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.
Thursday, October 30, 2008
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.
Hypochondria 10/08/08
Good evening,
What a range today – up 180, down to 233 with a close at 189. I guess they’ll update my Almanac for next year. I agree with Paulson the recovery will require patience.
David Gaffen at the WSJ quoted Phil Roth of Miller Tabak – “Right now we’re in a sort of broad capitulation phase so everything is getting shelled and the last thing you want to do is pick some point on some chart and say that’s where its going. We’re at an emotional point where chart points can be breached by breathing on them.”
Redemptions on hedge funds and mutual funds continue to contribute to selling pressures. I think we can see the hedge fund process continue to play out over the next 3 weeks.
I was watching the Food Network this weekend. I love to play around in the kitchen and it’s one of the few areas where I don’t feel like I need to play by the rules so I can gently borrow from them and make my own creations. I’m going to go out on a limb with this one – I noticed that Emeril Agassi and Jim Cramer have a lot in common. They have a lot of theatrics with bells and whistles – well on the side of Emeril I believe it’s called onomatopoeia. I’ll venture to say though that neither is at the top of their game thus they have to resort to theatrics to keep your attention.
I bring up Jim Cramer and CNBC for a reason or two. Most everyone I know is glued to CNBC. I do believe for the most part their guests are well intentioned but ill-equipt to deal with the individual investor. Let’s review CNBC’s objectives – they want peaks and valleys so while they are screaming to sell out your portfolio their purpose is to sell ad space. If this is your objective – then by all means sell. But I don’t think that’s most folks’ objective. Emotionally this feels like it won’t turn around but it will. If you’ve got cash start nibbling on those things that are undervalued – of which there are some good ones. Ultimately, unless you believe every stock in DJIA is worth 35% less than it was a year ago there are some good buys.
Today’s markets are hard and the uncertainty is even more challenging. Humans are adaptive learners. Let me take you back to some recent history – in 2000 and 2001 Warren Buffet was called the “stupidest investor.” He had “lost his touch.” He was “out of touch with technology.” He didn’t understand the “new economy.” However, today he is the “Oracle of Omaha.” I want to ask you though if you believe his strategy has changed in the last 5-10 years ? I don’t think so. I just think he keeps his eye on the ball and isn’t distracted by all the clutter. Be an adaptive learner. Recognize this is a cycle.
Forecasting:
In all but one case, the last recession, the market begins to rally before the end of the recession.
Recession Market Bottom Gain in first 12 months
Jan 80- Jul 80 Apr 80 31.2%
Jul 90 – Mar 91 Oct 90 33.5%
Mar 01-Nov 01 Feb 03 38.5%
On to the better news ! The crucial credit markets show teeny tiny motions of response to loosening in the credit freeze up. This is good news for you. They may be tiny moves but they are the first moves we’ve seen in weeks and weeks.
Warm regards,
Rachel
OOOPS – I almost forgot the forecast** ! Just wanted to make sure you were paying attention.
Data: High for S&P500 last 5 years, 3rd Quarter 2007 1,526
Mean for S&P500 for the 5 year period 1,278
Low for S&P500 for last 5 years 4th Qtr 08 1,035 (10-6-08)
Assumptions: Regression to the mean
Normal Distribution of returns
Probabilities: End of 3rd Quarter 09
50% chance at 1,278 or better (+23.5%)
75% chance at 1,157 or better (+11.8%)
1% chance at 790 or worse (-23.5%)*
*this is the adaptive trend model
Remember that all forecasts are wrong, some are useful. The issue is what do you believe about the economic resilience and stability of the US Economy. If you think that in the long-haul that Warren Buffet is right, then these numbers may be comforting. If you believe the world is coming to an end, these numbers have no value.
Sources: Art Cashin-UBS, Richard C Marston – Wharton, NBER and **Merrill Lynch Research – proprietary PIA Forecaster. 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.
What a range today – up 180, down to 233 with a close at 189. I guess they’ll update my Almanac for next year. I agree with Paulson the recovery will require patience.
David Gaffen at the WSJ quoted Phil Roth of Miller Tabak – “Right now we’re in a sort of broad capitulation phase so everything is getting shelled and the last thing you want to do is pick some point on some chart and say that’s where its going. We’re at an emotional point where chart points can be breached by breathing on them.”
Redemptions on hedge funds and mutual funds continue to contribute to selling pressures. I think we can see the hedge fund process continue to play out over the next 3 weeks.
