on higher-yielding Italian debt without needing any capital to buy that debt.  More capital will cure many ills!

The good news is that Italy was able to sell $4 billion in new debt this morning.  While they had to pay a relatively high interest cost, albeit below the systemically important 7% level, it is significant that somebody was there to buy it.  I'll bet the banks were not buyers today, which increased the cost of borrowing. 

Italy will live to spend another day . . . maybe two.

Friday, November 11, 2011

Mr. President, That's My Chair

On Wednesday, the sky was falling, and the Dow lost 389 points.  Europe was killing us.  Then, Greece elected an economist as Prime Minister to take the place of the third-generation professional politician.  Then, Italy made real progress in passing a budget, when uber-politician Berlusconi will resign.  It is widely reported his replacement will also be an economist. 

With the replacement of two career politicians by economists, the stock market has recovered all its losses on Wednesday and is heading up.  Maybe, there is a lesson in this that we should learn . . .

A Good View from 35,000 Feet

Most of my public speaking for the last few years has been on the subject of globalization, which fascinates me.  One of the primary thought leaders on the subject is Pulitzer-winning Tom Friedman.  Anything written by him is required reading.  His latest book, co-written with Michael Mandelbaum, is That Used To Be Us.

It is a bittersweet walk down Memory Lane beginning with the happy days following the collapse of the Soviet Union and the fall of the Berlin Wall.  The U.S. was the undisputed leader of the world, our economy was booming, the budgets were balanced, and the dollar really was King Dollar.

In a very short time, we have fallen far.  To his credit, Friedman barely touches the subject of fault and looks to the future.  His analysis is that we have four problems to attack simultaneously, i.e., (1) globalization, (2) changes caused by the IT revolution, (3) chronic deficits, and (4) the consequences of rising energy demand in the face of climate change.  I think Republicans and Democrats would agree on the first three and quibble on the fourth.

He reminds us of what Winston Churchill said to the British people during the depths of World War II, when he said "we have not journeyed across the centuries, across the oceans, across the mountains, across the prairies, because we are made of sugar candy."

The U.S. clearly has problems to attack, but let's not forget the "five pillars of our prosperity" that put us on top before and will pull us back to the top again.  They are (1) good public education, (2) infrastructure, (3) immigration, (4) government support, and (5) implementation of necessary regulation on private economic activity.  I suspect the Republican response would be chronic deficits preclude any of the above, and the Democratic response would be to plead for one last gasp of deficit spending.  My response would be the bond vigilantes won't permit "one last gasp."  They didn't hesitate to attack Italy, the world's eighth largest.

I have immense appreciation for Tom Friedman's ability to see the trends from 35,000 feet, but we do not live in a rational world.  We cannot fund the pillars of our prosperity before we deal with the heart-breaking problem of entitlements, which Friedman barely touches.

Just as one small example, Medicare spent $55 billion in 2009 paying for the last two months of life.  Was it worth borrowing from the Chinese?  And, which of the five pillars of prosperity would benefit most from $55 billion?  It is a terrible trade-off.

Dealing with the problem of entitlements is indeed heart-breaking!

Thursday, November 10, 2011

The View from Wells Fargo . . . and Europe

I enjoy reading the economic forecast from Wells Fargo, which inherited the highly-respected Economics Group of Wachovia when that bank failed.  In short, they expect to see continued slow growth in the U.S. with no recession.  However, they point out that Europe is already entering recession.

Several months ago, I predicted there was only a 33% probability of a recession in this country, unless Europe pulls us into one.  Now, it looks like that will happen.  The question becomes how severe and how long will it be, as those answers drive investment planning.

The answer to those questions depend on how Europe responds.  Yesterday's loss of 389 points on the Dow is a somber indicator of how grim it is.  Make no mistake:  We are now watching the battle for Europe.  The few remaining World War II veterans will experience deju vu.

Overnight, Italy was able to see about five billion euros worth of short term bonds at slightly lower-than-expected interest rates, which was a small victory over the bond vigilantes.  More importantly, comments by both Sarkozy and Merkel show they are thinking about a new "two-speed" Europe.  In other words, it shows they are ready to cut off the PIIGS and go on without them.  While that would be painful, the market is comforted that there is at least some plan!

