I felt it important to send this out before Obama addresses the nation this afternoon. I will try to be brief but the information requires a bit of chronology. We’ll skip the correlating history story even though it is about the ship the “Mary Celeste” and how she mysteriously disappeared into the pantheon of myth and folklore much like the gossipmongers of yesterday peered into the abyss of misinformation to create fear.
Rumors of secret meetings of the victorious Democrats began to swirl as the Dow took a dive. These meetings betold a story of plans for dramatic changes – freezing 401(k)’s, plans to tax your 401(k), etc. Then the real travesty occurred. This rumor morphed into government controlled, mandated retirement accounts. Conspiracists saw the additional mandate of being restricted to buying US Treasuries as a means to funding ballooning debt. The meltdown in the market looked like my grandmother’s cheese sandwich.
I’m getting to how the story was resurrected. Let’s tackle the why first. We are in the midst of getting a new President who is presumed to have new policies. The economy is in severe distress. Since the media has no more election to sell they are forced to wildly speculate that some of the proposals will be sweeping New Deal style policies. Since we have no details, nor specific proposals, this makes for fertile rumor mongering ground. And the Dow delivered on the rumors.
The spark to all of this – as far as I can tell (with the help of some savvy friends) – the basis was probably the testimony in a House sub-committee hearing several weeks ago. Some of the proposals suggested ending tax breaks for 401(k)’s and other sweeping new government plans. There was very little press coverage at the time (remember the election wasn’t over) and as far as research bears, no vote was taken.
How did this turn into harried rumors? Reuters revisited the hearing and CNBC picked it right up. Rather than waste the time I have with you, here’s the link: http://www.cnbc.com//id/27558644. Essentially, the resurfacing of a stale story sank the Dow. Unfortunately, what does get lost is real news like state and local governments talking about cutbacks and tax hikes in the face of imploding revenues. Herein lies a truly potential counter to confound turning the economy.
The 900 level in the S/P is important. The bull’s next defense is 880. Should that barrier be tested the likelihood of a retest rises sharply. 1000 points in two days makes it tough to identify the resistance. Perhaps 8820 in the Dow and 820 in the S/P
Market reaction to Obama will be watched closely. If you’ve planned your work, then work your plan. Opportunities abound.
http://fa.ml.com/Rachel_McLaughlin
Sources: Art Cashin-UBS, CNBC, Financial Times, Economist. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 7, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing
Friday, November 7, 2008
Thursday, November 6, 2008
Broad Economic impact of an Obama Win 11/05
Running mates were considered yesterday as the market had its best Election Day rally since the Reagan Victory in 1984. There were also some interesting patents issued on this day – one to a George B. Selden for the automobile. But since I think people are more interested in the future than the past today you’ll have to do your own research on the history of the Association of Licensed Automobile Manufacturers.
Quick overview – The projected negative cycle kicked in today. The S/P500 broke its support of 960 so circle the wagons and expect to see some more weakness and a stronger negative cycle around November 14-17. Importantly, the credit markets continue to ease.
Politics make great cocktail chatter but economic fundamentals always outlive any political administration. Fortunately, I have the advantage of using the environment to find opportunities. Regardless, of who is leading the nation, opportunities always exist. Going back to something I said in early October – “I am a firm believer that uncertainty drives fear. As humans we are fundamentally wired to want control – decision making is a tool in our toolbox of control. Another aspect of my practice is to help people make more successful decisions. The magnitude of decision making over time in today’s world is tremendous. We are now living a second industrial revolution, but instead of steam, the new revolution is information. And, as in the first revolution, relative success will be determined by the ability to handle the propelling force. Do you have a process for decision making?” Can you distinguish the noise from real news?
