Jeremy Siegel: “The Market Will Stage a Comeback”

Tuesday, July 14th, 2009

Jeremy Siegel, Wharton School prof and Director of Wisdom Tree ETFs, says “Now that it’s clear the recession will not turn into a depression, stocks are poised for a recovery.” Siegel recently was the subject of an interview conducted by Knowledge@Wharton. You may listen by clicking the player below, or read the edited transcript of the interview below.

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Here is an excerpt:

Knowledge@Wharton: The market just had its first weekly [decline] in a number of weeks. What was driving that?

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Siegel: I think there are two principal concerns in the market. One is the rising commodity prices — particularly energy prices and oil. And the other is the rising interest rates, which are in turn caused by fears of huge deficits, as well as rising commodity prices. My feeling is, the market would have been up last week, too, if it didn’t have to contend with those. And now, it’s concerned that those [factors] might push the economy down. Today [June 22], we had a decline in energy prices and in the market. But … energy prices and interest rates [are] our main concerns.

Knowledge@Wharton: Are the energy prices being driven by demand?

Siegel: Demand in China is rebounding very rapidly, although there are some experts who say that there’s still a lot of speculation in it, and that the price … has run a little bit ahead of itself. But China and India are recovering quickly. There are a record number of applications for new cars in China, and those generally use gasoline and oil. So, looking forward, over the next couple of years, those bulls in oil are saying there’s going to be a big increase in [consumption].

Knowledge@Wharton: Doesn’t the rise in demand [indicate] an improving economy overall?

Siegel: Certainly … a good part of the rebound in oil and in interest rates is because the depression scenario has basically been taken off the record. It’s now considered an extraordinarily low probability. So, we’re dealing with a severe recession, and [the question of] how fast we are going to improve from that. And once you’re into that mode, you don’t accept 2% to 3% bond rates any more, and oil won’t stay down at $35 a barrel. But I think some of [the movement has occurred] in anticipation of strong demand from China, particularly for oil, and, on the bond side, from the huge deficits, trillion-dollar-plus deficits that are going to cascade down on the market.

You may read the whole transcript here.

Source: Jeremy Siegel: ‘The Market Will Stage Another Recovery’, Knowledge@Wharton, June 24, 2009

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Posted in Emerging Markets, India, Markets | No Comments »

Michael Lewis: The End of Wall Street

Tuesday, June 16th, 2009

Michael Lewis, the trenchant author of Liar’s Poker, Money Ball, and Home Game, discusses what he calls “The End of Wall Street,” in this 5:33 minute segment. It’s an enlightening discussion, I promise. Don’t miss it. Click play to see it.

Lewis explains how he went out of his way to talk to the people who seemed to have known the crisis was coming, and discovered that they were the less sophisticated, net-long breed of hedge fund investors, and not the genius financial engineer cum alchemist types.

In essence, these were, as in one case, portfolio managers who poked holes in the ratings system. In his example, Lewis tells of the story of the investor who asked Standard and Poor’s to explain how a whole whack of BBB mortgage paper could fetch a AAA rating? This was followed by the question, “What would happen if housing prices start falling?” to which the S&P official responded, “there is no place in the model to insert negative numbers.”

Lewis does a great job of explaining what the critical factors were that contributed to “the end of Wall Street.”

Read the whole article here.

Tags: Array, Ball Game, Bbb, Critical Factors, Financial Engineer, Fund Investors, Genius, Hedge Fund, Holes, Home Game, Investor, Liar, Liar Poker, Liar S Poker, Michael Lewis, Minute Segment, Money Ball, Money Game, Mortgage Paper, Negative Numbers, Poker, Poker Game, Portfolio Managers, Wall Street, Whack
Posted in Markets | No Comments »

Jeffrey Saut: Long Emerging Markets and Raw Materials

Tuesday, May 12th, 2009

Raymond James’ chief investment strategist, Jeffrey Saut, has published his newsletter of May 11, 2009, in which he posits a discussion on investing in emerging and frontier markets and raw materials, and corroborates his thoughts with those of Thomas Melendez from MFS, and Jeremy Grantham, GMO.

You may read, as well as print, this weeks entire letter in the slidedeck below by clicking on the ‘full screen’ radio button at the top right hand of the frame.

You can download the entire document here.

Jeffrey Saut’s Bio:
Jeffrey Saut is Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates.

Mr. Saut began his career on a trading desk in New York City. In 1973, he joined E.F . Hutton, where he began following equities and writing research. He subsequently worked as a securities analyst for Wheat First Securities, and then Branch Cabell, where he ran the equity research group as director of research and acted as portfolio manager for the firm’s affiliate, Exeter Capital Management. As director of research, he built the research and institutional sales departments for the regional brokerage firm Ferris, Baker and Watts, Inc. and subsequently Sterne, Agee & Leach, Inc.

Mr. Saut is well known for his insightful and colorful commentary regarding the stock market, and he makes regular media appearances.

Hat tip: Marketfolly.com

Tags: Add new tag, Array, Branch Cabell, Brokerage Firm, Chief Investment Strategist, Colorful Commentary, Director Of Research, E F Hutton, Emerging Markets, Equity Research, ETF, Ferris Baker, Frontier Markets, Hat Tip, Institutional Sales, James Jeffrey, jeffrey saut, Jeremy Grantham, Media Appearances, Radio Button, Raymond James, Raymond James Associates, Regional Brokerage, Securities Analyst, Sterne Agee, Sterne Agee Leach, Writing Research
Posted in Commodities, Economy, Emerging Markets, Markets, Outlook | No Comments »

Seth Klarman (Baupost Group) Speaks to Ivey School of Business

Sunday, May 3rd, 2009

Seth Klarman, Legendary investor, founder of Baupost Group, and author of the $1,200, much sought after, and out of print, now classic investing book, Margin of Safety, recently spoke to the Ivey School of Business sharing his thoughts and wisdom on investing as well as his methodology. This is a rare and valuable lecture, a must listen, and contextually relevant as it is very recent, recorded on March 17th, 2009.

You may view the video courtesy of Ivey School of Business’ Ben Graham Centre for Value Investing.

Bio (Wikipedia):

Seth Klarman is the founder and president of The Baupost Group, a Boston-based private investment partnership, and the author of a book on value investing. Klarman is notable for his willingness to hold significant amounts of cash in his investment portfolios, sometimes in excess of 50% of the total^[1]. In 1991, Klarman authored Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which since has become a value investing classic. Now out of print, Margin of Safety has sold on Amazon for $1,200 and eBay for $2,000.^[2] Before founding Baupost, Klarman worked for Max Heine and Michael Price of the Mutual Shares fund (now a part of Franklin Templeton Investments).

Klarman is a graduate of Cornell University and Harvard Business School. ^[3]

Tags: Amazon, Array, Bachelor Of Arts, Baker Scholar, Baupost Group, Book Margin, Chestnut Hill, Cornell University, Distressed Debt, Ebay, Franklin Templeton Investments, Global Opportunities, Harvard Business School, Individual Investors, Investing, Investment Portfolios, Investor Group, Ivey School Of Business, Magna Cum Laude, Margin Of Safety, Max Heine, Mba Graduate, Methodology, Mutual Shares Fund, Private Equities, Private Investment Partnership, Safety Risk, School Of Business, School Of Management, Seth Klarman, Seth Speaks, Wikipedia, Willingness, wisdom, Worrier
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Jim Rogers isn’t buying a US stock recovery (Barron’s)

Sunday, April 26th, 2009

“Legendary investor Jim Rogers is skeptical of the latest rally in equities – as well the health of the global economy. As such, he is scorning stocks and bonds while embracing commodities as his investment vehicle of choice. Barron’s John Kimelman got the chance to interview the CEO of Rogers Holdings, with the following excerpts appearing on the website yesterday:

Q: When you last did a lengthy interview with Barron’s magazine a year ago you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?

A: No. I’ve sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the US since then. I’m not buying anything in China right now because the Chinese market ran up maybe 50% since last November. It’s been the strongest market in the world in the past six months and I don’t like jumping into something that has been that run up. Still, I’m not thinking of selling these stocks either. I think if it goes down I’ll buy more. I think you will find that it’s the single strongest market in the world since last fall.