I was watching the Food Network this weekend. I love to play around in the kitchen and it’s one of the few areas where I don’t feel like I need to play by the rules so I can gently borrow from them and make my own creations. I’m going to go out on a limb with this one – I noticed that Emeril Agassi and Jim Cramer have a lot in common. They have a lot of theatrics with bells and whistles – well on the side of Emeril I believe it’s called onomatopoeia. I’ll venture to say though that neither is at the top of their game thus they have to resort to theatrics to keep your attention.
I bring up Jim Cramer and CNBC for a reason or two. Most everyone I know is glued to CNBC. I do believe for the most part their guests are well intentioned but ill-equipt to deal with the individual investor. Let’s review CNBC’s objectives – they want peaks and valleys so while they are screaming to sell out your portfolio their purpose is to sell ad space. If this is your objective – then by all means sell. But I don’t think that’s most folks’ objective. Emotionally this feels like it won’t turn around but it will. If you’ve got cash start nibbling on those things that are undervalued – of which there are some good ones. Ultimately, unless you believe every stock in DJIA is worth 35% less than it was a year ago there are some good buys.
Today’s markets are hard and the uncertainty is even more challenging. Humans are adaptive learners. Let me take you back to some recent history – in 2000 and 2001 Warren Buffet was called the “stupidest investor.” He had “lost his touch.” He was “out of touch with technology.” He didn’t understand the “new economy.” However, today he is the “Oracle of Omaha.” I want to ask you though if you believe his strategy has changed in the last 5-10 years ? I don’t think so. I just think he keeps his eye on the ball and isn’t distracted by all the clutter. Be an adaptive learner. Recognize this is a cycle.
Forecasting:
In all but one case, the last recession, the market begins to rally before the end of the recession.
Recession Market Bottom Gain in first 12 months
Jan 80- Jul 80 Apr 80 31.2%
Jul 90 – Mar 91 Oct 90 33.5%
Mar 01-Nov 01 Feb 03 38.5%
On to the better news ! The crucial credit markets show teeny tiny motions of response to loosening in the credit freeze up. This is good news for you. They may be tiny moves but they are the first moves we’ve seen in weeks and weeks.
Warm regards,
Rachel
OOOPS – I almost forgot the forecast** ! Just wanted to make sure you were paying attention.
Data: High for S&P500 last 5 years, 3rd Quarter 2007 1,526
Mean for S&P500 for the 5 year period 1,278
Low for S&P500 for last 5 years 4th Qtr 08 1,035 (10-6-08)
Assumptions: Regression to the mean
Normal Distribution of returns
Probabilities: End of 3rd Quarter 09
50% chance at 1,278 or better (+23.5%)
75% chance at 1,157 or better (+11.8%)
1% chance at 790 or worse (-23.5%)*
*this is the adaptive trend model
Remember that all forecasts are wrong, some are useful. The issue is what do you believe about the economic resilience and stability of the US Economy. If you think that in the long-haul that Warren Buffet is right, then these numbers may be comforting. If you believe the world is coming to an end, these numbers have no value.
Sources: Art Cashin-UBS, Richard C Marston – Wharton, NBER and **Merrill Lynch Research – proprietary PIA Forecaster. 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.
The Heisman 10/06/08
Good evening,
Today’s humor -- In light of some of the recent close football games and upsets around town I thought this might be an apropos analogy. Close to this day in 1916 there was a lopsided victory in football history. The most lopsided one I believe. The coach of Georgia Tech was ahead 222 to 0. It’s not very sporting and one would have thought he would have sent in the water boys when they were up by 100. The coach of this team was John Heisman. Yes, the Heisman of the Heisman trophy. It is my understanding he invented half the plays in football – one being the hidden football trick, which was eventually banned. My point is this, the markets are confused, the hidden assets value trick is at it again.
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 ?
Market corrections return stocks to their rightful owners. As Pasteur said, “Chance favors the prepared mind.” I think we are in a recession so in the coming week’s we’ll explore the economic landscape and what that will have to offer.
I hear a lot of people worrying about inflation next year so let’s talk about that for a moment. We will be talking about deflation this time next year. Recessions are by definition deflationary events. Given that we have had two bubbles burst (housing and credit), there is even more potential for deflationary pressures. Add into the mix the deleveraging process, which will take years to finally abate, and the recent bout of price inflation caused by energy and food will pass, as demand destruction for oil will hold oil prices in check.
An excerpt from John Maudlin – I can’t say it better !
