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Does the Bear Still Have Some Work to Do?

2010-01-01T13:25:00.001-08:00

Another great chart from Doug Short here. Notice how little time the last bear market spent at an undervalued level. Blink and you missed it. Prior bear markets spent years if not decades below the trendline. Does the bear then still have some work to do?

via dshort.com

Posted via email from jessefelder's posterous

Happy Due Year

2010-01-01T09:53:00.001-08:00

via editorialcartoonists.com

Posted via web from jessefelder's posterous

A Fitting Finish to a Disaster of a Decade

2009-12-31T15:16:00.001-08:00

Today was the third worst final day of the year in history for stocks (via SentimenTrader). The S&P 500 closed below 1121, the 50% retracement level that's proven to be key resistance for the past month or so. I guess we should expect no less from the decade than for it to go out with a thud.

Posted via email from jessefelder's posterous

How the Best Stock Fund of the Decade Had the Worst Investor Returns

2009-12-31T10:27:00.001-08:00

Ken Heebner rang up 18% per year in the CGM Focus Fund over the past ten years, despite operating in one of the worst equity investment environments in history, earning it the title "best stock fund of the decade." I'm a big fan of the focused approach to portfolio management; diversification beyond a certain point becomes nothing more than a cop out. If you want 500 stocks buy the index. If you want to do better than the index you have to focus only on the most attractive investment opportunities. Props to Heebner for having the balls to run an open-ended mutual fund this way.

One difficulty with managing focused portfolios, however, is that they are typically more volatile (but not necessarily riskier) than more diversified portfolios. From the looks of things, this had a detrimental effect on the fund's investors because they managed to find a way to lose 11% per year in the fund over the same time it rang up the best returns in the biz. How is this possible? Only by buying at the top and selling at the bottom. Amazing.

via wsj.com

Posted via email from jessefelder's posterous

The Stupidest Idea of the Decade

2009-12-31T09:26:00.001-08:00

via editorialcartoonists.com

Posted via web from jessefelder's posterous

Bear Ranks Thin Further

2009-12-31T08:36:00.001-08:00

Jason Goepfert, sentiment research guru, posted the following chart today. Note the last time the bearish % was more than 2 standard deviations from its average: right at the March bottom when everyone and their mom were bears. Now we see the exact opposite; there's not a bear in sight.

via Sentiment's Edge

Posted via email from jessefelder's posterous

A Red Flag for the Nasdaq

2009-12-30T15:28:00.001-08:00

Here's an interesting divergence: as the Nasdaq roars to new highs (on the lightest volume in years) its advance/decline line, a sign of the internal strength or weakness of the index, fails to confirm.

See and download the full gallery on posterous

Posted via email from jessefelder's posterous

No Fear

2009-12-30T15:15:00.001-08:00

The VIX, aka the "Fear Index," is now down over 75% over the past year.

Posted via email from jessefelder's posterous

Fewest Bears Since 1987

2009-12-30T10:03:00.000-08:00

Barry Ritholtz reports:

Wow, I know things are better than they were one year ago but are they so dramatically better with little downside risk? According to stock market newsletter writers the answer is yes. The level of Bears in today’s Investors Intelligence reading fell to 15.6% from 16.7% last week and is now at the lowest level since April 1987. Back then the bulls were right for another 6 months and then something bad happened. Combine this sentiment reading with the VIX at 20 and 2010 will be interesting, especially with the very likely prospect of higher interest rates.

via ritholtz.com

Who Will Pay the Bill for the Boomers' Entitlements?

2009-12-29T15:49:00.000-08:00

via AAEC

Stocks Stand Alone Once Again

2009-12-29T15:13:00.000-08:00

Since the March low for the stock market virtually every asset class has risen in tandem. I believe that watching the correlations of various markets can be very useful. For example, one tipoff that the March low was a meaningful low was the fact that not every asset class was making a new low at the same time the S&P 500 was doing so. These divergences, seen in Chinese stocks, gold, oil and bonds hinted that not everything was going to hell in a hand basket:

We may now be seeing the opposite signal, however, as many of these same markets and asset classes once again diverge from the S&P 500 as it makes new highs for 2009:

Is Obama Taking Richard Koo's Advice?

2009-12-29T11:34:00.000-08:00

The lost decade for stocks has been a popular topic in the financial press lately. Well I guess we should be thankful that it's only been one decade. Tim Iacono notes today that over in Japan they are celebrating (okay, maybe not celebrating - probably marking with melancholy) the twentieth anniversary of the top of their stock market bubble.

According to economist Richard Koo, Japan's economy has been so weak for the past couple of decades due to an ongoing "Balance Sheet Recession." Koo also believes that America's economy now faces a similarly dismal fate.

One prescription he advocates for ameliorating the brutal effects of such a predicament is something Amity Shlaes wrote about in a piece for Bloomberg today titled, "Obama's Next Trillion Spending Might Be Worth It":

Obama’s best move would be to stop spending. [Koo would strongly disagree with this.] But given that he won’t, and that he has three more years in office, the right kind of infrastructure splurge might not be such a bad idea -- especially if you don’t call it a stimulus.