At 6AM, futures indicate the Dow will recover about 55 points at the open.  However, like any day since the European crisis began, it could be a wild ride on Wall Street until 11:30AM here, when the European markets close.  Pray that Rome can pass their budget today and that Greece can pick new Prime Minister . . . is that too much to ask??

Does anybody care that Wells Fargo predicts fourth quarter growth will be a respectable 2.5% in the United States of America? 

Wednesday, November 9, 2011

Wear Your Neckbrace

Late yesterday, Berlusconi promised to resign.  U.S. markets started to rally, with the Dow closing up 101 points.  Overnight, the Asian markets also rallied.  Then, the European bond markets opened, and interests rate on Italian bonds promptly shot well above 7% for ten-year bonds, a critical level historically.  (Short term interest rates rose even more, inverting the yield curve, which usually predicts a recession.) 

The "cat is out of the bag" now, and the bond vigilantes are attacking Italy as they did Greece.  This is the last stand against chaos in Europe, and it will be not be easy.  Italy may be too big to save.  If the ECB flinches, it will be ugly indeed!

Futures indicate the Dow will lose about 200 points almost immediately.  Whiplash is possible, so go find your neckbrace now!

Wrong + Wrong = Right?

Yesterday was election day in America.  Across the country, there were numerous union-weakening measures, ALL of which went down in over-whelming defeat.

My experience with unions is that they produce armies of political zombies by smothering the individuality of their members.  They help perpetuate the entitlement culture that is a cancer on our country.  Yet, I was glad the union-weakening measures were defeated.

The irresponsible elimination of unions would be a unilateral disarmament before the corrupting flood of corporate money into politics.  The recent Citizens United decision by the Supreme Court made it even worse.

My favorite conservative intellectual is George Will, longtime columnist for Newsweek.  He has argued that corporations are entities which are denied the right to vote but easily victimized by the political process.  He argues the unlimited flow of corporate dollars into lobbyists to protect the corporation and employees is only fair. 

Like two drunks holding each other up, we need the smothering unions as much as we need the corrupting corporate money and lobbyists.  I would gladly support a measure to eliminate both but not one nor the other.

Tuesday, November 8, 2011

Wax On, Wax Off

The gold standard for investment management has been Modern Portfolio Theory (MPT) for most of my career.  It was mathematically proven to maximize return while minimizing risk over the long term, because it required money to be invested in multiple different asset classes, i.e., long, short, and medium term bonds:  big, small, and medium company stocks:  foreign stocks;  commodities, currencies, etc.  The reason MPT worked so well was because each asset class had its own investment dynamics, which means all asset classes would not move the same direction at the same time.  In our language, the asset classes were not closely correlated.

In 2008, the asset classes became correlated.  With only two exceptions, all asset classes lost value.  Since then, many investment advisors have abandoned MPT and adopted a Risk-on, Risk-off approach to investing.  When uncertainty is high, you increase cash.  When uncertainty is low, you decrease cash.  I've used this approach for years and am quite confident with it . . . but only as part of an overall blended approach.

However, there are few absolutes in life and certainly no silver bullets.  Abandoning MPT completely to practice Risk-on, Risk-off makes no sense to me.  Both have great wisdom and can be used simultaneously, along with value investing and the other popular approaches.  Don't trust anybody who says they have seen the light and practice the one tried & true approach. 

Remember the kid in the movie "Karate Kid," who applied wax to a car in a mindless fashion.  Exclusively applying Risk-on, Risk-off to a portfolio is equally mindless.

Meanwhile, Back in Paris . . .

The world is transfixed by what is going on in Greece and Italy.  It is uncertain who will be the leader going forward.  Can the new Greek leader adopt the EU offer, in the face of increased rioting over increasing austerity?  Will the wily but incompetent Berlusconi finally throw in the towel and let reform begin, before the market for Italian bonds evaporates?  Right now, the futures market seems to think Berlusconi will be voted out today, and the Dow looks to gain about 65 points at the open.

But, look at France.  They are actually concerned about keeping their triple-A credit rating . . . who knew?  When we faced that prospect, we took a one-handed approach of cutting discretionary spending, ignoring both entitlement spending and tax increases.  The French just instituted their second austerity plan in less than three months.  They accelerated the change in their pension retirement age by one year.  They cut health care spending by 1.2 billion euros.  They cut housing subsidies by 400 billion euros.  They increased the VAT by 1.5% to bring in 1.8 billion euros.  They stopped indexing their tax brackets, so that taxpayers with rising incomes would be forced into higher tax brackets.  And, they put a temporary 5% increase in income taxes on their biggest corporations, raising 1.1 billion euros.