Q: That being said, you currently think Chinese stocks are bid-up now, so you’re not buying at these levels. So what have you been buying lately?

A: I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won’t let me buy individual commodities. I recently bought all four Rogers indexes – the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.) That’s how I invest in commodities and that’s what I bought last week. I have been buying these shares since last fall and up to last week.

Q: Now despite the recent stock-market rally that started in March, many US stocks are trading well off their 2007 highs. How come you see no value to this market?

A: I am not buying US companies mainly because I think we may have seen a bottom but I don’t think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Q: Can you summarize the reasons for your bullishness about commodities?

A: It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years. And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it’s going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to. And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.

That does not mean that if suddenly the US goes bankrupt that everything won’t collapse in price. But I would rather be in commodities because it’s the only thing I know where the fundamentals are improving. They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.”

Click here for the full article.

Source: Barron’s, April 20, 2009.

Hat tip: Investment Postcards

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Posted in Bonds, Commodities, Emerging Markets, Markets | No Comments »

Hugh Hendry: Citywire Interview

Saturday, April 11th, 2009

Hugh Hendry, the outspoken CIO and co-founder of Eclectica, one of the UK’s most successful hedge funds during the last 4 years, and in particular the last 2 years, appears in a full length interview, speaking on a variety of issues, including his thoughts on contrarianism, quantitative easing, deflation vs. inflation, his outlook for the market, and future of the hedge fund industry.

As usual, Hendry is both enlightening, and controversial, and his remarkable accuracy about the nature of the market and course during the last year make him worth listening to. Click play to view:

Part 1: The Eclectica co-founder explains why he is sticking to his guns despite having ‘my tail between my legs’ after the recent banking sector rally, and why the dollar could approach parity with the euro.

Part 2 : The outspoken hedge fund manager argues that the majority of his peers ‘have no future’, and explains his fear that tighter financial regulation will mean two decades of deflation in the second of a two part series.

Here is a complete transcript of the interview:

We have had an unprecedented period, unprecedented. Its never happened before. It’s never been the case that the stock market has gone up almost 30 times in just one movement. What I’m saying to you is that the Dow Jones in 1975 was around 590 points, and in 2007, we got to around 14,200 points. I round down, you know. That’s never ever happened. That is unprecedented prosperity. And the people who gained the most from that, are the fund managers, like me. Except, I’m aware of it. A lot of people are just not aware of it, to be lucky to be in the right place at the right time. But as you know, equity markets have done nothing for the past ten years, and if you look at the example of Japan, you’re stretching 25 years, and you’re seeing lows that we recorded in the 1980s. And I think that’s coming, that’s encroaching on our path.

When I go the major cities of the world, I say, hey, “Where do the fund managers live?” “Where do they work?” I want to short people like me; I’m very fearful about my profession’s career. So to lay it off, I want to short these guys. “Who has the biggest portfolio of assets?” ’cause all assets are coming down, coming down. So, you’re going to go from being the luckiest and the chosen, to being the unluckiest and the reviled. So, fund management franchises, insurance companies; I don’t care if you’re composite or if you’re life. I worry about the opacity of it. The ability to see in and the ability to test the value of their portfolio. I worry about what’s this mark-to-market. The banks have had the discipline of it, and we’ve seen what that’s done to their share price. The insurance companies haven’t. That’s my premise, the same thing applies with General Electric, GE, GE Capital. That’s a huge investment manager: $660-billion in assets and they’re coming down, but they’ve only marked 2% of the assets to market. To my mind, if you gave that business an appropriate hair cut, it would suggest that that business is insolvent, and yet its deemed to be one of the most credit worthy companies in the world today. Nothing makes sense today.

Will the Dollar Maintain its Strength?

Whatever I say now, no one will understand, so with that caveat, I don’t say that as a conceited man, I’m not talking down to anyone, its just a difficult theory, nevertheless its a theory postulated by one of the great economists of the twentieth century, Irving Fisher, and its [the kind] along the lines of paradox of thrift. And what’s happening is that, or what’s happened again in America is that like everyone else we took on too much debt, and at its peak we had $53-trillion, think about that, that’s a lot of zeroes, $53-trillion of debt outstanding. People went crazy, they had these liabilities and they hoped that on [the other] this side, they had $53-trillion of assets, and indeed, three years ago, they probably had $80-trillion of assets, and they were looking kind of funky.

The problem is the assets, house prices have fallen 25% in the US, that’s a big haircut, equity prices, they’ve fallen 50-60%, that’s a huge haircut. Commodity prices, they’re down 30%-40%-45%, that’s a huge haircut. Suddenly, you’re finding that as you come to create dollars [convert assets in to cash], because you own things and you sell things, you’re getting less dollars. So what I want to tell you is that there is a scarcity of cash, there is a scarcity of dollars, and that sounds absurd, because here we are today, and they’re announcing they’re bank bailout scheme, and they’re talking about $50-100-billion of government money and leveraging it, they can’t break the link with the past, they want to leverage it up to half a trillion dollars. That’s why I want to say to you…if you think about all of the government’s announcements in the US…its small change out of $53-trillion of debt. That’s why I say to you, the economy will weaken, because they’re not being heroic enough, actually they believe the consensus that if you print enough money you create inflation.

Every one believes in Friedman, everyone is being slow to deal with the fact that there’s this legacy of $53-trillion and its like a heavy object, just pressing the life out of the entrepreneurial spirit, and therefore keeping the economy down. Look, that’s my presumption, and under that presumption, the dollar should be strong, and the dollar has been strong. Its been a frustration to the many people, the strength of the dollar. Now in the last two weeks with the quantitative easing announcement, the dollar has weakened, but I think in the process of the next month or two, you will see the dollar bottom and then go on, and I wouldn’t be surprised if we got close to parity vis-a-vis the Euro within the months and years to come.

The Paradox of Contrarianism

Expert after expert lines up to tell you that the future’s inflationary and you should be selling conventional government bonds. Government bonds have been in an uptrend, so that is an intellectual conceit which is not supported by the price trend, and therefore I am invested in government bonds, I’m trend following, but I’m contrarian. The dollar over the course of the last 3 years has risen. Every investment counsellor will advise you to sell dollars. I will advise you to buy. I pursuing the trend, yet I’m being contrarian. You see how it works out? So first principals are 1) identifying the idea, the opportunity, and then 2) testing it against the market. I got a computer screen on the wall and I say to my kids, Mirror, Mirror on the wall, who’s the prettiest of them all? When I’m stuck, I ask the market. And if the market’s trending higher, then it says I should be trying to buy them, and if its trending down, I should be trying to avoid it.

What people forget is that a successful contrarian is only contrarian 20% of the time. Less than 20% of the time do you ever dare to go against the trend. So most of the time we are pursuing trend. And yet, being contrarian.

A Bear Market Rally – A Test of Faith?

Last March, my hedge fund, we lost 16% percent. That’s a hefty decline. The preceding two months, we made 25% and then we lost 16%, then we lost money in April and May, and June. I have to say, I was quite suicidal, but remember, for the year we made 32%.

So, I tell you, we could sum it up, the stock market was captured by the biblical story. It was St. Peter or St. Paul, but he was the most fervent believer. He’s seen the almightiest Jesus Christ, he’s there in the garden, and he says’s “You’re the man!” And Jesus says, “What are you talking about?” Before the cock crows three times you’ll have rejected me not once, but three times. And he says “Impossible!”

That’s what stock markets are all about. Here I am with my deflationary notions of what might happen. Here I am believing that there’s no intrinsic value in banking stocks, and the cock’s crowing and its kind of “Have I changed my mind?” I haven’t. Have I changed my mind? Markets are set up to take you away from the purity and the sanctity of sensible thinking. And because of that I spend my time talking to you. I spend my time; I’m just back from China, I hug trees, I do anything but sit in my office and watch the portfolio go like that [he makes a fluttering motion].

