Thursday, February 28, 2013

Comparative Stupidity

Does anybody think the Founding Fathers designed our government to lurch from one manufactured crisis to another?  Did the Founding Fathers ever imagine Americans would be suffering crisis-fatigue or policy-fatigue?  Did the Founding Fathers ever think Congress would be more despised than used-car salesmen?

As stupid as all that is -- and, it is -- there is something else that is equally hard to understand, believe it or not, and that is . . .  drum roll, please . . . healthcare costs.

Your first homework assignment is to read this excellent article in Time magazine  

Your second homework assignment is to explain the logic of it to me . . . please!

Wednesday, February 27, 2013

A Too-Tiny Pasture

How much would you pay me for a stock that earns $1 per share per year?  No, that doesn't mean it pays out a dividend of $1 per year.  It just earns that much, regardless of whether it pays out the earnings as dividends.

The market determines how much you have to pay.  Sometimes, you have to pay $25 for that stock earning $1.  Sometimes, you only have to pay $15 for that stock.  Historically, the market peaks at $20, which means it is selling at a PE (Price Earnings) Ratio of 20 times.  Now, take a look at this graph showing the Price Earnings Ratio since 1900:

Chart of the Day

You can see in the late 1990s, during the internet bubble, when the PE Ratio reached an astronomical 40 times earnings.  You can also see the huge spike that occurred in 2009 when stock prices actually fell faster than Earnings Per Share (EPS) could be reported quarterly.  But, mostly you will see that bull markets rise until the Ratio hits 20 before the bears take over, and the market goes down.

Today, our Ratio is about 16, which means our stock market remains under-valued and has plenty of room to rise, IF the policy-drama in Washington ever ends.  Home sales are increasing, home values are increasing, consumer confidence is rising, bank lending is rising!  The bulls want to run . . . please let them run, Mr. Obama, Mr. Boehner, Mr. Reid, Mr. McConnell, Ms. Pelosi,!

Tuesday, February 26, 2013

The End of Austerity?

The most neglected part of governing is educating.  A government cannot get too far ahead of what the people understand and are willing to follow.

You'll recall the Austrian school of economics believes government receipts and disbursements should be equal each year.  The Keynesian school believes, during times of under-employment or excess capacity, the government should spend more than received.  The problem with the Keynesian approach is that it works best for nations that are not already deep in debt, such as the U.S. and Italy.

The Italians just voted to reject further austerity and plunged their government into the impotency of gridlock.  As the third largest economy in Europe, it is "too big to fail" but may have made itself ungovernable at the worst possible time.  

At this point, it is unclear if it can take the Keynesian approach of issuing a great deal more debt, because the market doesn't really want to buy much more of their bonds.  To entice the bond-buyers, interest rates have already started rising.  As a rule of thumb, a crisis begins when 10-year rates on government debt hits 6.0%. Yesterday, that rate for Italy jumped from 4.45% to 4.77%, a huge jump in one day.

Every Spring for the last three years, the European financial crisis has flared up, and Spring may be coming a little early this year.  The Euro has clearly telegraphed its expectations following the Italian vote for gridlock.  Take a look at the last five days:

As ominous as this appears, one cannot help but wonder how the Italian vote would have been different if the voters better understood the issue of austerity.  It means working longer before retirement but not much longer.  It means accepting some responsibility for their own health care but not much more.  It means giving employers a little more control of their workers but not much more.  But, then again, do Americans understand this?

The irony is that the Italians are declaring an end to austerity before the Americans even begin.  The lesson for our government is that austerity will not be given enough time to work -- unless we educate our voters now.  Maybe sequestration will begin that process of education?

Monday, February 25, 2013

Missing the Barracudas

I have often written about the power of "bond vigilantes."  The clearest historical example is that the bond vigilantes determined when World War II would begin.  To build-up his military, Hitler borrowed heavily by issuing government bonds.  When the bond vigilantes stopped buying German bonds, Hitler knew his military would never be any stronger, and it was then time to begin the war.

George Soros was the famous bond vigilante who "broke the Bank of England" in 1992 by betting the English pound was over-valued.  The Bank was spending billions to keep the pound strong, especially against the German mark.  The more Soros bet against the pound, the more the Bank had to spend to support the pound.  Finally, the Bank stopped wasting money, and Soros pocketed a cool billion dollar profit.