While I take issue with certain parts of this new austerity program, I marvel that they are actually able to do something.  It is especially remarkable that they took this action before their elections next Spring.  That took a degree of political courage and willingness to compromise that deserves respect!  At least, they are trying to save their AAA . . .

After all, nobody ever accused the French of being impotent . . .

Monday, November 7, 2011

Twisting in the Wind . . .

The U.S. stock market is not in control of itself.  It is twisting in the wind, blown by breezes out of Europe.  Nobody knows what the Greek outcome will be.  We can see what increased political instability in Greece is doing to stock markets worldwide.  Now, political instability is rising rapidly in Italy, which is "too big to fail."

Overnight, Asia was down almost 1%.  Europe is now down almost 2%.  At 5AM, futures indicate the Dow will lose about 130 points at the 9:30AM open.  It could be a long day.

Meanwhile, back at home, America keeps lumbering along, growing slowly, producing some jobs, but burdened with political impotence, not political instability.  We actually look pretty good, relatively speaking.

Important economic data from China, the world's growth engine, will come out on Wednesday and Thursday, which will give us something non-European to fixate on.  We need the Chinese to do well, to save the world from Greece and Italy and Spain and Portugal and . . . ? 

Sunday, November 6, 2011

Another One Bites the Dust

One of the earliest values I remember being taught as an inquisitive boy was to "mind your own business," which is difficult for the intellectually curious, but I have have tried to hold onto that value and have been annoyed by those nosey people who do try to mind my business for me.  Maybe, that is why I have lamented the loss of privacy so many times in this space.  In fact, I've marvelled repeatedly that young people don't seem to understand the concept of privacy at all, because they have never experienced it.  Their eyes glaze over, like they're forced to listen to Latin.

Hoping that privacy is still possible, I just read How To Be Invisible by J.J. Luna.  The book is a treasure trove of techniques, ranging from burning your garbage to having utilities in different names to avoiding the internet.  There is even a website .

My conclusion is that privacy is indeed a historical relic and that this book is more useful for criminals and people-with-nothing-else-to-do.  For the average person, privacy is dead.  I'm sad . . .

Friday, November 4, 2011

Jobs Report . . . not so bad after all

The monthly Jobs Report came out this morning.  Expectations were that 95 thousand new jobs were created in October, with 120 thousand new jobs in the private sector and a loss of about 25 thousand in governments.

The headline is that only 80 thousand jobs were created, with 104 thousand in the private sector and a loss of 24 thousand in the government.  Also, the unemployment rate dropped from 9.1% to 9.0%.

However, the good news is that last month's report was revised upward.  As it turns out, the private sector produced 191 thousand jobs instead of the 137 previously reported.

The closely watched U-6 report, which counts both unemployed and those forced to work only part-time or under-employed, dropped from 16.5% to 16.2%, which is a nice improvement.

The stock market rallied on the good news but quickly sank back to a minor loss at the open.  The extra strength last month caused the rally, but weakness returned when we realized we really need 150 thousand just to stay even.

Since passage of the Stimulus Bill, the economy has gained 2.7 million jobs.  Was that because of . . . or in spite of the bill?  All I know is that there are 24 million people who need work to do, most of whom are miserable.

Thursday, November 3, 2011

In a "Lighter" Vein . . .

Everybody has heard this before:  With 30% of Americans now considered obese (BMI > 30), it now costs America $147 billion annually.  Obese Medicare patients cost taxpayers an extra $1,723 every year and is rising more rapidly than other medical costs.  There has been serious discussion that Medicare premiums be increased for obese patients.

Now, there is debate among financial planners whether it is ethical to NOT discuss this with obese patients, making sure they are aware their annual health care expenses will be $1,429 greater than a non-obese client.  Plus, should we advise them they need less retirement savings, since they will not live as long as the actuarial tables suggest?

Speaking for myself, I don't plan to discuss the subject with anybody.  First, everybody who is obese already knows all this.  Second, I live in a glass house . . .