Broad Impact:
* Any campaign promises will have to be passed and funded by Congress – while a majority in Congress should make it easier Democrats will not move lockstep on every issue and Republicans still have some clout
* Economic recession – the environment of weak economic growth will make it difficult for an Obama Administration and Congress to enact some wholesale changes; simply, there will not be enough money available
o Ex: Ambitious Healthcare Plan – providing low-income Americans with subsidies would require significant tax incentives or spending increases
* There have already been discussions in Congress about the possibility of creating a new fiscal stimulus plan. The outlines of such a plan are only beginning to fall into place, but such a plan could potentially include an extension of jobless benefits, investments in infrastructure projects, a moratorium on foreclosures and extended or new tax credits for individuals or corporations. It is also likely that some additional legislation focused on limiting the short-term risks to home prices will be enacted
Regulation:
* Regulation across a broad scope of industries is likely to increase, but investors should try to keep an open mind. The financial sector might be a prime target, but investors typically benefit from additional transparency. For example, although corporations generally dislike much of the post-Enron legislation (Sarbanes-Oxley), corporate profits were extremely strong subsequent to the enactment of these laws and the stock market performed well
Tax Outlook
* Taxes, especially on the wealthy and corporations, are likely to increase. Objectively speaking, that is not necessarily bad. The key question, which seems to be ignored by most observers, is what are the economic multipliers for programs funded by the new tax revenue? Raising taxes isn’t so bad if the multipliers associated with spending programs are bigger than the negative multipliers associated with raising taxes.
* With the economy in a recession the government will be forced to borrow more money and increase tax rates simply to keep the government running
* Higher tax rates for investors will be a headwind for equities, but not an insurmountable one
* Municipals are one of the few areas of the market likely to benefit from any increased taxation
Minor Headwinds
* From a historical perspective, equity markets tend to under perform when Congress and the White House are occupied by the same political party; diversity is needed - the most recent and strongest example occurred during the 1990’s when President Clinton faced a hostile Republican Congress. The next two to four years this is part of the equation, but again not insurmountable
At least the uncertainty over the election has been removed from the list of negatives impacting the markets.
Sources: Art Cashin-UBS, Bob Doll - Blackrock and Merrill Lynch Research – Rich Bernstein. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 5, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing
Quick overview – The projected negative cycle kicked in today. The S/P500 broke its support of 960 so circle the wagons and expect to see some more weakness and a stronger negative cycle around November 14-17. Importantly, the credit markets continue to ease.
Politics make great cocktail chatter but economic fundamentals always outlive any political administration. Fortunately, I have the advantage of using the environment to find opportunities. Regardless, of who is leading the nation, opportunities always exist. Going back to something I said in early October – “I am a firm believer that uncertainty drives fear. As humans we are fundamentally wired to want control – decision making is a tool in our toolbox of control. Another aspect of my practice is to help people make more successful decisions. The magnitude of decision making over time in today’s world is tremendous. We are now living a second industrial revolution, but instead of steam, the new revolution is information. And, as in the first revolution, relative success will be determined by the ability to handle the propelling force. Do you have a process for decision making?” Can you distinguish the noise from real news?
Broad Impact:
* Any campaign promises will have to be passed and funded by Congress – while a majority in Congress should make it easier Democrats will not move lockstep on every issue and Republicans still have some clout
* Economic recession – the environment of weak economic growth will make it difficult for an Obama Administration and Congress to enact some wholesale changes; simply, there will not be enough money available
o Ex: Ambitious Healthcare Plan – providing low-income Americans with subsidies would require significant tax incentives or spending increases
* There have already been discussions in Congress about the possibility of creating a new fiscal stimulus plan. The outlines of such a plan are only beginning to fall into place, but such a plan could potentially include an extension of jobless benefits, investments in infrastructure projects, a moratorium on foreclosures and extended or new tax credits for individuals or corporations. It is also likely that some additional legislation focused on limiting the short-term risks to home prices will be enacted
Regulation:
* Regulation across a broad scope of industries is likely to increase, but investors should try to keep an open mind. The financial sector might be a prime target, but investors typically benefit from additional transparency. For example, although corporations generally dislike much of the post-Enron legislation (Sarbanes-Oxley), corporate profits were extremely strong subsequent to the enactment of these laws and the stock market performed well
Tax Outlook
* Taxes, especially on the wealthy and corporations, are likely to increase. Objectively speaking, that is not necessarily bad. The key question, which seems to be ignored by most observers, is what are the economic multipliers for programs funded by the new tax revenue? Raising taxes isn’t so bad if the multipliers associated with spending programs are bigger than the negative multipliers associated with raising taxes.