In 2011, many of us were concerned about the bond vigilantes during our debate debacle to raise the debt ceiling (which led to today's sequester debacle).  If the vigilantes or barracudas had started betting against the dollar then, the Fed wouldn't have had the "firepower" to defend it without causing serious inflation -- which would only weaken the dollar later instead of then.

Today, there is honest discussion as to whether the bond vigilantes still have that power to move governments.  When they represented the buyers of government bonds, they were important.  Now that the Fed buys up to 75% of all bonds issued by the U.S. government (quantitative easing), and other central banks do the same, the power of the bond vigilantes is reduced.

This is not good!  Bond vigilantes enforced market discipline, and we need that.

Last week, the Fed released minutes of their last meeting.  The stock market fell when it read there was honest discussion about ending quantitative easing (QE).  The stock market likes the "sugar high" it gets from QE.  I felt the market was wrong to fear the end of QE, which would be a short-term negative but a long-term positive.  Bring it on!

Sunday, February 24, 2013

And, The Oscar Goes To . . .

It has been many years since I watched the Academy Awards Show on television, probably decades, but I'll be watching tonight, because I've actually seen four of the Best Picture nominees, which has never happened before.

First, Argo is the story behind the rescue of Americans hiding in the Canadian embassy during the early days of the Iranian revolution in 1980.  I watched it from the edge of my seat and highly recommend it.

Second, Lincoln is the story behind passage of the constitutional amendment outlawing slavery, which is normally over-shadowed by the gruesome backdrop of the Civil War.   It is impossible to watch without being impressed by the actor, Daniel Day Lewis, and I highly recommend it.

Third, Zero Dark Thirty is the story behind the beautiful killing of Osama bin Laden.  My love, respect, and kinship with all Special Forces knows no bounds  Again, I watched from the edge of my seat and highly recommend it.

Fourth, Amour is different.  It is a story about the quiet agony of both the failing human body and the exhausted human spirit.  It is a French film with English sub-titles, making it a bit difficult to watch, but it should be required viewing for anybody with very elderly parents.  It details the never-ending and exhausting struggles of a husband caring for his beloved wife.  There can be no happy ending for a story like this, only a lingering sweetness.

As a child, I was taught that decent, hard-working Christians have no time for fiction, whether in novels or in movies.  The first three movies are about non-fictional or historical events and therefore acceptable.  The fourth movie is about an entirely fictional family based on a fictional book and therefore unacceptable.  Still, it is profoundly touching.

Yet, sometimes, fiction can teach us more about truth than history can.  Tonight, I'll be pulling for Amour to win Best Picture.  All four movies are certainly well worth seeing but only one will touch your soul and change your perspective.

Friday, February 22, 2013

The Pain of Agreement?

As a child, I was always told to "go along and get along."  And, I hated that!

While I never disagree just to be disagreeable, it is a point of honor to disagree whenever I think it matters.

So, it annoys me when I find myself in agreement with a large group of people.  This morning, I saw a new survey of money managers by the firm of Towers Watson about stock market conditions that concluded "our central thesis is it is going to be a bumpy ride over the next several years.  The immediate landscape looks all right, but the long-term problems are still there."

They expect U.S. equity returns to be about 7%, down from 8% a year ago.  English and Japanese stock markets are expected to rise about 6% this year, with the Eurozone rising 7%, each up 1% from last year.  China is expected to rise 10%, up from 7.8% last year.

Volatility will remain high but not as high, dropping from 20% possible swings to "mere" 15% swings.

The biggest problems is the Eurozone's financial crisis and fiscal policy impotence in the most powerful country, i.e., the U.S. -- duh!

While I can quibble with some of this, I cannot disagree . . . darn it!

Thursday, February 21, 2013

A Golden Twinkle in My Eye

Merrill Lynch predicts gold will pass $2,000 an ounce by year-end.  Yet, it dropped dramatically yesterday, by over $40, and is sitting about $1,570 now.  As it turns out, a large commodity hedge fund had purchased a put at the $1,600 level.  So, rumors spread quickly that they were dumping their gold holdings when the price touched that level, which further depressed the value of gold.

