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"