01.06.08

Today is the 1st anniversary of Lucy's death. I'm having a watercolor done of her. I hope to have it in a few weeks. She lies in permanent repose under a forest pansy red bud--our blog friend, MarkM, noted this variety and its beautiful plum colored leaves. It did very well this year, and I hope it flourishes.









Martin Pring is offering his January 2008 newsletter for free this month. I think that you will find it worth your time to visit and print it out. You can find it here. He also provides an interesting chart. I'm providing it here:

He notes that when the red line below is crossed or touched, that it has always been preceded by a recession. As this line has been crossed and should this metric continue its success as an "oracle", then it suggests that we may already be in a recession.

Recessions and bear markets are always viewed with clarity in the rear view mirror. Truly time will tell. I agree with Cat that we are in a recession. The weak jobs report in addition to the uptick in unemployment was a spook. Was it a surprise? Not to me. But I think that the employment numbers have been the last bastion of hope for many bulls that so long as these numbers held, we could see our way through. That hope was dashed a bit. Now there are likely investment banker prayer meetings for lower rates. I think that the Fed will pleasantly surprise on that account.

Ascribing reasons for this and that. I've become increasingly aware of the fallacious nature of ascribing reasons for market/economic activity. So often, it seems, the 'reasons' are merely rationalizations to support a bias. You and I both do it, too. We cannot help it, as it is human nature. Even though these reasons are specious at times, it is smart to pay attention if not for the sole reason of finding the holes in the logic bucket.

Here are a few of my favorites on why the bull market would run on forever:

• Interest rates are historically low. Yes, they are. So why, then, is there this unrelenting clamor for the Fed to lower rates, particularly when inflation is somewhat problematic.
• The housing sector is only 3% of the economy so it will not affect GDP now that it is back pedaling. Okay, but when housing was running hot, hot, hot, the numbers bandied about for housing were centered on that sector's creating 60% of the jobs in the latest recovery. Perhaps relative to overall GDP housing is small, but I consider 60% to be pretty large component in looking at incremental increases. So the blather about it not mattering is just that, blather.
  
• Global economic boom (with the theory that markets have decoupled): All developed nations are reporting marked slowing. Developed nations are still the biggest consumers of commodities and consumer goods. And the emerging markets are emerging to (1) satisfy our needs and (2) satisfy their growing needs. Their needs do not grow if ours our slowing--and it spooks those markets terribly as we've seen. I'm not saying that these markets are coming to a grinding halt, but he decoupling theory is badly damaged.
• Global liquidity: Structured finance sucked the life out of global liquidity story. Until financial institutions can rebuild their capital basis, money will not trickle out in the form of new loans. Not only do banks have to deal with their own investments in structured finance that have imploded, much of the lending was for the housing boom. We've heard very little (surprisingly so) about loans to builders etc. There's still lots of exposure out there that has yet to be resolved.
• Employment is high, new job creation is robust and wages are high: High employment is good, but when you are at the crest, there is only one way to go. Down. New job creation is largely a figment of the BLS's imagination and subject to so many revisions that it is hardly credible. Income growth at 4-5% doesn't really cover the cost of food, health care and energy costs that are running 20-50% higher in the last year and a half. When you see those numbers adjusted for 'inflation' you must remember that the major components of your and my spending (e.g. food, energy) are not included. Interest rates have also increased about 50% in the last two years.
• Corporate profits are high and balance sheets are strong. There's another argument for the 'cresting' thing. When profits are at historic highs, that nasty little reversion to the mean often comes out of hibernation. Balance sheets are strong--they'll be a lot less stronger once some of this investment crap is sifted through and there is recognition of mounting healthcare/pension liabilities. Plus, think about all of the trillions of dollars in stock buybacks AT THE TOP OF THE CYCLE.
  

So much of this stuff is a confidence game. If one is confident about the future, then one will take greater risks and be gain motivated. If one is not confident, then one will be loss-avoidance motivated. The trick is to find the balance between the two. I think the successful balance rests in the quality of the information on which one makes decisions. Accordingly weighing the credibility of ascribed reasons is key. All of the items I listed above were true for a goodly amount of time. But these reasons cannot be perennial no more than economic booms or busts are perennial.

I was chatting during a holiday get together of fellow dog transporters. One works for the medical college. She spent 10 years as a stock broker and finally said, "This is not for me." She said that her conclusion was largely because the bias was on selling products and services more so than helping individuals. She said frankly, "They really do not care." Pete Najarian on FastMoney said something very frank, too, a couple of days ago. He said broker upgrades and downgrades are designed to do one thing: create order flow. I rarely find broker upgrades/downgrades helpful. They are generally late to the party or they've lingered too long.

On bear-market funds: I went to bed with this thought rattling in my head: With the proliferation of bear market fund, and the easy accessibility to downside protection, does that create a stronger market floor than what we've seen in other bear markets? I've not seen any discussion about this, but I have to believe that there is SOME influence, of magnitude unknown, of the availability of such protection. I guess the real estate investment trusts or the financials, both of which have inverse funds available, were not saved, so maybe that answers my question!!!!

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