Tail Wagging the Dog

Greece is less than 2% of the European economy and far less than 1% of the world economy, but it is beating the world stock market like a dog.  What makes it so important is that world banks, mostly European ones, could quickly be bankrupted if Greek bonds are worthless.  (And, because nobody knows who is really holding the bag or has sold the credit default swaps, nobody knows what banks are safe to do business with.)

Still, when Americans 401(k)'s lose 5% of their value in only two days because of the Greeks, it is more than annoying.  Even more annoying, there is almost nothing the U.S. can do.  Europe was late dealing with the problem but is now doing a credible job.  Greece is the problem.

Now, the Greek tragedy is morphing into a Greek comedy . . . almost.  Yesterday, the EU told Greece you get no more cash until this insane referendum is over, and the Greek government accepts the handout, along with the new austerity programs.  It is pure power-politics, as Greece is not thought to have enough cash to survive until the referendum.  Overnight, the Greek finance minister broke with the prime minister, who proposed this referendum.  Two other ministers have broken with the prime minister, who is now unlikely to win the no-confidence vote tomorrow

So . . . then what?

At 3AM, Dow futures were down 162 points but up 53 at 7AM, reflecting the worldwide confusion. 

When is enough . . . enough?

Wednesday, November 2, 2011

Extreme Brinksmanship

Last week, the European Union developed a template to save Greece now and possibly other members later.  But, the Greek people felt they had been ignored and abused by the process.  So the Greek prime minister made a bold call to hold a referendum in January, forcing the voters to choose between severe austerity or absolute chaos, both ugly choices.

If the Greeks choose to remain members of the European Union, they continue to use the Euro as their currency and benefit from reduced trade barriers with other members.  They also agree to pay cuts, reduced entitlements, delayed retirements, and higher unemployment.  Importantly, they also agree to actually pay their taxes, a new concept for them.

If the Greeks choose to leave and return to the Drachma as their currency, the cost of all imports will sky-rocket, as the Drachma would plummet in value immediately.  Exports would suddenly decrease dramatically (before rebounding after a great deal of damage).  The courts would be jammed on how to enforce legal agreements denominated in Euros.  The country would experience a heart-breaking paralysis.

Of course, this is not set in concrete.  Their prime minister has a no-confidence vote on Friday.  This decision to hold a referendum may well be a campaign tactic, which could be reversed immediately.

Another benefit of announcing a referendum is to increase the negotiating strength of Greece.  This current deal was largely crammed down their throat.  When the Greeks choked on it, world stock markets tanked, and nobody wants to go thru that again.

So, the decision to hold a referendum was good for the prime minister in the short run and good for the Greek people in the long run.  Political cynics would call the move "brilliant."

The European markets are relatively flat this morning, and futures indicate the Dow will open up about 90 points.  Let's pray the referendum is cancelled on Monday, so we can resume healing . . .

In a normal environment, we would be focused on the all-important Jobs Report this Friday, but this is not a normal environment, unfortunately.

Tuesday, November 1, 2011

Hold Your Britches!

Now that Greece has decided to self-immolate and to take Europe with them, the world stock markets are heading down, almost straight down.  Futures indicate the Dow will drop about 220 points at the open.

Europe is already tanking.  For example, the German market is down almost 6% today.  The Spanish market is down almost an incredible 9% . . . not bad for one day!

Last week, the leaders of Europe finally completed their Herculean effort to save Greece.  The world stock markets started to heal.  Then, Greece did the unimaginable.  They decided to hold a referendum IN A FEW MONTHS to decide whether to accept the aid or not.  Apparently, support for the ever-increasing austerity program is virtually non-existent, and the Greek politicians were afraid to proceed without some popular support.

Germany never held a vote to ditch the Mark and to hitch their wagon to the Euro.  Neither did France or the other nations of the European Union.  Voting on complex financial matters is something few voters are equipped to evaluate.  This is the outer limit of democracy.

I was relieved last week but expected there would be a few bumps before we understood the template approved last week and expected the market to be down the early part of this week.  But, nobody imagined the Greeks would refuse a handout.  It must be the first handout they ever refused.  I'm glad I had not made any changes yet!

Adding to the panic is that the MF Global bankruptcy produced a very ugly surprise, i.e., there may have been commingling of client funds and some may be missing.  The firm's CEO was one of the most respected men on Wall Street.  First, it reminded everybody of Lehman.  Next, it reminded everybody of Madoff.  That's just too many bad memories for one day!