People claim that I get very cocky. I read some of the correspondence that goes on when they’ve seen me on television and they were saying after my last appearance, I really was a bit cocky, so you know what? Yeah, I get my head handed to me by these people. I sober up, you’re quite right, It’s a lesson that has to be relearnt over and over again, that no one person is bigger than the market, that no one person has a divine right to be right. There, I hear you, I hear you [motioning hand to ear to God].

The hedge fund industry in its construction, as we know it from like, a year ago or 18 months ago is finished. Its finished, I think, yeah. And it was a disfiguration of the spirit of hedge funds. Hedge funds in the 1970s, there weren’t many, they were kind of kooky, kind of maverick, eclectic people. The kind of thing that I’ve tried to emulate, probably with less success. And because of all those characteristics, you can never give them much mind. That’s why they’re alternative. You kind of respected them, but it was just too much, they were just too mad. And then you spent of the rest of your life wishing you’d given them more money. I think we go back to that environment. There are too many hedge fund managers, and not enough kooky brave independent thinking spirits out there like them. I  think the mechanism that will take us there, is all these non-kooky individuals losing money. The average hedge fund lost money last year. 

The average hedge fund has imposed gates and locked their clients in. They’re finished. They’re finished. There are hedge funds out there and they have gated, what I mean is they’re denying their clients withdrawing their money. They’re writing to their clients, the good news, is that we’ve made money in January, and February, we’re making money in March. Absolute tripe! Okay, you have not made a penny, when you’re denying the clients their money. So these are people who have no future, who are walking around pretending that they have a future. That time will catch up with them. Lastly, the point I want to make to you is that the common thread of these funds like Madoff, which have failed, and the example of one unveiled last week in London, this Global Macro fund, the commonality is the very low volatility. These are funds that made money in a reasonable consistent manner; it was almost linear, linear, linear, year after year after year. I never believe in linear progression.

I believe in volatility and the craziness of life as we search for the uncertain future. My returns are volatile. Our only thing is from a calendar year of risk, we never lose much money. One year, we lost 3% and it still gobbles me that we lost 3%., not 33%. On a month-by-month basis it can be crazy. So what we found, we found a conceit in that as a society, we have abolished the business cycle so rather than going up and down with the economy. Gordon Brown told us he had abolished boom bust so that we have a linear progression. Bernie Madoff was a linear progression. We could make money without doubts, hence we elevated the hedge fund community into the premier division. That was all a mistake. And, cyclicality is re-imposing itself, and I’m just warning you that cyclicality, once unleashed, isn’t necessarily 2-3 years, it’s 20-30 years in its formation. 

Can the Regulators Save Us?

This is a big fear, I think its a legitimate fear. The fear is that there’s now an open outcry, by society at large as to the remuneration, and the risk taking that was necessary over the last few years by the financial sector. And, because society has been called in to rescue the financial sector is demanding its pound of flesh. And I don’t take issue with that, I accept that as the natural course of events. But, there is also this law of unintended consequences, so we look at say the British property market, and it now seems crazy. One could get up to 5 times your salary to purchase your house. And now we might impose a low amount of leverage of 2-3 times. The problem with that is that even with the decline in housing prices, no one could afford a house price if you bring down the… so that the credit leverage was only a function of asset prices being very high, and therefore you had to overarch in order to gain a competitive return as a speculator or just get on the housing matter as a regular person. The commonality between those two transaction is asset prices. They were too high.

So the regulator’s coming in and trying to bring down leverage in the market, and they are after hedge funds. I don’t know why… I do know why – They are rich and successful. Fair game – bring down their leverage and bring down the leverage of home buyers, prospective house buyers. The problem with that is it bakes in the notion that house prices and assets will spend the next 20 years deflating, under this more sober and conservative environment.

The Hedge Fund as Investment Laboratory

The last two weeks, nothing has been fun, because all the portfolios, they all go the same way. There’s no product diversification, so one fund’s doing well another one’s not doing well. I don’t understand that word, supermarket, and the difficult thing right now is we have no confirmation for our ideas, we’re taking a pasting. Three weeks ago, we were 11 or 12 points ahead of the index and today, that’s probably now 3 or 4. At the same time, we were up 10-11 points in absolute terms in the hedge fund and that’s come down to 4. So everywhere I look now, my tail’s between my legs. But my message is the same. All my money’s in my hedge fund. The hedge fund, I believe, is as superior product, and if you’ve got that minimal market, those pounds, euros, and dollars, I, we’ve placed within the hedge fund; we use the hedge fund as a laboratory, a test pad. We incubate ideas and once they take root and they gain legitimacy, and once we start to make money on the blasted things, we can then take little transplants and put in to our long [term] holdings. Its a better way, I hope its harmonious and they can live together, one benefits from the other.

What is Eclectica’s Investment Process?

We are very much free thinkers at the macro level. We, through our collective efforts in travel, in terms of information sources, in the way we look at things – you know we’re trading currencies, we’re trading commodity futures, we’re trading government bonds, we’ve got fingers in the all of the pies, so when we come to look at an equity portfolio, we drill down all that wealth of experience, to try and determine the most likely path of the economy and the stocks that benefit from it. Our portfolios have undergone a dramatic change. Up until July of last year, we had up to three quarters of the portfolios invested in commodities, and the majority of that was agricultural commodities. But then, something happened. This deflation shock struck, and it hit, our crisis, and after three or four more months it hit the two year trend, and our portfolio changed. And today our portfolio is defensive. Tobacco, health care,  utilities, staples. In the last three weeks that’s come under enormous downside pressure. But as I say to you its three weeks and we need monthly observations. Now if that downside pressure were to continue, our portfolio would change again.

My ideological preference is that that won’t happen, but I have to remain intellectually robust to change my portfolio if it does need to. As I say to you, it’s not a process of three weeks or four weeks, we’re not high intensity traders. New world, new price. New trend, new portfolio. That’s our mantra, but today, we’re still from the view that the economy is under duress and therefore we’re still sticking to the low end of these trends, close to trends in the defensive stocks. Time will tell if we have to change them. 

Fund Management Without Conviction

Conviction has got no role in my operation. There are concerns about Eclectica, or about, me… The concern is that you see me everywhere, you see me on CNBC, I do Bloomberg in the US, I’m on the BBC – heavens, I made a documentary for Channel Four last year, and its all high falutin stuff and it all gives the impression that there’s all of this conceit and arrogance – Hey, you’re taking on, I am Hugh Hendry taking on the market, but its actually driven by the reverse. I actually very fearful of having ideas that I can articulate and gain your conviction. I’m very fearful of that, and so those first principals that we built up, what we call portfolio management principles. – we developed a series of rules which are there to constrain what I can do. So I can only get involved in the portfolios as I said to you when we have the legitimacy of a positive trend. Without a postive trend, you can take my conviction and you can throw it away. You can discard it. Conviction has to married with discipline, and we’ve always done that, but of course, when you see the odd soundbyte, and I’m going on and pontificating about something, you forget that if the trend changes, we change the portfolio.

Tags: Array, Banking Sector, Cio, Cities Of The World, Citywire, Co Founder, Decades, Deflation, Dow Jones, Eclectica, Fear, Full Length, Fund Managers, Guns, Hedge Fund, Hedge Fund Manager, Hedge Funds, Hugh Hendry, inflation, Legs, Length Interview, Lows, Major Cities Of The World, Parity, Peers, Quantitative Easing, Rally, Remarkable Accuracy, Right Place At The Right Time, Stock Market, Unprecedented Period, Unprecedented Prosperity
Posted in Bonds, Commodities, Credit Markets, Markets | 3 Comments »

The Misbehavior of Markets

Monday, April 6th, 2009

Why do markets misbehave? How should you measure market risk? And what’s wrong with academic finance?

These are a few questions that polymath Benoit Mandelbrot addresses in the fascinating book The Misbehavior of Markets: A Fractal View of Financial Turbulence. Mandelbrot suggests all of these questions can be properly understood by rejecting the standard assumptions of academic finance and instead using a “fractal view” of risk and markets.

Fractals are at the heart of this book. Fractal geometry is a form of mathematics developed by Mandelbrot that deals with rough but highly self-similar structures like trees, coastlines, and mountains. Fractals have helped explain a wide range of natural phenomena and revolutionized computer graphics, influencing movies like Star Wars Episode III. There is room for more applications in this early science, and fractals may help explain the jagged but predictably irrational patterns in the stock market, claims Mandelbrot.