But, what caused the value of gold to dip below $1,600 in the first place?  Yesterday, the Fed released minutes of their last meeting, which indicated serious discussion of ending quantitative easing sooner than expected.  (It is widely believed that quantitative easing tends to weaken the dollar.)  With the release of those minutes, the dollar spiked upwards.  An increasing dollar generally reduces the price of gold, and it did just that yesterday, causing gold to hit $1,600 and the commodity fund to start dumping their gold holdings.

And, that set up yet another problem.  When the 50-day moving-average-price for a stock or anything else crosses below the 200-moving-average, that is called the Death Cross, which signals the price will continue to fall significantly.  When the large commodity fund started dumping their holdings, that pushed the 50-day average below the 200-day average.  Many technical followers of gold will now dump their gold at this point, further depressing the value of gold.

A few months ago, a commodity guru I respect, Jim Rogers, predicted gold would hit $1,550, and that would be the time to "back up the truck."

Gold is traditionally the ultimate inflation hedge, but I don't see inflation breaking out significantly for another year or two at the earliest.  Still, the price of gold is getting very shiny and awfully pretty . . . excuse me, I think I'm starting to drool.

Wednesday, February 20, 2013

Crisis Du Jour

Sequestration is almost upon us, and the stock market doesn't seem to care.  Neither should you!

You'll recall this odd concept of arbitrary cuts in government spending was created when the Congressional partisans could not agree on raising the debt ceiling in 2011.  Of course, nobody asked why they were more likely to find common ground for agreement in 2013 than 2011.  I guess they were just hoping the 2012 election would break the impasse?

The most asinine aspect to sequestration is that it forces cuts in those areas of government spending that don't need to be cut and doesn't cut in those areas that do need to be cut.  The 800-lb-gorilla that is eating more and more government dollars every year is entitlements, like Social Security and Medicare, but is unaffected by sequestration, as is my own veterans disability check.  Meanwhile, construction on infrastructure and Navy ships will stop.  This is crazy, of course . . . but not fatal to either the economy or the market.

My expectation is that government spending will be slashed on March 1st, and I'm hoping the stock market will take a mini-nose-dive, as I have some more money to invest.  However, it will be short nose-dive.  I expect the Republicans will be blamed for the many inconveniences of sequestration.  (TV coverage of those inconveniences, like flight delays, will be 24/7.)  At that point, the Republican half of the Congressional partisans will be forced to make some agreement, realizing there are two more opportunities to manufacture a crisis.

At the end of March, the continuing resolution (CR) that funds our "government-without-a-budget" will expire.  The resulting government shutdown will be much more annoying than inconveniences of sequestration.  Fair or unfair, the Republicans will take the rap for this crisis as well and eventually cave-in.

Lastly, the debt ceiling must be raised in May.  This is the big one!  Sequestration and expiration of the CR will definitely hurt the economy and could even push us into recession.  Failure to raise the debt ceiling could cause a financial crisis, which is far worse than some garden-variety recession.

Each of these three manufactured crises is more painful and embarrassing that the previous one.  Maybe, that was by design.  Maybe, the "can will be kicked down the road" again.  Maybe, the mounting disgust of the American people will shame the Congressional partisans, but I doubt it.  Maybe, there are three more good investing opportunities this year?

Tuesday, February 19, 2013

Italian Humor . . . or A Bad Joke

Fourteen months ago, Italy was definitely in trouble.  Some called it a "great big Greece," where employers could not terminate employees in many jobs without regulatory approval and where tax cheats openly boasted about the taxes they didn't pay -- about $160 billion each year.  In fact, their elected leader was also a convicted tax cheat, who was appealing his four year sentence to prison.