So, hold on . . . it will be scary today!

Monday, October 31, 2011

The Indignation of Crybabies

Let's see . . . you expect full retirement benefits at age 55 and one of the best health care systems in Europe as well.  Oh, and paying taxes is only for chumps.  You are renowned across Europe for not filing your income tax returns, and the government barely tries to collect them.  For the 20% of the workforce that "works" for the government, you have lifetime job security until you get your full retirement at age 55.

Sorry to hear your government cannot afford to pay all of this, but don't worry, your government can issue bonds and borrow as much money as they need from the rest of the world.  After all, you deserve it, right?

Sorry to hear the world stopped buying any new bonds of your government, cutting off the flow of borrowings to support your entitlements.  But, the world was glad when the European Union rode to your rescue last week, effectively cutting your national debt by almost 30%.  Stock markets around the world rallied strongly on the news your bonds wouldn't destroy the European banking system.

But, I don't understand why you are indignant, just because it does require changes in your entitlements and really collecting taxes from you.  Today, your government announced a referendum on whether to accept the largess of the European Union.  Whether to accept it . . . ARE YOU NUTS?  I can understand the importance of indignation.  I can understand that you want to believe somebody stole all the Greek money.  But . . . ARE YOU NUTS?  Without it, your government will collapse and may take the European banking system with it.  It only took fifteen months to negotiate your bailout, and now you want to vote on it?  ARE YOU NUTS?

As a result, the U.S. stock market dropped 276 points today, primarily because of you!  THANKS!

Yucky Muddy Water

Last week, Europe developed their template to resolve their financial crisis.  Stock markets around the world rallied and rallied strongly on the breakthrough.  I knew it wouldn't last, as markets cannot go straight up without falling back for consolidation.  Plus, there had to be lots of details in the template that would concern the market.

So, I'm not surprised nor concerned that the stock market is down today, about 150 points on the Dow as I type this.  What does concern me is that the bond market is less happy than the stock market.  An old adage in the bond markets is that it is smarter than the stock market.  My experience is that there is some truth to that.

Italian bond rates have actually risen, which is worrisome.  In addition, the TED spread has increased, which means LIBOR rates have also risen.  This means banks don't trust each other, even after the template.  Something is wrong!  Maybe, the concern is that the template may work for Greece but would not be replicated for Italy or Spain, who are much bigger problems.  Maybe, the concern is that the Greeks have gotten off too easy, creating a "moral hazard," whereby irresponsible behavior is rewarded.

Complicating the market today is the bankruptcy filing for MF Global, a huge futures trading company.  While not completely unexpected, it did put the taste of Lehman Brothers in everybodys mouth, prompting stockholders to say "yuck" and "sell."  MF Global is tiny compared to Lehman Brothers, and it is pretty clear that it failed as a result of one very bad trade.  (They bought a huge amount of bonds issued by European governments, just before they crashed.)

Increasing uncertainty this busy week will be a two-day Fed meeting (where nothing will happen), another G-20 meeting (where anything could happen), and the market-moving monthly Jobs Report on Friday (let us pray!).

The MF Global bankruptcy filing is a sideshow.  The lack of love in the bond market for the European template is the main attraction.

Saturday, October 29, 2011

Goose and Gander

Clients frequently ask me about making investments in businesses or real estate outside the stock market.  I am required to tell them that I have a conflict of interest, because my fee income could decrease if they reduce the funds under my management in order to make the outside investment.  In other words, it is theoretically possible I might recommend against a good investment just because it would cost me.  While it seems silly to my clients, it is still a good rule.

But, taking off my advisor hat and putting on my economist hat, there is no such rule.  A former Fed governor was paid by the Iceland Chamber of Commerce to write a glowing report of Icelandic economy shortly before it collapsed.  Companies often pay economists to write glowing reports on the economic impact of some new project or rule, and those economists are not required to disclose they were paid.

At long last, that is starting to change, and I'm glad.  The American Economic Association is currently writing ethical guidelines for economists.  Those guidelines will require we disclose all "relevant and material financial relationships."  Although it would not unfortunately be binding, it would certainly change the tone. 

If financial advisors have to disclose conflicts of interest, so should economic advisors!