“In the next few weeks and months, I think you can count on more extraordinary actions by the Fed and Treasury to try and jump-start the credit markets. Actions which were highly improbable a few months ago will be on the table. Will the Fed open its balance sheet to non-banks? Possibly. If they can guarantee money markets, will there be a scheme to insure commercial paper at some price? Not out of the question. Will European governments take more equity in large European banks? Very likely. Will the Fed and/or the Treasury invest even more capital in larger financial institutions? Given that We the People now own 80% of AIG and 100% of Fannie and Freddie, it is certainly within the realm of possibility that we will be the proud owners of even more private institutions.
Again, this is not just a US issue. We will likely see similar actions in Europe and some of the developing world. This is a worldwide crisis, and the response will be from central banks all over the world.
Understand, I am not advocating these actions. I am simply trying to help you understand what actions might be put into place by the various government of the world in an effort to avoid systemic economic collapse.”
At the end of the day, ask yourself when you believe the recovery is possible. Stay tuned for tomorrow’s prediction for the end of Q3 2009 where I outline our recovery !
Sources: Art Cashin-UBS, John Maudlin and Robin Hogarth – Judgement and Choice. 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 6, 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.
Today’s humor -- In light of some of the recent close football games and upsets around town I thought this might be an apropos analogy. Close to this day in 1916 there was a lopsided victory in football history. The most lopsided one I believe. The coach of Georgia Tech was ahead 222 to 0. It’s not very sporting and one would have thought he would have sent in the water boys when they were up by 100. The coach of this team was John Heisman. Yes, the Heisman of the Heisman trophy. It is my understanding he invented half the plays in football – one being the hidden football trick, which was eventually banned. My point is this, the markets are confused, the hidden assets value trick is at it again.
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 ?
Market corrections return stocks to their rightful owners. As Pasteur said, “Chance favors the prepared mind.” I think we are in a recession so in the coming week’s we’ll explore the economic landscape and what that will have to offer.
I hear a lot of people worrying about inflation next year so let’s talk about that for a moment. We will be talking about deflation this time next year. Recessions are by definition deflationary events. Given that we have had two bubbles burst (housing and credit), there is even more potential for deflationary pressures. Add into the mix the deleveraging process, which will take years to finally abate, and the recent bout of price inflation caused by energy and food will pass, as demand destruction for oil will hold oil prices in check.
An excerpt from John Maudlin – I can’t say it better !
“In the next few weeks and months, I think you can count on more extraordinary actions by the Fed and Treasury to try and jump-start the credit markets. Actions which were highly improbable a few months ago will be on the table. Will the Fed open its balance sheet to non-banks? Possibly. If they can guarantee money markets, will there be a scheme to insure commercial paper at some price? Not out of the question. Will European governments take more equity in large European banks? Very likely. Will the Fed and/or the Treasury invest even more capital in larger financial institutions? Given that We the People now own 80% of AIG and 100% of Fannie and Freddie, it is certainly within the realm of possibility that we will be the proud owners of even more private institutions.
Again, this is not just a US issue. We will likely see similar actions in Europe and some of the developing world. This is a worldwide crisis, and the response will be from central banks all over the world.
Understand, I am not advocating these actions. I am simply trying to help you understand what actions might be put into place by the various government of the world in an effort to avoid systemic economic collapse.”
At the end of the day, ask yourself when you believe the recovery is possible. Stay tuned for tomorrow’s prediction for the end of Q3 2009 where I outline our recovery !
Sources: Art Cashin-UBS, John Maudlin and Robin Hogarth – Judgement and Choice. 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 6, 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.
10/02/08 A little Levity
Good evening,
While the Oracle of Omaha has evolved into a kind of two-legged “Good Housekeeping Seal of Approval,” the market shrugged that off and paid attention to the rampant tsunami of mutual fund redemptions. This is said to be forcing funds to sell securities and as a result is wreaking havoc on us all. Naturally, they sell their winners so their performance isn’t dragged down. Selling those winners results in a capital gain for the fund holders - should be an interesting year as far as tax consequences.
As my mentor said to me this morning, your job is not to find blame your job is to find your clients the investment vehicle that will produce for them what they need. With that said, there are some seriously good buys out there for the long term. I saw a report today labeled “Fine in ‘09” and I’m not sure that will come to bear – no pun intended – but I do believe the rough edges will begin to soften.
Today’s drop is no mystery so I’ll leave you with a bit of levity!
"A tournament, a tournament, a tournament of lies.
Offer me solutions, offer me alternatives and I decline.
It's the end of the world as we know it and I feel fine.
(It's time I had some time alone.)"
- Lyrics from R.E.M., 1987
Sources: Art Cashin-UBS, The Economist, and The Financial Times, October 2, 2008 US Edition. 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 2, 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.