As Italy is the third largest country in Europe, it is definitely too big to fail without hurting the world economy.  When it began having trouble refinancing its existing national debt, their legislature conspired with the European Union to replace their colorful elected leader with a solid technocrat/economist to impose some degree of austerity on the free-spending government.  Since then, the Italian economy has stabilized.  Borrowing costs have gone down.  However, unemployment is up to a thirteen-year-high of 11.2%, but it is up less than expected and less than half the unemployment rate in Spain or Greece.  And, tax evasion is actually falling.  While the economy is in a minor (1-3%) recession, that reflects wider European economic conditions more than the austerity imposed by the technocratic leader, Mario Monti, who was nicknamed "SuperMario" for stabilizing the Italian economy.  He was hailed by both bankers and intellectuals alike as a hero at this year's World Economic Forum in Davos.

The national election for Italy is this weekend.  Unfortunately, Italian voters are not showing that appreciation for SuperMario, who is now running in fourth place.  The bitter irony is that his predecessor, Silvio Berlusconi, is running a close second.  Did I mention that, in addition to his conviction for tax evasion, this 79-year-old man has also been charged with paying an underage girl for sex?

If an American President badly damaged the economy, was convicted of tax evasion, facing possible jail time, and charged with having sex with an underage girl, what are the odds he would be reelected?

My first thought is that the Italians have a great sense of humor, but then I realized Berlusconi has a good chance of being reelected, because he has promised to pardon all tax evaders and to abolish real estate taxes for everybody.  So, he promises to use government money to bribe the voters to reelect the man who already ran the economy into the ditch.

Please tell me this is an Italian joke!  Italy is too big to revert to its "bad old ways."  The reelection of Berlusconi is a threat to the whole European Union, which, as we have seen, can severely impact the U.S. stock market.

I'll be watching Bloomberg late Sunday night to see how this election is decided.

A-B-B . . . Anybody but Berlusconi!

Friday, February 15, 2013

If You Were Ben Bernanke . . .

More than any other person, Ben Bernanke prevented the financial collapse of the United States of America.  But, in doing so, he laid the groundwork for the eventual financial collapse of our country.  It may be more correct to say that he postponed, rather than prevented, our financial collapse.  Maybe, he just bought us enough time for Congress to act, if that is possible

As head of the Federal Reserve, he can control the supply of money in this country.  That includes currency in circulation plus deposits in various types of bank accounts.  According to monetarist theory, if the money supply increases faster than real GDP growth, inflation will erupt.  Ben Bernanke has increased our money supply at a much faster rate!  So, why hasn't inflation erupted by now?

There is a relationship between the supply of money and what happens to that money.  If the new money is spent for new "goods & services," that is good.  Real GDP increases!  However, if the new money remains unspent or on the balance sheet of banks, then only nominal GDP increases, which is inflationary, because you have "too much money chasing too few goods."  This frequency of money being spent is called the velocity of money.

Since 2008, the velocity of money has decreased more than Bernanke has increased the money supply.  In fact, Bernanke is very worried about deflation, which is a much more difficult problem than inflation.  (Ask Japan.)  If velocity dropped too much faster than the money supply increased, we could have had the serious problem of deflation.  In other words, he needed to increase money supply to prevent deflation.

What causes velocity to change?  Forgive my language, but I must use the "U-word."  The word has become so politicized that I'm reluctant to say . . . "uncertainty," . . . but it is a problem.  If you're afraid of losing your job, you reduce spending.  If you don't know how much your expenses will be increasing, you reduce spending.  If you don't know how much your taxes will be, you reduce spending.  All this has reduced velocity.

When the "U-word" is no longer a problem, velocity will increase, and so will inflation IF Bernanke does not reduce the money supply at the same time.  There is a popular impression that reducing the money supply is difficult to accomplish, but it is relatively simple.  The difficult part is knowing how quickly or slowly to reduce the money supply.  If he decreases money supply too quickly, in order to prevent inflation, he can easily throw the nation into recession, with rising unemployment.  If he decreases money supply too slowly, he can easily unleash inflation.

All central bankers worldwide are responsible for one thing, i.e., controlling inflation.  Except one!  The head of the U.S. Federal Reserve has a dual mandate.  He is responsible for maintaining full employment while simultaneously maintaining price stability.  Since it will cause rising unemployment if Bernanke decreases money supply too quickly, I have long believed he must err on the side of decreasing money supply too slowly, thereby unleashing inflation.

But, there is another argument supporting this belief.  Imagine what would happen in Congress if Bernanke sent them a bill for a whopping $170 BILLION.  They would instantly become apoplectic!   The Tea Party would be in the streets with pitchforks.