In this book, Mandelbrot contends that fractals are the key to modeling the market. The interesting part is that Mandelbrot does not merely explain why he’s right but he goes to great length to explain why others-those using the standard theories of academic finance-are wrong. Mandelbrot offers interesting history, anecdotes, trivia, and beautiful illustrations to make his case. The stock market does not act like a random walk, he says, but rather it’s like the flight of an arrow down an infinite hallway. It sounds a bit abstract at first, but this is exactly where the book shines. There are stories and illustrations that make such abstract concepts easily understandable. I literally felt smarter after reading each chapter…

But back to the subject at hand. What do fractals offer to finance? First, fractal math can help generate realistic stock price series. Mandelbrot graphically illustrates that his fractal-generated prices resemble actual price data more closely than the standard (geometric Brownian-motion) generated prices. Not only will this help for valuation and understanding risk, but it could also help one estimate damages in securities fraud cases.

Second, fractals can help explain why bubbles form and how prices are dependent over time. These are phenomena that every stock trader understands, but amazingly are classified as impossible by standard academic theory. Clearly something is wrong when experience contradicts the sacred cows of the random walk, Efficient Markets, CAPM, and Black Scholes, etc. Although this fractal theory doesn’t offer a complete answer yet, it at least allows for a theory consistent with practical experience.

But Mandelbrot’s fractal view has not taken hold in academia, the author explains, and it is this conflict that drives the narrative. The arguments in the book are about the battle between Mandelbrot’s ideas and standard finance. Mandelbrot elaborates on this in many ways, and after reading the book here are some useful comparisons between the two theories:

If you have qualms with academic finance, or agree with even a few of Mandelbrot’s revisions, I think you’ll enjoy this book.

There are but two reservations I have to this book. The first is that it touches on a lot of different ideas so it doesn’t elaborate on how to put the ideas into practice. Mandelbrot talks about the concepts like alpha (α) for measuring volatility and the H coefficient as an exponent of price dependence, but the book doesn’t offer enough for my liking. This appears to be intentional, however, as the authors admit their motives early in the book:

So caveat emptor. This book will not make you rich…If it fits any genre, it is that of popular science. It explains a new, and important, way of looking at the world-in this case, the financial world. It attempts to do so using common English, with as few formulae as possible-or at least, with no jargon unexplained. (p 23)

The second reservation is that the Mandelbrot makes everything into a battle between himself and academia. It reminded me a lot of the way Taleb wrote The Black Swan: The Impact of the Highly Improbable.(Though to be honest, as much as it annoyed me, there is something fun about reading someone with so much conviction.)

In short, check this book out and prepare to learn a new way of looking at risk and the markets. At a minimum you’ll be more skeptical about the frequently quoted statistics of risk so you can make better investment decisions.

Source: Mind Your Decisions,

http://mindyourdecisions.com/blog/2009/03/31/the-misbehavior-of-markets/

Tags: Abstract Concepts, Academic Finance, Array, Assumptions, Benoit Mandelbrot, Brow, Coastlines, Computer Graphics, Early Science, Fractal Math, Geometric Brownian Motion, Geometry, Hallway, History Anecdotes, Market Risk, Misbehavior, Natural Phenomena, Random Walk, Star Wars Episode, Star Wars Episode Iii, Stock Market, Stock Price, Turbulence
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Words from the (investment) wise for the week that was (March 30 – April 5, 2009)

Sunday, April 5th, 2009

“Words from the Wise” this week comes to you in a shortened format as my traveling in the US precludes me from doing my customary commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.

Investors’ mood benefited last week from the potentially positive implications for the global economy emanating from the London G20 meeting, and the Financial Accounting Standards Board’s decision to relax mark-to-market accounting rules. And the previous week’s announcement of the Geithner plan to remove toxic assets from the balance sheets of banks was also still seen as a tailwind for stock markets.

Source: Chicago Tribune

Has the avalanche of policy actions and bank guarantees backstopped the global economy? If stock markets are a gauge of better tidings, it would seem that a bottoming phase might have started. Risk-taking investors pushed the S&P 500 Index to a straight four-week winning streak, registering a gain of 23.3% – the strongest since April 1933. But the jury is still out on whether the bear is simply offering a temporary reprieve.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.

For discussion about the direction of stock markets, see my recent posts “Video-o-rama: The road to recovery“, “Schiff interviews Faber“, “Stock market performance round-up: Signs of recovery” and “Donald Coxe: Investment Recommendations (March 2009)“. (And do make a point of listening to Donald Coxe’s webcast of April 3, which can be accessed from the sidebar of the Investment Postcards site.)

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “bank”, “market”, “index”, “prices”, “economy” and “financial” featured prominently.

Economy
“Business pessimism remains deep and widespread across all industries and regions of the globe. Survey responses regarding hiring and equipment and software investment fell to record lows last week,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. However, the Survey concluded that it was encouraging that businesses were becoming steadily less negative about the economy’s prospects later this year.

Source: Moody’s Economy.com, March 30, 2009.

A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

April 03
• Employment situation remains grim

April 02
• China: Signs of a recovery – already?

April 01
• Factory sector is tiptoeing towards a recovery
• Housing market: Pending Home Sales Index – positive signs
• Auto sales stage small rebound
• Japan: More news about a worsening situation

March 31
• Case-Shiller Home Price Index – downward spiral of home prices persists
• Consumer confidence retraces a small part of loss

Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, April 3, 2009.

In addition to interest rate announcements by the Bank of Japan (Wednesday) and the Bank of England (Thursday), the US economic highlights for the week include the following:

Source: Northern Trust.

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, April 3, 2009.

John Maxwell said: “The pessimist complains about the wind. The optimist expects it to change. The leader adjusts the sails.” (Hat tip: Charles Kirk.) Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers in steering their investment portfolios to make the best use of the tailwinds and be cognizant of the dreaded headwinds.

That’s the way it looks from Cape Town (or, more accurately, from beautiful La Jolla, California, for the next few days).

Paul Kedrosky (Infectious Greed): The Trump-Madoff Connection
“I hear you are personally acquainted with Bernie Madoff, who visited your country club in Palm Beach.

“I met Madoff a number of times at Mar-a-Lago. He loved golf, and I’d also see him at my golf club, which is nearby. One time he said to me, ‘Why don’t you invest with me?’ I said jokingly, ‘No thanks, I can lose my own money.’”

From an interview with Donald Trump in weekend NYT.

Source: Paul Kedrosky, Infectious Greed, March 29, 2009.

CEP News: G20 commits to ambitious stimulus plan extending into 2010
“The G20 will stand together to engage in additional stimulus plans aimed at creating jobs, cleaning up financial institutions and stimulating emerging market economies, according to the communiqué released on Thursday.

“Member nations said total stimulus spending will reach $5 trillion by the end of 2010, and that they will add an additional $1 trillion in global stimulus through the IMF and other international agencies.

“Meanwhile, the IMF has been promised $750 billion in funding for its lending operations worldwide through the sale of some of its gold reserves to increase its capital base. The Fund will also deploy $250 billion in Special Drawing Rights, a move analysts have said would effectively amount to a broad creation of global money supply.

“The G20 also agreed to regulate ‘systemically important hedge funds’, and says it will work together to develop a framework for reforming financial institutions, including responsible compensation schemes for employees.

“On global trade, the Group has agreed to provide $250 billion in financing to stimulate global trade, and has voiced calls to conclude the Doha talks.

“The G20 has asked the OECD to publish a list of tax havens which the G20 will target to limit tax evasion.”

Source: Erik Kevin Franco, CEP News, April 2, 2009.

CNBC: One-on-one with Soros
“Discussing new promises to increase spending in emerging economies, with George Soros, Soros Fund Management and CNBC’s Maria Bartiromo.”

Source: CNBC, April 2, 2009.

CEP News: FASB eases mark-to-market accounting rules
“Accounting standards for US financial institutions were eased on Thursday when the US Financial Accounting Standards Board recommended allowing firms to use ‘significant’ judgment when valuing toxic assets on their books.