* With the economy in a recession the government will be forced to borrow more money and increase tax rates simply to keep the government running
* Higher tax rates for investors will be a headwind for equities, but not an insurmountable one
* Municipals are one of the few areas of the market likely to benefit from any increased taxation
Minor Headwinds
* From a historical perspective, equity markets tend to under perform when Congress and the White House are occupied by the same political party; diversity is needed - the most recent and strongest example occurred during the 1990’s when President Clinton faced a hostile Republican Congress. The next two to four years this is part of the equation, but again not insurmountable
At least the uncertainty over the election has been removed from the list of negatives impacting the markets.
Sources: Art Cashin-UBS, Bob Doll - Blackrock and Merrill Lynch Research – Rich Bernstein. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 5, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing
What's around the corner? 11/06
On this day in 1869 America was changed (as is often the case) by the whim of its young people. Several movements were underway – notably the National Women’s Suffrage movement. Health and dependency were also flashpoints (ring any bells?!) and the temperance union was a new national force. We had a Republican president in whom we had immense respect for from a military standpoint but weren’t too sure of his economic fluency.
For you football fans, today marks the birth of intercollegiate football. Princeton and Rutgers butted heads and in just under and hour Rutgers soundly defeated Princeton 6 goals to 4.
Traders weren’t kicking any footballs yesterday, they were too busy kicking themselves. In the words of Peter Gabriel ... "You know you're plastic from your cash." Keep you cash handy as we move forward.
I don’t want to be too long winded so let me get straight to the point with some highlights:
* Much of the weakness in the market can be attributed to the transition period between administrations and parties that we are in the midst of.
* High Volatility has real potential – our fearful and fragile market is trying to envision what would happen if another Bear Stearns or Fannie Mae popped up between now and Inauguration – now that both parties are in the sandbox how well are they going to play together?
* The Bulls need to protect the 9000 level in the Dow – a break could raise the odds of a retest. If you follow the S/P500 you’re looking at 920.
A major, major rally could follow a successful retest. We are making history and it’s not just from an election standpoint.
Recognize that the markets historically start their recoveries in the midst of very bad news and most of the recovery in a few days.
Lastly, by not doing anything you are perfectly positioned for the past.
http://fa.ml.com/Rachel_McLaughlin
Sources: Art Cashin-UBS and Merrill Lynch Research – Proprietary PIA Research. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 5, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing
For you football fans, today marks the birth of intercollegiate football. Princeton and Rutgers butted heads and in just under and hour Rutgers soundly defeated Princeton 6 goals to 4.
Traders weren’t kicking any footballs yesterday, they were too busy kicking themselves. In the words of Peter Gabriel ... "You know you're plastic from your cash." Keep you cash handy as we move forward.
I don’t want to be too long winded so let me get straight to the point with some highlights:
* Much of the weakness in the market can be attributed to the transition period between administrations and parties that we are in the midst of.
* High Volatility has real potential – our fearful and fragile market is trying to envision what would happen if another Bear Stearns or Fannie Mae popped up between now and Inauguration – now that both parties are in the sandbox how well are they going to play together?
* The Bulls need to protect the 9000 level in the Dow – a break could raise the odds of a retest. If you follow the S/P500 you’re looking at 920.
A major, major rally could follow a successful retest. We are making history and it’s not just from an election standpoint.
Recognize that the markets historically start their recoveries in the midst of very bad news and most of the recovery in a few days.
Lastly, by not doing anything you are perfectly positioned for the past.
http://fa.ml.com/Rachel_McLaughlin
Sources: Art Cashin-UBS and Merrill Lynch Research – Proprietary PIA Research. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 5, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some investors may be subject to the Alternative Minimum Tax (AMT). You cannot invest directly in an index. Discuss your investment needs with your financial professional before investing
Thursday, October 30, 2008
Falling knives 10/29/2008
Good afternoon,
In the continued vein of October as a rough month for American history, the gunfight in the O.K. Corral took place late in October of 1881. History is written by the winners and Hollywood loves literary license so to correct a few flaws in the representations of “Tombstone” and “Wyatt Earp,” we’ll disclose that the actual shootout took place outside the photographic studio of Camillus Fly (about a block away) and there is also some record that the Earps and Holliday lay in wait for the Clanton/McLaury Group. When it was all said and done though, there were more Earps than Clantons to justify what happened. I can’t take credit for the following, “the legend would remain limp if they called it the “Flare up at Fly’s Studio” so they called it the Gunfight at the O.K. Corral.”