With a debt approaching $17 TRILLION, a one percent increase in interest rates will cost taxpayers another  $170 BILLION.

Since college, we've always be taught that the Fed can control short-term interest rates but not long-term rates, which are set by the market.  However, now the Fed has become virtually the whole market, buying as much as 75% of the new bonds issued by the U.S. Treasury.  The Fed now controls both short-term and long-term interest rates.

The primary tool to fight inflation is raising interest rates.  (Do you remember when Paul Volcker raised interest rates to 20% in order to break inflation in 1980?)  Can Bernanke really increase interest rates, knowing he is sending a huge bill to taxpayers?  Or, should he allow inflation to erupt?

If he decreases money supply too quickly, he risks recession which increases unemployment.  If he increases interest rates to forestall inflation, he risks recession which increases unemployment.

Nobody wants to raise unemployment.  Nobody wants inflation to return.  Nobody wants to send taxpayers an enormous bill.

So, if you were Ben Bernanke, what would you do?

Thursday, February 14, 2013

The Power of Powerpoint

I was selected to give the keynote address at the annual economic conference of the Hampton Roads Association of Financial Professionals on Tuesday of this week and hope they enjoyed it as much as I did.

While it may not make much sense without the commentary, the Association decided to post the slides I used at . . . . . . under "When To Convert To Cash."

Feel free to call me if you'd like to discuss any of the presentation.

Or, you can finish rearranging your sock drawer . . .

Wednesday, February 13, 2013

Numbers Obsession

As a kid, I liked math.  It could tell me things that words could not.  Numbers can reveal nuances more quickly than words.  But, numbers can also mislead.

The current obsession with 14,164 is misleading.  It is more nostalgic than significant.  True, the Dow Jones Industrial Average is now within 1% of that all-time high on April 7th, 2008, but is nowhere near its all-time high on an inflation-adjusted basis.  While inflation is not high, five long years of even low inflation can make a large cumulative difference.  Take a look at this graph.

Chart of the Day

This graph is reassuring for the bulls, as the market is nowhere near its red line of resistance.  In other words, the market should continue its upward march, assuming Washington gets out of the way.

Now, take a look of another interesting graph of the Dow, courtesy of The Privateer.

The Dow - From 1974

There has been a good deal of conversation about "the New Normal."  Historically, it has been normal to see stocks rise about 9% on average per year.  The New Normal suggests we are now living in a deleveraging, slow-growth world of 6% .  This graph shows the stock market has indeed "jumped the track" and is now playing catch-up in this new, slow-growth world of deleveraging (or paying-off debt).

However, neither graph shows any bearish indication.  Neither makes me concerned the market is currently over-valued and is getting ready to fall . . . assuming Washington can get out of way!

So, when you hear the media gush that the Dow has just set a new record high, simply yawn politely and reply "that's nice."

14,164 is just another of my many beloved numbers . . . no better, no worse . . . just another beloved number.

Monday, February 11, 2013

Arms Escalation

I don't normally read Rolling Stone magazine, unless somebody puts a gun to my head.  This weekend, my wife put a gun to my head and made me read last month's issue, that had a long article by Matt Taibbi entitled "Secrets and Lies of the Bailout."

He was also the author of an excellent, highly-regarded article a few years ago on the corporate culture of the legendary investment banking firm Goodman Sachs, describing it as "the great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

So, I expected a "hachet-job" on former Treasury Secretary Hank Paulson, as well as current Fed head Ben Bernanke for the work they did during the dark TARP days of 2008, and I was not wrong.  He maintains that both the Bush Administration and the Obama Administration demonstrated far greater concern for Wall Street than for Main Street.

I often speak to groups about the difference between recessions and financial collapse.  We worry too much  about recessions and too little about financial collapse.  A recession lays the seed for its own recovery, but a financial collapse can be permanent and is always worse than a recession.  A recession is more like a bad muscle pull, while a financial collapse is more like a heart attack.  While a financial collapse may not be fatal, a recession never is.

Sequestration is likely to throw us into a shallow recession.  Failure to raise the debt ceiling could cause a financial collapse.