“Analysts interviewed by Bloomberg said the move could increase net income for financial institutions by as much as 20%, by significantly easing the hit that financial institutions have had to take on so-called toxic debt on their balance sheets.

“‘Cynics will claim this is a thinly veiled attempt to disguise the seriousness of the financial crisis and losses being faced,’ said Marc Chandler at Brown Brothers Harriman. ‘On the other hand, there are many who see the mark-to-market as an unreasonable demand for financial instruments with no markets.’

“Indeed, over the last several quarters, market participants have argued that interest in toxic assets, such as mortgage-backed securities, has essentially dried up, meaning that firms have had to value some assets as worthless even though they could eventually regain their worth.

“The decision also comes ahead of earnings season, with the first quarter of 2009 having ended last week, and with Alcoa expected to release their report on Tuesday. The FASB also said the decision will be retroactive, allowing firms to take less writedowns.

“Furthermore, analysts have argued that the decision will reduce the effectiveness of the US Treasury’s Public Private Partnership Investment Program, whereby the government will back the purchase of toxic assets.”

Source: Erik Kevin Franco, CEP News, April 2, 2009.

Barry Habib (Mortgage Success Source): The real reason behind the economic crisis – “mark to market”
“The current economic crisis is the top news story for nearly every media outlet. But, somehow, one of the most important factors that led to this challenging market is also one of the least discussed.”

Source: Barry Habib, Mortgage Success Source.

Financial Times: Bailed-out banks eye toxic asset buys
“US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000 billion plan to revive the financial system.

“The plans proved controversial, with critics charging that the government’s public-private partnership – which provide generous loans to investors – are intended to help banks sell, rather than acquire, troubled securities and loans.

“Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ‘gaming the system to reap taxpayer-subsidised windfalls’.

“Mr Bachus added it would mark ‘a new level of absurdity’ if financial institutions were ‘colluding to swap assets at inflated prices using taxpayers’ dollars’.

“Many experts think it is essential to take these assets from leveraged institutions such as banks that are responsible for the lion’s share of lending, into the hands of unleveraged financial institutions such as traditional asset managers, where they will have much less impact on the flow of credit to the economy.

“Banks have three options if they want to buy toxic assets: apply to become one of four or five fund managers that will purchase troubled securities; bid for packages of bad loans; or buy into funds set up by others. The government plan does not allow banks to buy their own assets, but there is no ban on the purchase of securities and loans sold by others.”

Source: Francesco Guerrera and Krishna Guha, Financial Times, April 2, 2009.

Financial Times: Obama gets tough on US car industry
“The Obama administration on Monday ratcheted up the government’s involvement in the US auto industry, raising the spectre of bankruptcy if debtholders, unions and executives at General Motors and Chrysler fail to make new sacrifices.

“Condemning ‘a failure of leadership’ from Washington to Detroit for the decline of America’s carmakers, President Barack Obama rejected the turnaround plans GM and Chrysler presented to his administration last month. He said the government would fund GM for 60 days as it tries to put together a more aggressive restructuring programme. He gave smaller Chrysler 30 days to strike an acceptable rescue alliance with Italian carmaker Fiat.

“The deadlines marked the latest step in the administration’s increasingly interventionist approach to the auto industry. Just hours after forcing Rick Wagoner out as GM chief, the Obama administration said it would let GM and Chrysler slide into bankruptcy if necessary to facilitate the industry’s restructuring. ‘Their best chance at success may well require utilising the bankruptcy code in a quick and surgical way,’ it said.

“Fritz Henderson, speaking on his first day as GM’s chief executive, indicated that he believed the risk of GM filing for bankruptcy had grown.

“The federal government appears to favour a restructuring plan – in development since November – under which GM could file for bankruptcy protection within a month and then split the viable parts of its business from its messier obligations, people close to the matter say.

“A ‘new’ GM containing the good assets – and backed by a plan to build and sell cars that the government feels is acceptable – could then emerge from bankruptcy protection.”

Source: Tom Braithwaite, Julie MacIntosh, Bertrand Benoit and John Reed, Financial Times, March 30, 2009.

MarketWatch: California may tap US Treasury, Europe for credit
“California’s ‘liquidity problems’ may force the state to seek federal backstops for sales of its short-term notes this summer, even though it received heavy demand from retail buyers in a recent bond sale, its state treasurer said Tuesday.

“California Treasurer Bill Lockyer said in an interview that the state is talking with Treasury Department staff, including Secretary Timothy Geithner, about getting federally issued letters of credit to back upcoming issues of short-term securities known as revenue anticipation notes.

“Lockyer also said the state will probably issue about $12 billion to $16 billion revenue anticipation notes this summer.

“But it may have trouble getting private banks to issue letters of credit to secure the notes, a possibility that’s prompted it to seek government backup.

“‘What we’re starting to talk to them about is … short-term liquidity problems’ at the state and its municipalities, he said.

“Backup from the federal government would be for ‘contingency’ purposes. ‘We may need to get letters of credit from Treasury,’ he added.”

Source: Laura Mandaro & Stacey Delo, MarketWatch, March 31, 2009.

Bloomberg: Financial rescue nears GDP as pledges top $12.8 trillion
“The US government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

“New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from US banks. The money works out to $42,105 for every man, woman and child in the US and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.

“President Barack Obama and Treasury Secretary Timothy Geithner met with the chief executives of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending.

“‘The president and Treasury Secretary Geithner have said they will do what it takes,’ Goldman Sachs Group Chief Executive Officer Lloyd Blankfein said after the meeting. ‘If it is enough, that will be great. If it is not enough, they will have to do more.’

“The following table details how the Fed and the government have committed the money on behalf of American taxpayers over the past 20 months, according to data compiled by Bloomberg.”

Source: Mark Pittman and Bob Ivry, Bloomberg, March 31, 2009.

The New York Times: Obama’s ersatz capitalism
“The Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win – and taxpayers lose …

“With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost …

“Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

“Some Americans are afraid that the government might temporarily ‘nationalize’ the banks, but that option would be preferable to the Geithner plan. After all, the FDIC has taken control of failing banks before, and done it well …

“What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a ‘partnership’ in which one partner robs the other.”

Source: Joseph Stiglitz, The New York Times, March 31, 2009.

CNBC: Roubini’s read on the recession
“The solutions and government interventions that need to be tackled in order to take the economy and financial system off of life support, with Nouriel Roubini, RGE Monitor chairman/NYU Stern School of Business professor, and Arianna Huffington, Huffington Post.”

Source: CNBC, March 31, 2009.

Financial Times: OECD predicts 10% jobless rate for 2010
“One in 10 workers in advanced economies will be without a job next year, ‘practically with no exceptions’, the head of the Organisation for Economic Co-operation and Development said on Monday.

“In a graphic indication of the global recession’s transmission from the financial sector to the rest of the economy, Angel Gurría warned that the ranks of the unemployed in the 30 advanced OECD countries would swell ‘by about 25 million people, by far the largest and most rapid increase in OECD unemployment in the postwar period’.

“He said the misery of joblessness – what Mr Gurría described as ‘rapidly turning into a jobs and social crisis’ – would come as the OECD expected advanced economies to contract by 4.3% in 2009 with little or no growth expected in 2010. The forecast is significantly worse than the International Monetary Fund’s most recent estimate of a 3-3.5% contraction for 2009.”

Source: Chris Giles, Ralph Atkins and Mark Mulligan, Financial Times, March 30, 2009.

Asha Bangalore (Northern Trust): Employment situation remains grim
• Civilian Unemployment Rate: 8.5% in March versus 8.1% in February, cycle low is 4.4% in March 2007.
• Payroll Employment: -663,000 in March versus -651,000 in February, net loss of 86,000 jobs after revisions of payroll estimates for January and February.
• Hourly earnings: +3 cents to $18.50, 3.35% yoy change versus 3.59% yoy change in February, cycle high is 4.28% yoy change in December 2006.