While the Oracle of Omaha has evolved into a kind of two-legged “Good Housekeeping Seal of Approval,” the market shrugged that off and paid attention to the rampant tsunami of mutual fund redemptions. This is said to be forcing funds to sell securities and as a result is wreaking havoc on us all. Naturally, they sell their winners so their performance isn’t dragged down. Selling those winners results in a capital gain for the fund holders - should be an interesting year as far as tax consequences.
As my mentor said to me this morning, your job is not to find blame your job is to find your clients the investment vehicle that will produce for them what they need. With that said, there are some seriously good buys out there for the long term. I saw a report today labeled “Fine in ‘09” and I’m not sure that will come to bear – no pun intended – but I do believe the rough edges will begin to soften.
Today’s drop is no mystery so I’ll leave you with a bit of levity!
"A tournament, a tournament, a tournament of lies.
Offer me solutions, offer me alternatives and I decline.
It's the end of the world as we know it and I feel fine.
(It's time I had some time alone.)"
- Lyrics from R.E.M., 1987
Sources: Art Cashin-UBS, The Economist, and The Financial Times, October 2, 2008 US Edition. 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 2, 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.
10/01/08 Connecting the Dots part II
Good evening !
Let me set the rules of engagement again. I’m not here to make a political statement about the proposed “socialization” of the problem as to what is right or wrong in this situation. It is inappropriate and irresponsible for me to make that statement carte blanche. Off-line I’m more than happy to have this discussion and welcome the various views I know are out there !
However, part of my responsibility is to protect you from the enthusiasm of my industry and the pessimism of the media.
Fast forward to summer of 2007. We’re going to fly at 34,000 feet. The complexity of a global market and the other various investment vehicles that have entered the market in the last 20 years are relevant to stock market performance today. They also are relevant to where the credit markets are but less so. As a result, I will focus less on those activities.
What is a credit market and why do you care ?!
Credit markets come in a variety of shapes and sizes. As a consumer, the ones you are most familiar with are installment loans (automobiles and mortgages) and revolving credit – AKA credit cards. The one in the news is between banks and banks, banks and countries, and countries and countries. That is why the numbers are so large.
Why do you care about the credit market between banks and banks and countries and banks and countries and countries ? Lending is the circulatory system of capitalism and globalization. It allows for growth and expansion of business and countries. Much like your circulatory system, if it gets shut down the extremities suffer. So when banks quit lending to other banks out of fear or charge double digit interest rates and the cost of doing business is too expensive banks stop lending. Take Iceland – an otherwise conservative investment – they are being charged 15% to borrow today.
Individual consumers are the extremities in this case. For instance, in a typical month 83% of automobile loans are approved. Since the beginning of September 63% of automobile loans were approved. Should there be some reduction in lending – probably so ! Twenty percent ? I think that’s an extreme. Small businesses also suffer – they are not able to expand as quickly and as they are one of the largest employers in America this has a direct impact on employment. Another irony to this particular situation is that many times in the face of unemployment the youth of our nation go back to school. However, the pool of lending for Student Loans is DRY.
Why has our circulatory system been put under cryogenics ? I go back to what I said yesterday. When you buy and sell any security there is an assumed underlying value to what you’re buying. As a buyer or seller of a security you should be able to determine what you’re buying. When you buy GE as a stock, you know you’re buying a company that makes light bulbs, they make jet engines, they sell life insurance policies and so on. For the buyers and sellers of CDOs and MBSs they stopped looking at what they were buying and selling and if they could even discern what they were buying and selling. For example: “This one CDO factory--this one office, owns a share of 16 million homes. And each of those homes has lots of other owners--people in other CDO offices around the world--there are lots of them. And, other investors. You start to see what a crazy web of confusing interconnections this whole process is.”
Most lenders are frozen because the value of what they own isn’t clear. Add on top of that the “free-market” isn’t clear on what the value is either. UBS and CitiGroup have their CDOs and MBSs listed for 50-60 cents on the dollar on their balance sheet. Merrill Lynch sold theirs for 22 cents on the dollar in August of 2008. Last summer the hedge funds went to the last resort and sold municipal bonds to raise capital, because the market said there was $0 value to their CDOs and MBSs. Both Goldman Sachs and Morgan Stanley are well capitalized institutions (they have cold hard cash in the bank). While they participated in the CDO and MBS markets their risk parameters were much tighter so their exposure was less. However, because the “free-market” can’t seem to assign a clear value to what they do own they are forced to change their business structure. Herein lies the problem. Firms are not necessarily failing, but they are contracting, they are deleveraging. They are unable to raise capital and are refusing to lend which is squeezing the economy.