There were no gunfights yesterday on Wall Street but there were lots of fireworks – hugely so !
Foreign markets were pummeled both Friday and Monday, as we had hoped to see here. Friday and Monday the yen had an unprecedented short covering the spike. A ferocious elimination of the yen “carry trade” (the strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate) caused much of the violent selling in the foreign markets. Late Monday night the yen spike abated and we had huge rallies around the globe. Amazingly investors all but shrugged off a stunningly low Consumer Confidence number. The carry trade theme went a bit further – the Nikkei suggested the BOJ was considering a rate cut. The anti-yen rally resumed with jet fuel. The afternoon was interesting to say the least – As Art Cashin so artfully put it – “It looked like one of those bargain table sales when folks realized there were suddenly more people than products.” The Dow closed at the sixth best daily percent gain in the history of the index.
Those folks expecting a huge rally today as a result of the 50bps rate cut missed the fact that it was already baked into the cake. Some pullback was expected and we got a bit. Interest rate policy is temporarily no longer of paramount importance to traders because the links between the cost of bank borrowing and corporate borrowing has broken down to some extent. A better indicator is the 3 Mos Libor -- the huge skew between the Fed Funds rate and the LIBOR (265 bps) is more telling since it usually it between 12 and 15 bps. It’s come down but has a ways to go.
This rally may have real legs as the bulls begin to take control. Thanks to the avarice of hedge funds and their investors the markets are at their most oversold in decades. However, as James Surowiecki noted, “If there’s a silver-lining in all this, it’s that investors who can endure past the present moment now have the chance to buy what at least look like very cheap stocks. Still it’s not surprising that investors have been unwilling to step up. It’s hard enough to catch a falling knife. But it’s nearly impossible when hedge funds are hurling it.”
Sources: Art Cashin - UBS, Merrill Lynch Research – proprietary PIA Research, The New Yorker – James Surowiecki. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 29, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
In the continued vein of October as a rough month for American history, the gunfight in the O.K. Corral took place late in October of 1881. History is written by the winners and Hollywood loves literary license so to correct a few flaws in the representations of “Tombstone” and “Wyatt Earp,” we’ll disclose that the actual shootout took place outside the photographic studio of Camillus Fly (about a block away) and there is also some record that the Earps and Holliday lay in wait for the Clanton/McLaury Group. When it was all said and done though, there were more Earps than Clantons to justify what happened. I can’t take credit for the following, “the legend would remain limp if they called it the “Flare up at Fly’s Studio” so they called it the Gunfight at the O.K. Corral.”
There were no gunfights yesterday on Wall Street but there were lots of fireworks – hugely so !
Foreign markets were pummeled both Friday and Monday, as we had hoped to see here. Friday and Monday the yen had an unprecedented short covering the spike. A ferocious elimination of the yen “carry trade” (the strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate) caused much of the violent selling in the foreign markets. Late Monday night the yen spike abated and we had huge rallies around the globe. Amazingly investors all but shrugged off a stunningly low Consumer Confidence number. The carry trade theme went a bit further – the Nikkei suggested the BOJ was considering a rate cut. The anti-yen rally resumed with jet fuel. The afternoon was interesting to say the least – As Art Cashin so artfully put it – “It looked like one of those bargain table sales when folks realized there were suddenly more people than products.” The Dow closed at the sixth best daily percent gain in the history of the index.
Those folks expecting a huge rally today as a result of the 50bps rate cut missed the fact that it was already baked into the cake. Some pullback was expected and we got a bit. Interest rate policy is temporarily no longer of paramount importance to traders because the links between the cost of bank borrowing and corporate borrowing has broken down to some extent. A better indicator is the 3 Mos Libor -- the huge skew between the Fed Funds rate and the LIBOR (265 bps) is more telling since it usually it between 12 and 15 bps. It’s come down but has a ways to go.
This rally may have real legs as the bulls begin to take control. Thanks to the avarice of hedge funds and their investors the markets are at their most oversold in decades. However, as James Surowiecki noted, “If there’s a silver-lining in all this, it’s that investors who can endure past the present moment now have the chance to buy what at least look like very cheap stocks. Still it’s not surprising that investors have been unwilling to step up. It’s hard enough to catch a falling knife. But it’s nearly impossible when hedge funds are hurling it.”