“The headlines and details of the employment report present a dismal picture of employment conditions in the US economy. The main message is that the Fed is on hold for the foreseeable future. That said, there are positive aspects in the report we are watching closely – employment in construction, manufacturing, and temporary help (see charts 7 and – and it is a matter of time before we can conclude if in fact these are meaningful signals of economic recovery.”

Source: Asha Bangalore, Northern Trust – Daily Global Commentary, April 3, 2009.

CNBC: Pimco’s Gross talks jobs report
“Reacting to the jobs report and how the markets will respond, with William Gross, Pimco co-chief investment officer/founder.”

Source: CNBC, April 3, 2009.

Yahoo Finance: Nouriel Roubini sounds, GASP, positive about economy!
“Okay, not ‘positive’, exactly, but certainly less negative than he’s sounded over the past 18 months.

“NYU professor Nouriel Roubini, you’ll recall, is known as ‘Dr. Doom’, the most famous of the handful of economists who actually predicted the current debacle. A few days ago, after a speech in Italy, he was quoted as saying he might see some ‘light at the end of the tunnel’. And he repeats a similarly non-apocalyptic outlook on TechTicker in our interview here.

“To be clear: Roubini is NOT predicting an imminent recovery. He thinks that most economists are still way too bullish, that the stock market will retest its lows, and that unemployment will eventually rise over 10%. He just thinks that the quarter that is now ending, Q1, will be the worst rate of decline in the economy and that things will gradually stop deteriorating and then get better from here.”

Source: Yahoo Finance, March 31, 2009.

(in)efficient frontiers: Rising inflation expectations
“I’ve written in the past about the misinterpretation of yield numbers on TIPS (Treasury Inflation Protected Securities). While the yield numbers (and price when expressed as percentage of par unadjusted for the inflation index ratio) have given false readings, the dollar value of a basket of TIPS does offer insight. Consider the chart below:

“The chart illustrates the relative price performance of the Barclay’s iShare TIPS fund and the 10-year T-note futures over the last 4 months. As can be seen from the chart, the basket of TIPS in the iShare has appreciated by about 8% while the treasury contract has been roughly flat. The best explanation for this relative outperformance is rising inflationary expectations.

“Last fall, when TIPS falsely appeared to be signaling deflation, those who championed massive government spending cited TIPS performance as supportive evidence. Now that TIPS are clearly starting to warn of rising inflation, those same voices are noticeably silent on this fact.”

Source: Jeff Korzenik, (in)efficient frontiers, March 31, 2009.

CNBC: Bernanke – housing & the economy
“Federal Reserve chairman Ben Bernanke says the Fed has sought to avoid credit risk and allocation in lending programs.”

Source: CNBC, April 3, 2009.

Case Shiller: S&P/Case-Shiller – downward spiral of home prices persists
“Data through January 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of US home prices, shows continued broad based declines in the prices of existing single family homes across the United States, with 13 of the 20 metro areas showing record rates of annual decline, and 14 reporting declines in excess of 10% versus January 2008.

“The chart above depicts the annual returns of the 10-City Composite and the 20-City Composite Home Price Indices. Following the lead of the 14 metro areas described above, the 10-City and 20-City Composites also set new records, with annual declines of 19.4% and 19.0%, respectively.

“‘Home prices, which peaked in mid-2006, continued their decline in 2009,’ says David Blitzer, Chairman of the Index committee at Standard & Poor’s. ‘There are very few bright spots that one can see in the data.’”

Source: Standard & Poor’s, March 31, 2009.

Asha Bangalore (Northern Trust): Pending Home Sales Index – positive sign
“The Pending Home Sales Index (PHSI) of the National Association of Realtors rose to 82.1 in February from 80.4 in the prior month. The PHSI leads actual sales of existing homes by one/two months. The February gain of the index is a positive sign for home sales during March/April 2009.”

Source: Asha Bangalore, Northern Trust, April 1, 2009.

Asha Bangalore (Northern Trust): Consumer confidence retraces a small part of loss
“The Conference Board’s Consumer Confidence Index rose slightly to 26 in March from a record low of 25.3 in February. The strength was entirely from the Expectation Index (28.9 versus 27.3 in February) as the Present Situation Index (21.5 from 22.3 in February) dropped in March.”

Source: Asha Bangalore, Northern Trust, March 31, 2009.

Asha Bangalore (Northern Trust): Factory sector is tiptoeing toward a recovery
“The ISM manufacturing survey results for March indicate that the factory sector is contracting less rapidly compared with the situation in February. The composite index edged up to 36.3 in March from 35.8 in February. The level of the composite index denotes a contraction of the factory sector but the March reading is now notably higher than the cycle low of 32.9 seen in December 2008. The New Orders Index (41.2, +8.1 points) recorded the largest gain among the different components of the survey.

“Indexes tracking production employment, exports, imports, backlogs, and prices advanced in March, while indexes measuring vendor deliveries and inventories fell.”

Source: Asha Bangalore, Northern Trust, April 1, 2009.

CNBC: Gross Talks Bonds
“Bond holders are still negotiating and hoping, with Bill Gross, Pimco, and CNBC’s Erin Burnett.”

Source: CNBC, March 31, 2009.

Bloomberg: Geithner’s non-recourse gift keeps on giving to Gross
“Treasury Secretary Timothy Geithner’s plan to rid banks and markets of devalued assets may be a boon for Pimco’s Bill Gross.

“The plan may reward investors with 20% annual returns on ‘really ‘toxic’ mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with ‘non-recourse’ government-backed debt, New York-based Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote in a report. That loan would be worth 15 cents to an investor seeking the same return who can’t use borrowed money.

“Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors. Federal Reserve Chairman Ben Bernanke said March 20 that ‘credit market dysfunction’ is countering efforts to fix the economy.

“‘One of the challenges has been that leverage has really been pulled away from the system and as a result the kinds of returns investors are looking for haven’t really been available,’ said Ken Hackel, head of fixed-income strategy at RBS Securities in Greenwich, Connecticut. RBS is one of the 16 primary dealers that are obligated to bid at the Treasury’s auctions of government debt and which trade with the Fed.

“Since Geithner unveiled the plan on March 23, Pimco, which manages the world’s biggest bond fund, and New York-based BlackRock, the largest publicly traded US asset manager, said they may be interested in participating in PPIP.

“‘This is perhaps the first win/win/win policy to be put on the table,’ Gross, co-chief investment officer of Newport Beach, California-based Pimco, said in an e-mailed statement last week.”

Source: Jody Shenn, Bloomberg, April 2, 2009.

Bespoke: 30-year fixed mortgage drops below 5%
“The national average 30-year fixed mortgage rate dipped below 5% as of last Friday to a level of 4.93%. The only other time it was below 5% in the last ten years was back in June 2003. One reason that the Fed is buying up Treasuries is to get this mortgage rate lower in order to help the consumer and the struggling housing market. So far the Fed announcement has done a pretty good job of lowering mortgage rates, but we’re sure they want to see it even lower.”

Source: Bespoke, March 30, 2009.

John Mauldin (Thoughts from the Frontline):
“Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the ‘70s.

“Let’s go back to the really long run. Starting in 1802, we find that stocks have beat bonds by about 2.5%, which, compounding over two centuries, is a huge differential. But there were some periods just like the recent past where stocks did in fact not beat bonds.

“Look at the following chart. It shows the cumulative relative performance of stocks over bonds for the last 207 years. What it shows is that early in the 19th century there was a period of 68 years where bonds outperformed stocks, another similar 20-year period corresponding with the Great Depression, and then the recent episode of 1968-2009.

Source: John Mauldin, Thoughts from the Frontline, March 30, 2009

Bespoke: Largest 4-week winning streak since 1933
“The S&P 500 has now been up for 4 straight weeks, registering a gain of 23.28%. Interestingly, the last time we had a 4-week winning streak that saw gains of at least 10% was 10/02-11/02, which was the start of the five year bull market that ran until 10/9/07. … this is the 3rd strongest 4-week winning streak on record, and the strongest since April 1933.

“The average change in the fifth week following these 4-week periods has been 0.24%, while the median change has been -0.35%. The average change over the next 4 weeks has been 1.87%.”

Source: Bespoke, April 3, 2009.