Enter in TARP. Mr. Bernanke is a student of the Depression and lived through the 70’s. I think the biggest lesson he took away from all of his academics is that inaction is the worst thing to do. 1933 saw the first large infusions of federal cash into institutions after the crash in 1929. An action Bernanke has argued was “the only major New Deal program which successfully promoted economic recovery.” I believe that both Bernanke and Paulson have the best interest of the United State of America at heart. As Warren Buffet said today this is an effort to save the US Economy not Wall Street. And in saving the US Economy we once again show the world that capitalism and democracy can succeed. Keeping global faith in the US Economy is to the benefit of us all. (I can’t help that aside – I am proud to be an American.)
I do not believe we are entering into a Great Depression. I believe we’re stuck for a while like a rocking chair…. Things are moving back and forth but we’re not really going anywhere.
We’ve flown at 34,000 feet today. If you have any additional questions, you know where I am.
Let me set the rules of engagement again. I’m not here to make a political statement about the proposed “socialization” of the problem as to what is right or wrong in this situation. It is inappropriate and irresponsible for me to make that statement carte blanche. Off-line I’m more than happy to have this discussion and welcome the various views I know are out there !
However, part of my responsibility is to protect you from the enthusiasm of my industry and the pessimism of the media.
Fast forward to summer of 2007. We’re going to fly at 34,000 feet. The complexity of a global market and the other various investment vehicles that have entered the market in the last 20 years are relevant to stock market performance today. They also are relevant to where the credit markets are but less so. As a result, I will focus less on those activities.
What is a credit market and why do you care ?!
Credit markets come in a variety of shapes and sizes. As a consumer, the ones you are most familiar with are installment loans (automobiles and mortgages) and revolving credit – AKA credit cards. The one in the news is between banks and banks, banks and countries, and countries and countries. That is why the numbers are so large.
Why do you care about the credit market between banks and banks and countries and banks and countries and countries ? Lending is the circulatory system of capitalism and globalization. It allows for growth and expansion of business and countries. Much like your circulatory system, if it gets shut down the extremities suffer. So when banks quit lending to other banks out of fear or charge double digit interest rates and the cost of doing business is too expensive banks stop lending. Take Iceland – an otherwise conservative investment – they are being charged 15% to borrow today.
Individual consumers are the extremities in this case. For instance, in a typical month 83% of automobile loans are approved. Since the beginning of September 63% of automobile loans were approved. Should there be some reduction in lending – probably so ! Twenty percent ? I think that’s an extreme. Small businesses also suffer – they are not able to expand as quickly and as they are one of the largest employers in America this has a direct impact on employment. Another irony to this particular situation is that many times in the face of unemployment the youth of our nation go back to school. However, the pool of lending for Student Loans is DRY.
Why has our circulatory system been put under cryogenics ? I go back to what I said yesterday. When you buy and sell any security there is an assumed underlying value to what you’re buying. As a buyer or seller of a security you should be able to determine what you’re buying. When you buy GE as a stock, you know you’re buying a company that makes light bulbs, they make jet engines, they sell life insurance policies and so on. For the buyers and sellers of CDOs and MBSs they stopped looking at what they were buying and selling and if they could even discern what they were buying and selling. For example: “This one CDO factory--this one office, owns a share of 16 million homes. And each of those homes has lots of other owners--people in other CDO offices around the world--there are lots of them. And, other investors. You start to see what a crazy web of confusing interconnections this whole process is.”
Most lenders are frozen because the value of what they own isn’t clear. Add on top of that the “free-market” isn’t clear on what the value is either. UBS and CitiGroup have their CDOs and MBSs listed for 50-60 cents on the dollar on their balance sheet. Merrill Lynch sold theirs for 22 cents on the dollar in August of 2008. Last summer the hedge funds went to the last resort and sold municipal bonds to raise capital, because the market said there was $0 value to their CDOs and MBSs. Both Goldman Sachs and Morgan Stanley are well capitalized institutions (they have cold hard cash in the bank). While they participated in the CDO and MBS markets their risk parameters were much tighter so their exposure was less. However, because the “free-market” can’t seem to assign a clear value to what they do own they are forced to change their business structure. Herein lies the problem. Firms are not necessarily failing, but they are contracting, they are deleveraging. They are unable to raise capital and are refusing to lend which is squeezing the economy.