Sources: Art Cashin - UBS, Merrill Lynch Research – proprietary PIA Research, The New Yorker – James Surowiecki. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 29, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
Monday, October 27, 2008
Classic Bottom? 10/24/2008
Good afternoon,
Just a few quick insights as we move into the afternoon, which recently has been predictably filled with loss. The Market Beat blog of the WSJ has cited an interesting phenomenon. According to the study, the Dow fell about 28% from April 1 through October 17. But if you only took the move in the final hour of each day, the Dow was down 13%. So nearly half the recent losses have occurred in the final hour.
The same may hold true today if we are truly reaching for a bottom. How do you know a bottom is upon you ? Well, there’s no where to hide. The Dow is down, the S&P500 is down, the Nasdaq is down. Commodities are down – even oil despite the fact that OPEC has said they are going to cut production today. Diversification is the tool of many practitioners and its theoretical purpose is to provide non-correlated investments. Not only does this not work at a bottom but it also doesn’t work at the top. When the bottom is near, everything is down. When the top is near, everything is up.
Why invest in America? I will go ahead and warn for some patriotism in the next couple of sentences but I also believe it provides a cogent argument for why we will come out ahead. Caveat: I love America. I also love to travel and have a great appreciation for many countries and cultures around the globe – at last count I had been to 28 countries on 4 continents.
Who came to America? Dissatisfied Brits. Who continues to come to America? People who are dissatisfied with the opportunities their own countries present. The rest of the world seemingly likes the status quo. Americans like to break through the status quo. Take the most recent market correction. The status quo of capitalism no longer worked for America so democracy (i.e. the government) stepped in and is working on improving the current situation. We are a culture of innovation and performance (the proof is in the pudding!) and we will continue to be. I believe it was Margaret Thatcher who said, “America eventually does the right thing after she’s tried everything else.” Right now we’re working on the right thing.
The stock market is a discounting mechanism, as such it will be the first to rally and the first to make the most back. Other classes like Real Estate, treasuries, bonds will make their comeback but not with the same gusto or volume as the stock market.
Lastly, stock market corrections return stocks to their rightful owners. If this afternoon you’re not a rightful owner there will be someone who is.
Sources: WSJ-Online, Merrill Lynch Research – proprietary PIA Research. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 24, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
Just a few quick insights as we move into the afternoon, which recently has been predictably filled with loss. The Market Beat blog of the WSJ has cited an interesting phenomenon. According to the study, the Dow fell about 28% from April 1 through October 17. But if you only took the move in the final hour of each day, the Dow was down 13%. So nearly half the recent losses have occurred in the final hour.
The same may hold true today if we are truly reaching for a bottom. How do you know a bottom is upon you ? Well, there’s no where to hide. The Dow is down, the S&P500 is down, the Nasdaq is down. Commodities are down – even oil despite the fact that OPEC has said they are going to cut production today. Diversification is the tool of many practitioners and its theoretical purpose is to provide non-correlated investments. Not only does this not work at a bottom but it also doesn’t work at the top. When the bottom is near, everything is down. When the top is near, everything is up.
Why invest in America? I will go ahead and warn for some patriotism in the next couple of sentences but I also believe it provides a cogent argument for why we will come out ahead. Caveat: I love America. I also love to travel and have a great appreciation for many countries and cultures around the globe – at last count I had been to 28 countries on 4 continents.
Who came to America? Dissatisfied Brits. Who continues to come to America? People who are dissatisfied with the opportunities their own countries present. The rest of the world seemingly likes the status quo. Americans like to break through the status quo. Take the most recent market correction. The status quo of capitalism no longer worked for America so democracy (i.e. the government) stepped in and is working on improving the current situation. We are a culture of innovation and performance (the proof is in the pudding!) and we will continue to be. I believe it was Margaret Thatcher who said, “America eventually does the right thing after she’s tried everything else.” Right now we’re working on the right thing.
The stock market is a discounting mechanism, as such it will be the first to rally and the first to make the most back. Other classes like Real Estate, treasuries, bonds will make their comeback but not with the same gusto or volume as the stock market.