Today the country can ill afford another trillion in stimulus. But if such an outlay is inevitable, then let that trillion go to a national Big Dig [exactly what Koo is promoting]. As Eisenhower demonstrated, a growth project like a road can be superior to a new social program. A road, or a railway, or a plan to collect water in space, after all, reflects more hope. Obama will achieve the happiest outcome if he simply makes like Ike and plows forward.

Is it possible that the administration is taking Koo's advice but not publicly acknowledging as much in order to avoid raising public concern over the true economic weakness the country faces? Plausible if not provable, I guess.

Clouds Gather Over Cascade Bancorp

2009-12-28T10:26:00.000-08:00

Cascade Bancorp gave shareholders a rather unsurprising Christmas present last week by notifying them of two discouraging developments. First, the company has given up on trying to raise capital. How this affects the January 27th deadline to do so imposed by an FDIC cease and desist order is not yet clear.

Secondly, the company said that the Nasdaq has officially given notice to the company that they are in danger of losing their listing on the exchange. The company could perform a reverse split to bring the price back above the minimum one dollar bid but this tactic, typically employed by similarly embroiled companies, usually fails.

All in all, things aren't looking up for the company. One reason investors might be staying away it that the company's commercial real estate portfolio looks like its following residential real estate into the mean reverting abyss, a fact I wrote about back in October. Either that or investors have simply lost faith in a management team that jumped headfirst into the biggest financial bubble in history.

The Volatility Value Play

2009-12-28T10:11:00.000-08:00

The Barron's interview over the weekend with Kevin Duffy and Bill Laggner makes for some interesting reading. They are firmly in the bear camp, whose ranks have thinned out quite dramatically over the past couple of months:

The immediate risk is the economy. We've had a nine-month rally. We think it's a false rally... In real terms, can we get cut in half from here? We think so. S&P earnings are distorted because of accounting changes for banks and brokers; if banks were marked to market, S&P earnings next year could fall to $45 a share. Bullish sentiment is rivaling the 2007 top, and volatility has fallen dramatically. We like the VXX, an exchange-traded note that's based on S&P 500 short-term volatility as measured by the VIX index. It's down 67% this year, and fits into the whole idea that complacency is very high.

Is there value in the volatility index right now? The last time the VIX was this low was the summer of 2008 just before the financial crisis really kicked into high gear. It's also currently below its average level of the past decade. Have our problems really been fixed? Are things really back to normal? The VIX seems to think so.

Happy (?) New Economy!!

2009-12-28T10:06:00.001-08:00

Remember way back at the beginning of the decade when everyone was talking about the "New Economy"?

via AAEC

A Dud of a Decade

2009-12-26T12:01:00.000-08:00

via Editorial Cartoonists

The Rationale of a "Balance Sheet Recession"

2009-12-23T10:39:00.000-08:00

Barry Ritholtz makes a great point today in a piece titled, "Why Aren’t Banks Lending? They Are Being Rational":

[The big] banks STILL have to much debt, too little capital. They [sic] books are festooned with bad loans, which, thanks to our corrupt Congress, they no longer have to disclose appropriately. Thanks to Mark-to-Make-Believe, they can pretend these assets are worth near what they paid for them. In reality, they cannot sell them even at 50% off.

Lending money is a risky business; there is the possibility of loss. Under-capitalized banks cannot take that chance. By not lending, their capital base goes up. IT is the rational thing to do from their perspective.

Rather than engage in traditional money lending, these banks have decided to simply borrow from the Fed at 0%, and make risk free loans to the Treasury at 3%.

I would only make this addendum: "Why Aren't Consumers Still Borrowing? They Are Being Rational."

Consumers have been binging on credit for a very long time now. They've only started to save more but as the following chart (from TBI) shows, they still have a very long way to go to get back to reasonable levels of debt:

The combination of the two, banks not lending and consumers not borrowing, is the foundation for a deleveraging cycle that will pose a major challenge to the economy over the coming years.

Bend Home Prices Hammered in Q3

2009-12-21T11:48:00.000-08:00

Bend: from the most-overvalued home prices in the country to the hardest hit home prices in the country. Oregonlive.com reports:

Yes, prices are still falling the Bend. They tumbled 5.6 percent between the second and third quarter, the biggest decline in the country. Las Vegas was right behind Bend, down 5 percent. That’s according to the IHS Global Insight “House Prices in America” report out today.

Early next year I'll have to update my statistics and charts because it looks like Bend is finally getting close to fair value (but not yet undervalued). Read the whole report here.

The "Real" Mega-Bear Markets

2009-12-21T10:14:00.000-08:00

Great chart here from Doug Short comparing the S&P 500 from 2000 to today to the 1929 crash and the Japanese stock market crash that began in 1989 (all adjusted for inflation):

via dshort.com

Mr. Market Makes the Case Against Traditional Asset Allocation

2009-12-21T09:32:00.000-08:00

So it turns out I started my investment company just at the dawn of the worst decade for the stock market in recorded history. The WSJ reports:

In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.

Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress. Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of 0.5% a year thanks to the twin bear markets this decade.

My company and my career survived this debacle only due to the fact that I shun virtually every aspect of the traditional investment approach. If the past decade isn't reason enough to abandon traditional asset allocation than I don't know what is. I mean anyone who told you that in 2000 you should have had even a "normal" allocation to equities based on age or what have you obviously couldn't have been more wrong.

Links, Lyrics & Laughs: The Spirit of Christmas

2009-12-19T10:23:00.000-08:00

Gold Is the New Tupperware, and You're Invited to the Party

4.22 Citi Shares For Each Person in the World

Carl Icahn's new target: Grand Theft Auto publisher Take-Two Interactive

My favorite Christmas album

"The recession was less calamitous than many feared. Its aftermath will be more dangerous than many expect."

Shadow inventory looms large over the housing market.

Moody's: The Housing Market Has Bottomed

"Strategic defaults" gaining popularity among homeowners deeply under water

Bank Lending Is Collapsing All Around The Globe

Who woulda thunk it? Aspies make great computer geeks.

FDIC Ramping Up to Accommodate Increasing Bank Failures in 2010

Great Idea: He Delivers Christmas Trees for Rent

Gold Buying by Central Banks Sends Sell Signal as Past Haunts Future Price

"Modern" Hobbit Architecture the New, New Thing in Hobbiton

Bend Now Has the Fastest Internet Service in the Country

The De-Leveraging Cycle Has Only Just Begun

If The Banks Don't Extend Credit Soon, The Market Is Toast

IRS Quietly Gives Citigroup Big $38 Billion Tax Cut, Wiping Out All Of The Taxpayer's "Profits"

Paul Volcker: “Wake Up, Gentlemen”

"Whack-a-Banker" arcade game has proved so popular the owner keeps having to replace worn out mallets.

Rates Are Low, but Banks Balk at Refinancing

My vote for FAIL of the year 2009 http://bit.ly/6GoZzi

Warren Buffett believes his best deals during the economic crisis may well turn out to be the ones he didn't do.

Stocks Hang Tough Ahead of the Holidays

2009-12-18T15:07:00.000-08:00

SPY is clinging to both the uptrend line and the 50-day moving average here as we head into the heart of the holidays:

Recovery Reality Check

2009-12-18T11:00:00.000-08:00

Comstock Partners, a rare bear in today's market, makes the case for a "balance sheet recession":

The key factor to consider is that the so-called ‘great recession’ was caused by a credit crisis following an artificial boom and therefore bears more resemblance to the great depression following 1929 or Japan after 1989 than it does to the series of recessions experienced in the post World War II period... Despite the deep recession into early Summer, the consumer is still being forced to adjust to a far lower level of spending. When that level is eventually reached the economy can again grow in a robust manner, but we are not near that point now. The massive fiscal and monetary stimulation put into effect over the last nine months has mitigated the credit crisis and prevented a global collapse, but has not avoided the need for the economy to readjust to a new set of circumstances. We are still faced with historically high debt levels, a low household savings rate and a subdued housing industry. Reducing debt and getting the savings rate up will take an extended period of time. Furthermore, as a result of reduced consumer spending there is also an excess of capacity that will impede capital expenditures as well.

Read the rest at The Pragmatic Capitalist.

Deflation Is Nigh

2009-12-18T10:36:00.000-08:00

Great chart here of reconstructed M3, the broadest measure of the money supply, (the official data was discontinued by the Fed a few years ago) from Tim Iacono:

If the Banking System Is Healthy Again Why is the FDIC Preparing for More Failures?

2009-12-17T12:35:00.001-08:00

It's back to business on Wall Street. Banks, now sporting excess reserves, are repaying the government assistance they received only months ago and are awarding themselves massive bonuses once again. Everything is hunky dory. Or so it seems.

If the Banking System Is Healthy Again Why is the FDIC Preparing for More Failures? The WSJ reports:

The Federal Deposit Insurance Corp. in the next year plans to add more than 1,600 staffers, mostly to handle bank failures, and is pushing its budget up 35% as the number of tottering banks climbs...

More than 130 banks have failed this year, and the agency's inventory of assets in liquidation has more than doubled from the beginning of the year to $36.8 billion through the end of November. The FDIC has also agreed to share future losses on the assets of more than 80 failed banks, representing $108 billion in additional exposure.

In the agency's 2010 operating budget, released Tuesday, the FDIC would spend $2.5 billion to fund its bank failure operations out of a total budget of $4 billion. The agency's entire operating budget for 2009 was roughly $2.6 billion.

"It will ensure that we are prepared to handle an even larger number of bank failures next year, if that becomes necessary, and to provide regulatory oversight for an even larger number of troubled institutions," FDIC Chairman Sheila Bair said in a statement.

Can it be that under the surface not much has changed over the past few months?