Enter in TARP. Mr. Bernanke is a student of the Depression and lived through the 70’s. I think the biggest lesson he took away from all of his academics is that inaction is the worst thing to do. 1933 saw the first large infusions of federal cash into institutions after the crash in 1929. An action Bernanke has argued was “the only major New Deal program which successfully promoted economic recovery.” I believe that both Bernanke and Paulson have the best interest of the United State of America at heart. As Warren Buffet said today this is an effort to save the US Economy not Wall Street. And in saving the US Economy we once again show the world that capitalism and democracy can succeed. Keeping global faith in the US Economy is to the benefit of us all. (I can’t help that aside – I am proud to be an American.)
I do not believe we are entering into a Great Depression. I believe we’re stuck for a while like a rocking chair…. Things are moving back and forth but we’re not really going anywhere.
We’ve flown at 34,000 feet today. If you have any additional questions, you know where I am.
09/30/08 Connecting the Dots Part I
Good evening,
Over the last year and especially the last 2-3 weeks understanding the credit markets has been tough. This is not intended as a political statement. I believe in a Democracy and I believe in Capitalism. Neither ideology is an advocate for the other.
I want to bring more clarity to what’s going on and why there is so much urgency from not only our central bankers but also from central bankers around the globe. I’m going to hit the highlights so if you want more detail please don’t hesitate to call or email.
In the 1970’s mortgage backed securities (MBS) were introduced to the market. So let’s define a mortgage backed security. A mortgage-backed security is a claim to the cash flows generated by a specific pool of mortgages. Most mortgage-backed securities are issued by one of the three government-sponsored enterprises or agencies known as Ginnie Mae (GNMA), Freddie Mac (FHLMC) and Fannie Mae (FNMA). A growing trend in 2005 saw mortgage-backed securities being issued directly by large mortgage lenders. Since their inception in the 1970s, mortgage-backed securities became very popular as an investment vehicles among individual and institutional fixed-income investors. Key reasons for this popularity are that mortgage-backed securities offer attractive yields, have little or no credit risk and trade in a liquid secondary market.
In the 1980s, housing market analysts and policymakers were concerned that Freddie Mac and Fannie Mae were not adequately facilitating the financing of affordable housing for low- and moderate-income families. To address these concerns, the Department of Housing and Urban Development established quantitative Affordable Housing Goals requiring the Government Sponsored Enterprises (GSEs) to increase their purchases of mortgages originated by low- and moderate-income households and for homes located in low-income neighborhoods. Analysis indicates that the goals increased the supply of mortgage credit available to low- and moderate-income households, after controlling for other mortgage market factors. Analysis suggests that the increase in the supply of low-income mortgage credit occurred primarily in 1998.
Simultaneously in the late 1980’s the creation of collateralized debt obligations (CDO’s) entered the market.
During the Clinton Administration there were additional pieces of legislation to further open the American Dream of home ownership to more Americans. As a result credit standards were expanded and relaxed.
During the current Bush Administration there has been little to no request for any reigning of the deregulated markets. Both MBSs and CDOs have evolved in their 20 and 30 year existence respectively – more complex. What the secondary market bought and sold up until last year was in part very different than its origins. Some of the most significant differences were credit instruments that were introduced into or expanded in the market. For example, adjustable rate mortgages, car leases, student loans and most of availability of credit. These debt instruments were sometimes pooled together and separately and sold, re-pooled and sold again on the secondary market.
When you buy and sell any security there is an assumed underlying value to what you’re buying. As a buyer or seller of a security you should be able to determine what you’re buying. When you buy GE as a stock, you know you’re buying a company that makes light bulbs, they make jet engines, they sell life insurance policies and so on. For the buyers and sellers of CDOs and MBSs they stopped looking at what they were buying and selling and if they could even discern what they were buying and selling. Capitalism said there was a market and democracy didn’t intervene.
END PART I
Commentary on today – The stock market is just a sideshow to the circus. Credit markets are very, very nervous. They seem to expect more shoes to drop than were in Imelda Marco’s closet. Credit is the battlefield. The Fed added $330 Billion to its currency credit swap lines with foreign banks. Mid-morning yesterday, the Fed made available $630 Billion to the world financial markets. Mr. Bernanke has made it clear he “would like to get out of the business of crisis management (for which the Fed really lacks authority and broad support) and get back to monetary policy, which is our function, our key mission.”
Sources: Art Cashin-UBS, The Economist, Library of Congress,, St Louis Federal Reserve. 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 September 30, 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.
Over the last year and especially the last 2-3 weeks understanding the credit markets has been tough. This is not intended as a political statement. I believe in a Democracy and I believe in Capitalism. Neither ideology is an advocate for the other.
I want to bring more clarity to what’s going on and why there is so much urgency from not only our central bankers but also from central bankers around the globe. I’m going to hit the highlights so if you want more detail please don’t hesitate to call or email.