Lastly, stock market corrections return stocks to their rightful owners. If this afternoon you’re not a rightful owner there will be someone who is.
Sources: WSJ-Online, Merrill Lynch Research – proprietary PIA Research. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 24, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
No Free Lunch 10/17/2008
Good afternoon,
There must be something in the stars for October. A thorough search of my archives shows very little fun activity in October of any year - Capone went to prison, The Cuban Missile Crisis started, and The Hollywood Ten were investigated. This year, it’s certainly living up to its rocky history for the stock market. The only lighthearted bit of good was the founding of Disney Company yesterday in 1923. I guess Walt saw what was coming and wanted to give America an escape and in the nick of time created Mickey Mouse in 1928. Markets are being recreated before our eyes.
A few highlights as we continue to work our way through this drawn out process of correction. The time when people just give up and are exhausted seems to be leaving us behind. Caution is the word to the wise. The dust hasn’t settled yet and there are no clear sector indicators. I believe the time ahead of us will mimic the 1968-1982 period. If you’re a good stock picker these will be your times! Look for companies that can grow despite a slow economy. There are some good values even in today’s market in the technology, energy and healthcare sectors. Think outside the box.
We did get off a bit lucky today since about 25% of the 337 million existing options expired today. Next week keep your eyes open – the Lehman Credit Default Swaps may settle – this could be a big event.
This week’s wild swings can be a little hard on the blood pressure. As the credit markets strive to clear their current logjam, so the market will follow like a sideshow. The TED spread needs to ease some more before we’re out of the woods. To some degree the market is beginning to behave the way we would like it to. A “capitulation” is still a possibility but much less of a probability in light of yesterday’s sustained rally. Mainly, I don’t think Americans woke up Wednesday and said “Wow, we’re in a recession,” and drove the market down. Some of the swings may be noise not real activity. I believe the Elliot Wave Theory can be a good indicator in times like these. Stay calm and reasonable.
Sources: Bedlam Asset Management, Merrill Lynch Research – proprietary PIA Research. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 17, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
There must be something in the stars for October. A thorough search of my archives shows very little fun activity in October of any year - Capone went to prison, The Cuban Missile Crisis started, and The Hollywood Ten were investigated. This year, it’s certainly living up to its rocky history for the stock market. The only lighthearted bit of good was the founding of Disney Company yesterday in 1923. I guess Walt saw what was coming and wanted to give America an escape and in the nick of time created Mickey Mouse in 1928. Markets are being recreated before our eyes.
A few highlights as we continue to work our way through this drawn out process of correction. The time when people just give up and are exhausted seems to be leaving us behind. Caution is the word to the wise. The dust hasn’t settled yet and there are no clear sector indicators. I believe the time ahead of us will mimic the 1968-1982 period. If you’re a good stock picker these will be your times! Look for companies that can grow despite a slow economy. There are some good values even in today’s market in the technology, energy and healthcare sectors. Think outside the box.
We did get off a bit lucky today since about 25% of the 337 million existing options expired today. Next week keep your eyes open – the Lehman Credit Default Swaps may settle – this could be a big event.
This week’s wild swings can be a little hard on the blood pressure. As the credit markets strive to clear their current logjam, so the market will follow like a sideshow. The TED spread needs to ease some more before we’re out of the woods. To some degree the market is beginning to behave the way we would like it to. A “capitulation” is still a possibility but much less of a probability in light of yesterday’s sustained rally. Mainly, I don’t think Americans woke up Wednesday and said “Wow, we’re in a recession,” and drove the market down. Some of the swings may be noise not real activity. I believe the Elliot Wave Theory can be a good indicator in times like these. Stay calm and reasonable.
Sources: Bedlam Asset Management, Merrill Lynch Research – proprietary PIA Research. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 17, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
Tuesday, October 14, 2008
Mighty Casey Goes to Bat 10/10/08
Good evening,
To celebrate take a market strategist to the Might Casey Lounge and I’ll explain why I’m only as good as my last bat. It’s been a long year this week.
Ultimately, we live in a long stage of boredom. A random crisis occurs and those who make the best decisions in the crisis succeed. We are in the latter. The boredom has expired.
I've taken a good bit of time to compile the following information I believe it will provide a long-term enough perspective to frame where we are.