Bespoke: S&P 500 breaks above recent highs
“The S&P 500 took out its high from last week of 832 today, as the index is currently resting above the 840 mark. Technicians will be watching to see if the index can close above these prior highs, and if it does, it will be another positive for the uptrend that the market is currently in.”

Source: Bespoke, April 2, 2009.

Bespoke: Percentage of stocks above 50-day moving averages
“Currently, 75% of the stocks in the S&P 500 are trading above their 50-day moving averages. While this is a strong breadth measure, it has also been a level that has been met with selling pressure in the past. Health Care and Utilities are the only two sectors that still have less than half of their stocks trading above their 50-days. Technology, Consumer Discretionary, Materials, and Telecom all have more than 90% of stocks trading above their 50-days, which is definitely an overbought reading.”

Source: Bespoke, April 3, 2009.

Bespoke: Market volatility drastically lower, but still high
“In late 2008, the market experienced its most volatile 50-day period ever. At one point, the average daily move of the S&P 500 over the prior 50 days was +/-4%! While volatility is still very high, it has nearly been cut in half from its peak in late 2008. As shown below, the average daily change for the S&P 500 over the last 50 days has been +/-2.07%.”

Source: Bespoke, April 1, 2009.

Richard Russell (Dow Theory Letters): Identifying a bear market bottom
“First, based on the 76 years of the Lowry’s studies, prior to a bear market bottom, it is usual for their Selling Pressure Index (supply) to decline significantly, indicating that the desire to sell is being exhausting. Secondly, Lowry’s Buying Power Index (demand) begins to climb well before the final bear market bottom.

“This is NOT what has occurred. From its March 9 low, the Buying Power Index has risen an impressive 46 points. However, and this is the big problem, since March 9 Lowry’s Selling Pressure Index has declined by a mere 13 points. Thus, Selling Pressure has only dropped half as much as Buying Power has advanced. This suggests that there is still far too much desire to sell built into this market. Any cessation of buying will therefore succumb to selling, and this is NOT how new bull markets start. Selling Pressure is still far too high.

“From another standpoint I continue to believe that this advance is not the beginning of a bull market. Primary movements in the stock market tend to have a slow, persistent plodding look. In contrast, corrective moves tend to be rapid and violent, often spurred on by panic short covering. The action of this market since the March lows has the look of a secondary correction. The speed and the steep angle of ascent is suggestive of a bear market rally.

“Since March 9, the Dow has gained roughly 940 points in nine days. Thus, the Dow has regained 15% of its bear market losses in a mere nine days. This is bear market correction-type action.”

Source: Richard Russell, The Dow Theory Letters, March 31, 2009.

Richard Russell (Dow Theory Letters): Watch out for fizzling rallies
“The following from Financial Sense: The latest 23% surge in the Dow Jones Industrials towards the psychological 8,000-level, is its seventh significant rally of 1,000-points or more, since October 2007. During the bear market from 1929 to the bottom in 1932, the Dow Industrials fell by almost 90%. There were six bear-market rallies during that stretch, with returns of more than 20%, each one fueling a sense of renewed optimism. Yet each counter-trend rally ultimately fizzled-out and unraveled, before market indexes skidded to new lows.

“As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrials closed at 9,034 on January 2nd, its highest level since the autumn panic. The Dow Industrials melted down to as low as 6,500 on March 6, for an overall decline of 30% in two months, and to its lowest level in 12-years. The Dow Jones Commodity Index skidded to a six-year low, after tumbling by 57% since last July.

“We are now in the third Dow rally of 1000 points or more since October 7, 2007. The first over-1000 point rally started in March, 2008. The second started on November 17, 2008. The most recent over-1000 rally started on March 2, 2009. The first two rallies were wiped out with new lows in the Dow after the rallies fizzled.”

Source: Richard Russell, Dow Theory Letters, April 3, 2009.

Bespoke: Strategists continue to lower year-end S&P 500 price targets
“Below we have updated our table of strategist price targets for the S&P 500 at the end of 2009. UBS, Goldman Sachs, Credit Suisse, HSBC, and Barclays have all already lowered their year-end S&P 500 price targets. Bank of America actually recently increased their price target from 975 to 1,030. The average year-end S&P 500 price target is currently 956.5, which equates to a gain of just over 20% from the index’s current level. At the start of the year, the average year-end price target was 1,050.”

Source: Bespoke, March 31, 2009.

David Fuller (Fullermoney): Trillions of bailout money will buy downside cushion
“Forget a depression – the trillions of financial rescue packages will buy a downside cushion followed by economic recovery, even though more lagging bad data is in the pipeline.

“Forget another stock market meltdown – not all stock markets are equal but the bear has been ending since last October’s selling climax and the new bull is led by Asian emerging markets and South American resources markets.

“Forget long-dated government bonds as a safe haven – they are now a sucker’s game, propped up by the threat and occasional reality of quantitative easing, at a time when risk appetite is slowly returning.

“Forget US dollar safe haven – it is a Madoff-style Ponzi scheme, in which it pays to ask for your money back early.

“Expect commodity inflation – this is being led by precious metals and copper.”

Source: David Fuller, Fullermoney, March 31, 2009.

Jeffrey Saut (Raymond James): Kites!?
“Last week the DJIA and DJTA broke out above their respective 50-day moving averages (DMAs). They also now reside above their 10-DMAs and 30-DMAs. The 34% rally by the Transports since their March 9, 2009 low is particularly interesting given the Trannies’ economic sensitivity; and, amid cries that we are in a Great Depression environment.

“And don’t look now, but lumber has quietly gained nearly 30% since its February 2009 low. Again, that’s pretty impressive action given the current housing backdrop!

“Meanwhile, we are watching Personal Consumption Expenditures (PCE), for this is how recessions end. Indeed, if the ‘real’ PCE has stabilized, the end of the recession is not far off. Manifestly, the stock market always turns-up before the economy bottoms. So if the January/February strength in the PCE is for real, it is an extremely positive event. However, if the PCE strength is just a reaction to the +5.8% COLA adjustment, as well as the 13.2% increase in IRS tax refunds year/year, then the upcoming month’s data will revert to a more subdued reading. Accordingly, we are watching the PCE closely.

“While we are watching, however, our investments in platinum broke out to new reaction ‘highs’ last week, and indices playing to Brazil are attempting to break out to the upside. Still, it is day 16 in the ‘buying stampede’ and we have turned cautious. And, isn’t it interesting how the markets follow the news, for following ‘Friday’s fall’ (-148 DJIA) the Obama Administration warned that some banks will need more government aid and that bankruptcy might be the best option for GM and Chrysler.”

Source: Jeffrey Saut, Raymond James, March 30, 2009.

Bespoke: First quarter sector performance
“As shown in the chart below, the S&P 500 was down 11.7% in the first quarter of 2009. Six sectors outperformed the index, while four underperformed. The Financial sector was by far the worst performer with a decline of 29.5%. Industrials, Energy and Utilities were the three other sectors that underperformed the market as a whole. Only one sector finished the quarter in positive territory – Technology (4%). Consumer Staples, Consumer Discretionary, Health Care, Telecom, and Materials are the other five sectors that outperformed the market.”

Source: Bespoke, March 31, 2009.

BCA Research: Disenchanted with the US dollar
“The US dollar is unlikely to be dislodged as the dominant reserve currency any time soon.

“There are legitimate reasons for the Chinese to be worried about their dollar holdings: China’s foreign exchange reserves total $2 trillion, or 48% of GDP. The Chinese authorities are growing increasingly disenchanted with their exposure to the US dollar, worried that Fed policy is debasing the currency.

“Last week central bank Governor Zhou called for a reform of the international monetary system that would see the US dollar replaced as a reserve currency, such as the SDR. However, leaked parts of the upcoming G20 Communique do not hint that such a ‘super sovereign’ currency is being seriously discussed at high levels. Even if a consensus forms that a new reserve currency is a good idea, global authorities would have to convince international business people to invoice in SDRs. Moreover, a wide variety of financial assets denominated in SDRs would have to be developed and traded in deep markets. Such a massive undertaking would take many years to develop.