Taibbi doesn't seem to understand that critical nuance, reducing his article to just another attack on the motivations of anybody and everybody in government.  Hank Paulson and Ben Bernanke certainly made mistakes, but they were honest mistakes made during the rapidly-deteriorating financial crisis.

One famous comment by Paulson to justify the $700 billion of taxpayer money for TARP was that if the market knew he had a "bazooka" in his pocket, then he wouldn't have to use it.  Before I read another article in Rolling Stone, somebody will have to put a bazooka to my head.

Saturday, February 9, 2013

Keeping Your Eyes on the Forest

One of the biggest problems in deciphering economic data is how inter-connected the data is.  A change here creates a change over there.  One example is the GDP report for the fourth quarter, which originally showed a 0.1% DECLINE.  We could see immediately that it was skewed by the highly-unusual decrease in both government spending and business investment ahead of the Fiscal Cliff at year-end.  There is a cost to uncertainty!

Yesterday, we learned the trade deficit in December decreased over 20%.  This assures us that the fourth quarter GDP growth was under-reported and will be revised upward next month.

But wait . . . exports increased and imports decreased . . . at the same time . . . ??  That doesn't happen when the dollar is strengthening, as it has been recently.  That's because exports were skewed higher due to unusually heavy sales of gold to foreigners, and imports were skewed lower due to unusually low amounts of imported oil.

Maybe, what is considered "usual" is not so usual after all?  Fortunately, all these unusual economic data points have a tendency to cancel out each other . . . but not always.

Still, it shows the problem of seeing the trees but not the forest.  There are 130 economic reports issued each month, and that's a lot of trees.

However, if you look at the forest, you'll know the under-lying economy is stronger than most people think, and you'll see the fourth quarter GDP report is simply not believable.  Stay tuned for the revision!

Friday, February 8, 2013

The 800-lb-Gorilla on the Backburner

A year ago, it seemed like I blogged about the European Financial Crisis almost every day.  It was one of the three "wet blankets" on the stock market.  Since then, it has moved to the back burner.  Does that mean the crisis is over?  NO!

The three most important things that happened were (1) beginning operation of the European Stability Mechanism (ESM) and (2) the jaw-boning promise of the European Central Bank (ECB) to do "whatever is necessary" to maintain the Euro and (3) the promise of a unitary banking system to be regulated by the ECB.

What did NOT happen:  Fiscal integration of the 17-member nations, i.e., surrender of fiscal sovereignty over their budgets.  (Just imagine if the United States had to submit our budget to the United Nations for approval.)  This is the eventual solution to the problem of the European Union but won't happen anytime soon.

In the meantime, the five PIIGS of Europe (Portugal, Ireland, Italy, Greece, & Spain) have embraced severe austerity or, more correctly, had austerity crammed down their throat.  Unemployment in Spain and Greece, for example, is now worse than in the United States during The Great Depression era of the 1930s.  Partially as a result, the all-important debt-to-GDP ratio is starting to improve or at least stabilize.  In fact, Ireland is making a historic and heroic turnaround!

The European Financial Crisis is not going away anytime soon and is likely to remain on the backburner for awhile.  So far, the ESM has not needed to make any loans, and the ECB has not bought any sovereign bonds of the PIIGS.  Once we are past the German elections in September, assuming Merkel wins big, fiscal integration may actually move a step or two closer.

Still, it remains the biggest "wet blanket" on the stock market, because it could trigger a financial collapse, which is far worse than a normal recession.  However, with it on the backburner, we now have the luxury of obsessing over something else, like the ongoing U.S. budget drama.

Remember:  Wall Street is ALWAYS facing a "Wall of Worry."  Sometimes the wall is tall, sometimes not!

As long as the 800-lb-gorilla known as the European Financial Crisis continues to simmer on the backburner, it is more likely to have a happy ending.

Tuesday, February 5, 2013

"Sell in May & Go Away"

My favorite professor at Wharton was Dr. Jeremy Siegel, who also wrote Stocks for the Long Run, and I continue to follow his thoughts closely.