A study of the history of crises reveals a lot. Starting with the bombing of Pearl Harbor, history reveals there have been 20 major crises that have caused the stock market to drop significantly. Since most investor’s attention to the market fluctuations have only come over the last 10 years, they do not realize the frequency of crisis in the capital markets. All of those crises were resolved, markets recovered, and then ultimately went to new highs. Although the types of crises were different, the average recovery time for the market from when the crises started to when the market recovered to its pre-crisis level was 72 weeks. We are somewhere between weeks 30 and 50 depending on when you identify the start of this crisis. The one significant outlier was 347 weeks and was initiated by the bombing of Hanoi during the Viet Nam War. We should note that all crises seem unique at the time you are experiencing them.
Conclusion: The crisis will be resolved and the market will recover.
What would be a signal of the stock market bottom: Here the word is capitulation. Capitulation is when investors throw in the towel and emotional pain has triggered a fear based decision to flee. Stock markets traditionally hit a bottom and start going up after those investors who are desperate to sell are gone. Think of it this way, the only individuals who can push the market down are those who are in the market. They push it down by selling and providing supply, while demand is low. I disregard the short sellers because they are not as large a player as most people think and because their shorts represent pent up demand. If the majority of the sellers leave the market, its daily prices changes stabilize. Once equilibrium has been established, then any increase in demand (a buyer) faces reluctant sellers and prices start to creep up. Investors (mostly institutions, who are largely in cash) start to feel that they will miss the market recovery and start to systematically buy, pushing the price up. By the way, individual investors are normally the last out of the market and the last back in.
Conclusion: A significant sell-off (which may have started Thursday) followed by stabilization would be a significant bottom signal. Monday may have some continuation of selling based on the fact that mutual fund orders to redeem (sell) entered today will be funded by sales Monday.
Sources: Art Cashin – UBS, Merrill Lynch Research – proprietary PIA Research. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 7, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
To celebrate take a market strategist to the Might Casey Lounge and I’ll explain why I’m only as good as my last bat. It’s been a long year this week.
Ultimately, we live in a long stage of boredom. A random crisis occurs and those who make the best decisions in the crisis succeed. We are in the latter. The boredom has expired.
I've taken a good bit of time to compile the following information I believe it will provide a long-term enough perspective to frame where we are.
A study of the history of crises reveals a lot. Starting with the bombing of Pearl Harbor, history reveals there have been 20 major crises that have caused the stock market to drop significantly. Since most investor’s attention to the market fluctuations have only come over the last 10 years, they do not realize the frequency of crisis in the capital markets. All of those crises were resolved, markets recovered, and then ultimately went to new highs. Although the types of crises were different, the average recovery time for the market from when the crises started to when the market recovered to its pre-crisis level was 72 weeks. We are somewhere between weeks 30 and 50 depending on when you identify the start of this crisis. The one significant outlier was 347 weeks and was initiated by the bombing of Hanoi during the Viet Nam War. We should note that all crises seem unique at the time you are experiencing them.
Conclusion: The crisis will be resolved and the market will recover.
What would be a signal of the stock market bottom: Here the word is capitulation. Capitulation is when investors throw in the towel and emotional pain has triggered a fear based decision to flee. Stock markets traditionally hit a bottom and start going up after those investors who are desperate to sell are gone. Think of it this way, the only individuals who can push the market down are those who are in the market. They push it down by selling and providing supply, while demand is low. I disregard the short sellers because they are not as large a player as most people think and because their shorts represent pent up demand. If the majority of the sellers leave the market, its daily prices changes stabilize. Once equilibrium has been established, then any increase in demand (a buyer) faces reluctant sellers and prices start to creep up. Investors (mostly institutions, who are largely in cash) start to feel that they will miss the market recovery and start to systematically buy, pushing the price up. By the way, individual investors are normally the last out of the market and the last back in.
Conclusion: A significant sell-off (which may have started Thursday) followed by stabilization would be a significant bottom signal. Monday may have some continuation of selling based on the fact that mutual fund orders to redeem (sell) entered today will be funded by sales Monday.
Sources: Art Cashin – UBS, Merrill Lynch Research – proprietary PIA Research. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 7, 2008, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Merrill Lynch to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
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