In the 1970’s mortgage backed securities (MBS) were introduced to the market. So let’s define a mortgage backed security. A mortgage-backed security is a claim to the cash flows generated by a specific pool of mortgages. Most mortgage-backed securities are issued by one of the three government-sponsored enterprises or agencies known as Ginnie Mae (GNMA), Freddie Mac (FHLMC) and Fannie Mae (FNMA). A growing trend in 2005 saw mortgage-backed securities being issued directly by large mortgage lenders. Since their inception in the 1970s, mortgage-backed securities became very popular as an investment vehicles among individual and institutional fixed-income investors. Key reasons for this popularity are that mortgage-backed securities offer attractive yields, have little or no credit risk and trade in a liquid secondary market.
In the 1980s, housing market analysts and policymakers were concerned that Freddie Mac and Fannie Mae were not adequately facilitating the financing of affordable housing for low- and moderate-income families. To address these concerns, the Department of Housing and Urban Development established quantitative Affordable Housing Goals requiring the Government Sponsored Enterprises (GSEs) to increase their purchases of mortgages originated by low- and moderate-income households and for homes located in low-income neighborhoods. Analysis indicates that the goals increased the supply of mortgage credit available to low- and moderate-income households, after controlling for other mortgage market factors. Analysis suggests that the increase in the supply of low-income mortgage credit occurred primarily in 1998.
Simultaneously in the late 1980’s the creation of collateralized debt obligations (CDO’s) entered the market.
During the Clinton Administration there were additional pieces of legislation to further open the American Dream of home ownership to more Americans. As a result credit standards were expanded and relaxed.
During the current Bush Administration there has been little to no request for any reigning of the deregulated markets. Both MBSs and CDOs have evolved in their 20 and 30 year existence respectively – more complex. What the secondary market bought and sold up until last year was in part very different than its origins. Some of the most significant differences were credit instruments that were introduced into or expanded in the market. For example, adjustable rate mortgages, car leases, student loans and most of availability of credit. These debt instruments were sometimes pooled together and separately and sold, re-pooled and sold again on the secondary market.
When you buy and sell any security there is an assumed underlying value to what you’re buying. As a buyer or seller of a security you should be able to determine what you’re buying. When you buy GE as a stock, you know you’re buying a company that makes light bulbs, they make jet engines, they sell life insurance policies and so on. For the buyers and sellers of CDOs and MBSs they stopped looking at what they were buying and selling and if they could even discern what they were buying and selling. Capitalism said there was a market and democracy didn’t intervene.
END PART I
Commentary on today – The stock market is just a sideshow to the circus. Credit markets are very, very nervous. They seem to expect more shoes to drop than were in Imelda Marco’s closet. Credit is the battlefield. The Fed added $330 Billion to its currency credit swap lines with foreign banks. Mid-morning yesterday, the Fed made available $630 Billion to the world financial markets. Mr. Bernanke has made it clear he “would like to get out of the business of crisis management (for which the Fed really lacks authority and broad support) and get back to monetary policy, which is our function, our key mission.”
Sources: Art Cashin-UBS, The Economist, Library of Congress,, St Louis Federal Reserve. 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 September 30, 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.
09/26/06 Shifting Sands
Good morning,
We are in a wash of news and it is terribly difficult to determine what’s noise and what’s important. I thought this was an appropriate sideline to help us all keep cool heads.
A major shift occurred in the fall of 1989. Before that time, the media did not make excessive use of the terms such as crisis, catastrophe, cataclysm, plague or disaster. The word catastrophe was used 5 times more in 1995 than in 1985. Its use doubled again in 2000. It is also interesting to note that on Monday September 22, 2008 the media noted an Oil CRISIS since oil was back to $120 a barrel. What was it at $149 a barrel this past summer ?!!?! In an article by Frank Furedi, he discusses that as Western societies become more affluent and safe, as life expectancy has steadily increased, one might expect the population to become more relaxed and secure. The opposite has happened, “Western societies have become panic stricken and hysterically risk adverse. The pattern is evident in everything from environmental issues to the vastly increased supervision of children.”
I will let each of you draw your own conclusions as to the why’s and wherefores.
There is a great article in the WSJ this morning – “Debt Market Distress Spreads.” Pay particular attention to the affect on Main Street.
Sources: Art Cashin, UBS, Wall Street Journal, Frank Furedi. 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 September 26, 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.
We are in a wash of news and it is terribly difficult to determine what’s noise and what’s important. I thought this was an appropriate sideline to help us all keep cool heads.