He was enthusiastic about Friday's "jobs report" primarily because the unexpected upward revision of 127 thousand jobs created in October and November.  At the same time, he was puzzled by the GDP report, which was slightly negative.  Of course, it turned out that the GDP report was negative because of continued decreases in government spending and the deferral of capital goods purchases due to the Fiscal Cliff and other governmental uncertainties.

But, the stock market remained happy.  Because the "jobs report" also showed the unemployment rate increased from 7.8% to 7.9%, the probability of any increased interest rates decreased, which is good for stocks.  Plus, the market is smart enough to look below the headline GDP report of negative growth to see the reasons for it.  Then, the ISM report on manufacturing came in stronger-than-expected, over-shadowing the GDP report.

Earlier, Dr. Siegel predicted the S&P would end the year at 1575 or so, which would mean another 5% increase this year and is certainly possible.  The 5% increase in the month of January alone is clearly not sustainable.  It is time for the market to "digest" January's big gain, and yesterday's 129 point loss in the Dow is not surprising.  After digestion, the market should continue onward & upward . . . ??

The question in my mind is whether we will get the traditional "summer swoon," as we have for the last three years.  It is an old Wall Street adage that investors should sell in May and spend the summer at their beach house in the Hamptons.  Of course, it was a self-fulfilling prophecy, as the absence of those big traders depressed the stock market while they were gone.

Due to improved technology, most pundits predict the "summer swoon" will become a relic-of-the-past.  At least, I hope so . . .

Monday, February 4, 2013

Thinking at 35,000 feet . . .

On the long flight back last night from a conference of financial advisors in San Diego, I listed a few general observations:

1.  There was almost uniform agreement from the economists that the underlying economy is improving.
2.  There was some question about the length of the current economic recovery.  Is the recovery already longer than normal?  Is the normal length of a recovery screwed-up by the politicians?
3.  If politicians continue to be obstructionists, there is general agreement that a recession could occur but disagreement about how severe it would be.  Sequestration is expected to happen.
4.  There was almost uniform agreement from the investment strategists that the stock market wants to rise but is being restrained by the politicians.  The continuing budget deficits are the greatest threat to our economy and our markets.
5.  Of the economists I heard, I would classify them as either Austrian or Keynesian.  I heard almost no discussion of Supply-Side economics.  In other words, there was no discussion of cuts in the highest marginal income tax rate as being necessary for growth, which was surprising to me.
6.  Despite the general contempt for politicians, I found that contempt was equal for both Republicans and Democrats.  Nonetheless, Former Secretary of State Condi Rice was one speaker, and she was treated respectfully by everybody.  Former Republican Senator Alan Simpson and Clinton White House Chief of Staff Erskine Bowles were also treated respectfully.  Indeed, it was refreshing to listen to Simpson/Bowles discuss the deficit problem without all the partisan spin -- proving it can be done.
7.  With respect to Europe, there is a general sigh of relief that "Super-Mario," head of the European Central Bank has "saved" Europe the way Bernanke "saved" the United States.  I think that means they prevented a financial collapse, which should buy enough time for the politicians to fix the fiscal problems.

Generally speaking, there was far less acrimony than I've seen in the past.  Financial advisors are quite bullish, which worries me somewhat.

Still, my own analysis is that the underlying economy is indeed stronger than most investors expect, that Europe is healing slowly, and that China is strengthening again.  With all that, the stock market should continue rising.  Don't forget that only about 10% of the money that flowed out of stock mutual funds has returned, which means there is still more than $350 billion of investor money waiting to get back into the stock market.

However, until Europe addresses its fiscal problems, there is a strong risk of financial collapse on the scale of another "Lehman Brothers."  That doesn't mean we should stay out of the market, but it does mean we should act quickly to sell, if and when that becomes necessary.  For the long-term investor, a recession is not to be feared, but a financial collapse is!

Of course, the best part of any trip or conference is . . . getting home!

Friday, February 1, 2013

11:00 AM on Tuesday, February 12th

If you are seriously bored at that time, you are respectfully invited to listen to my keynote address to the Hampton Roads Association of Financial Professionals at their annual Economic Outlook Luncheon.  I will be discussing the current state of the economy and the importance of having a SELL strategy.  For additional information, go to

Or you could just stay home and re-arrange your sock drawer?