A major shift occurred in the fall of 1989. Before that time, the media did not make excessive use of the terms such as crisis, catastrophe, cataclysm, plague or disaster. The word catastrophe was used 5 times more in 1995 than in 1985. Its use doubled again in 2000. It is also interesting to note that on Monday September 22, 2008 the media noted an Oil CRISIS since oil was back to $120 a barrel. What was it at $149 a barrel this past summer ?!!?! In an article by Frank Furedi, he discusses that as Western societies become more affluent and safe, as life expectancy has steadily increased, one might expect the population to become more relaxed and secure. The opposite has happened, “Western societies have become panic stricken and hysterically risk adverse. The pattern is evident in everything from environmental issues to the vastly increased supervision of children.”
I will let each of you draw your own conclusions as to the why’s and wherefores.
There is a great article in the WSJ this morning – “Debt Market Distress Spreads.” Pay particular attention to the affect on Main Street.
Sources: Art Cashin, UBS, Wall Street Journal, Frank Furedi. 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 September 26, 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.
09/24/2008 Seasick?
Good afternoon,
Let’s see what’s going on this week. There’s been lots of news and reactions to contend with.
He is not here. He is in the hills. He will return when his people need him – That was the legend built around Milano Zapata by the Mexican people who could not accept the death of their beloved hero. Many communities and cultures have a Zapata equivalent – some figure who knows how to make the right move at the right time, almost uncannily.
Wall Street’s version of Milano Zapata (at least today) is Warren Buffet. The unerring economic general has electrified the financial media and markets by investing $5 Billion in Goldman Sachs. It is being heralded as a show of good faith not only in Goldman but the system itself. To say the very least, Mr. Buffet’s investment is a show of faith, yet not unequivocal one. His package was well crafted indeed. If you’re interested in the details – email me back and they will be yours.
Some poor soul at another financial firm was quoted as saying “Do you think that Warren Buffet has some special ability to see good investments that the rest of us lack?” I think $50 Billion in the bank is an unequivocal yes…so much for the thoughts of U and Us.
On with the Paulson package – while unpalatable to many – our Congressmen and women face a challenge. What is the solution for the greatest good ? Ultimately, I believe that we must do something to stave off the global ramifications. If the rest of the world loses faith in the U.S. economy it will get much worse than it is today.
I’d also like to put the $700 billion in context for everyone since the price tag seems to be a real sticking point –
Dr. David Kelley of JP Morgan Chase has prepared the following numbers:
Debt as a Function of GDP (formerly known as GNP)
1946 107%
1994 49%
2008 38% 2006 GDP (last available number) $13.13 Trillion
If we add in the $700B the 38% jumps to 44%. That is if we say there is NO value to the securities purchased by the Treasury. Folks, these securities WILL have value in the future. They are just illiquid now.
From your Olympic Optimist,
Let’s see what’s going on this week. There’s been lots of news and reactions to contend with.
He is not here. He is in the hills. He will return when his people need him – That was the legend built around Milano Zapata by the Mexican people who could not accept the death of their beloved hero. Many communities and cultures have a Zapata equivalent – some figure who knows how to make the right move at the right time, almost uncannily.
Wall Street’s version of Milano Zapata (at least today) is Warren Buffet. The unerring economic general has electrified the financial media and markets by investing $5 Billion in Goldman Sachs. It is being heralded as a show of good faith not only in Goldman but the system itself. To say the very least, Mr. Buffet’s investment is a show of faith, yet not unequivocal one. His package was well crafted indeed. If you’re interested in the details – email me back and they will be yours.
Some poor soul at another financial firm was quoted as saying “Do you think that Warren Buffet has some special ability to see good investments that the rest of us lack?” I think $50 Billion in the bank is an unequivocal yes…so much for the thoughts of U and Us.
On with the Paulson package – while unpalatable to many – our Congressmen and women face a challenge. What is the solution for the greatest good ? Ultimately, I believe that we must do something to stave off the global ramifications. If the rest of the world loses faith in the U.S. economy it will get much worse than it is today.
I’d also like to put the $700 billion in context for everyone since the price tag seems to be a real sticking point –
Dr. David Kelley of JP Morgan Chase has prepared the following numbers:
Debt as a Function of GDP (formerly known as GNP)
1946 107%
1994 49%
2008 38% 2006 GDP (last available number) $13.13 Trillion
If we add in the $700B the 38% jumps to 44%. That is if we say there is NO value to the securities purchased by the Treasury. Folks, these securities WILL have value in the future. They are just illiquid now.
From your Olympic Optimist,
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