“More likely, China will continue to slowly diversify away from the US dollar into other countries, a process that has been ongoing for years. China is unlikely to suddendly ‘dump’ US dollar assets, as this would damage China’s own interests. Bottom line: The structural downtrend in the US dollar has probably resumed, but it should be a fairly benign adjustment.”

Source: BCA Research, March 31, 2009.

Financial Times: China and Argentina in currency swap
“China, which is pushing to end the dominance of the dollar as a worldwide reserve, has agreed a Rmb70 billion currency swap with Argentina that will allow it to receive renminbi instead of dollars for its exports to the Latin American country.

“Xinhua, the official Chinese news agency, said the deal was signed on Sunday by Zhou Xiaochuan, governor of the People’s Bank of China, and Martín Redrado, Argentine central bank president, in Medellín, Colombia, where they are attending a meeting of the Inter-American Development Bank.

“An Argentine official confirmed a deal had been discussed and said the fine print was being worked out and negotiations were ‘very advanced’.

“Beijing has signed Rmb650 billion of deals since December with Malaysia, South Korea, Hong Kong, Belarus, Indonesia and, now, Argentina in an attempt to unblock trade financing that has been severely curtailed by the crisis.”

Source: Jude Webber, Financial Times, March 31, 2009.

Bloomberg: Frank Holmes says “odds favor” oil prices rising to $65
“Frank Holmes, chief executive officer of US Global Investors, talks with Bloomberg’s Pimm Fox about the outlook for oil, gold and commodity prices. Holmes also discusses mark-to-market accounting and his investment picks of San Juan Basin Royalty Trust and AngloGold Ashanti.”

Source: Bloomberg, March 31, 2009.

CEP News: ECB’s rate cut takes into account subdued prices & weak demand, Trichet says
“The European Central Bank’s decision to lower interest rates to a record low of 1.25% took into account weak price pressures and deteriorating economic growth, said ECB President Jean-Claude Trichet, noting that further unconventional policy measures would be discussed in May.

“‘After today’s decision, we expect price stability to be maintained over the medium term, thereby supporting the purchasing power of euro area households,’ Trichet said during his press conference following the central bank’s rate announcement on Thursday.

“‘The Governing Council will continue to ensure a firm anchoring of medium-term inflation expectations,’ he said.

“Trichet said the ECB Governing Council ‘voted by consensus’ to lower the main refinancing rate by 25 basis points to a record low 1.25%. Economists, however, had expected a 50 bps cut.

“In his introductory remarks, Trichet noted that economic activity has weakened markedly in the euro area and that it will likely remain at a low level for the year.

“Nevertheless, falling commodity prices and large amounts of stimulus to the economy and the financial system should help consumption recover in 2010, he said, adding that risks to the economy are broadly balanced as a result.

“Disinflationary pressures, due largely to the sharp fall in global commodity prices, are likely to push price growth temporarily into negative territory, he said, but added that such developments are ‘not relevant from a monetary policy perspective’.

Source: CEP News, April 2, 2009.

CEP News: Government efforts having effect on financial markets, says ECB’s Bini Smaghi
“Signs that government stimulus measures are having a positive effect on financial markets are beginning to emerge, European Central Bank Executive Board member Lorenzo Bini Smaghi said.

“Government efforts, including fiscal stimulus plans and rescue measures, ‘are starting to be felt in financial markets,’ Bini Smaghi said in a speech given in Milan, Italy on Monday.

“However, the financial industry is still likely to contract, even after the global economy finally recovers, the central banker said. Smaller profit margins and a smaller labour force in the sector is to be expected, he said.

“At the same time, global trade is likely to increase at a slower pace than before the crisis, Bini Smaghi said, adding that risk aversion is likely to remain at high levels for some time.”

Source: CEP News, March 30, 2009.

CEP News: SNB to use “all means” to prevent deflation, says Hildebrand
“The Swiss National Bank will continue to intervene in foreign exchange markets to bring down the value of the franc and reduce the risk of deflation, the central bank chairman Philipp Hildebrand said.

“In March, the SNB reduced its three-month Libor target rate by 25 basis points and announced that it would begin purchasing foreign currency through FX markets in an effort to counteract further appreciation of the Swiss currency.

“‘A renewed appreciation of the franc contains the risk of a sustained deflationary dynamic in Switzerland,’ Hildebrand said at an event in Bern on Thursday. ‘It’s about preventing’ deflation ‘by all means’.”

Source: CEP News, April 2, 2009.

Reuters: Soros – Eastern Europe “prime candidate” for IMF help
“Billionaire investor George Soros said on Tuesday Eastern Europe was a ‘prime candidate’ for International Monetary Fund (IMF) support.

“Speaking at the London School of Economic ahead of the G20 summit, Soros said: ‘G20 should not just provide pious words but should take steps to stabilise periphery countries.’”

Source: Cecilia Valente, Reuters, March 31, 2009.

CEP News: German manufacturing PMI improves further
“Declines in German manufacturing activity continued to slow in March, Markit Economics confirmed on Wednesday. However, activity in the sector continues to contract at a sharp pace, the research firm added.

“The German manufacturing purchasing managers index rose to 32.4 in March, up one point from February’s figure and in line with both preliminary estimates and expectations.

“March’s increase marks the second consecutive month of improvement after PMI reached a 12-year low in January of 32.0.

“Nevertheless, the figure remains well in contraction territory, with the average taken across Q1 as a whole notably lower than the previous quarter’s figure.”

Source: CEP News, April 1, 2009.

CEP News: Improvement in UK services PMI suggests worst may be over
“The contraction in the UK services sector eased more than expected in March, suggesting that the worst in terms of activity declines has passed, Markit Economics said on Friday.

“The UK services purchasing managers index rose beyond expectations to 45.5 in March from February’s 43.2 level. Economists had expected a far more modest gain to 43.5 for the month. March’s gain is the largest recorded since last September.

“‘The latest upturn in the activity index and another improvement in business confidence to a post-Lehman Brothers high provide further evidence that the severe contractions in services output at the end of last year may now be behind us,’ Markit senior economist Paul Smith said.”

Source: CEP News, April 3, 2009.

Nationwide: UK – surprise bounce in house prices
• House prices increased by 0.9% in March
• House purchase activity reaches highest level since May 2008
• Welcome signals of market improvement but too early to talk of house price recovery

“Commenting on the figures Fionnuala Earley, Nationwide’s Chief Economist, said:

“‘Spring brought a surprise bounce to house prices in March. The price of a typical house increased for the first time since October 2007, rising by 0.9% during the month and reducing the annual rate of fall from -17.6% to -15.7%. This brings the price of a typical house to £150,946.

“The moderation in the annual rate of fall is somewhat distorted by conditions last year and so it would be unwise to draw strong conclusions from the significant slowdown in the annual rate of fall. Equally, while the rise in prices in March is welcome, it is far too soon to see this as evidence that the trough of the market has been reached.

“The Bank of England has already taken strong measures to ease the tensions in economic and financial markets by cutting rates and commencing quantitative easing. However it will take time for these to work through into the housing market before we can expect a sustained recovery in house prices.”

Source: Nationwide, April 2, 2009.

Li & Fung Research Centre: Chinese PMI rebounds to over 50%
“The PMI rebounded to 52.4% in March 2009, up from 49.0% in the previous month. The index was back to the expansionary zone of higher than 50% for the first time since October last year. Output index, new orders index and purchases of inputs index were also higher than the critical level of 50% in March. Except stocks of finished goods, all sub-indices were higher than their respective levels in the previous month. Of which, imports index grew strongly by 7.0 ppt. to 48.8% in March, compared to the previous month.”

Click here for the full report.

Source: Li & Fund Research Centre, April 2009.

China View: Soros – China’s system more suited to emergency conditions
“China has a system ‘which is more suited to these emergency conditions,’ the Hungarian-born US billionaire George Soros said in London on Tuesday, adding the Chinese government has more control over the banks.

“Speaking at a seminar organized by the London School of Economics ahead of the G20 summit, Soros said China has the means to stimulate its economy and keep the growth.

“He noted that China was ‘badly hit as the rest of the world,’ in some ways ‘even worse than some countries’ by the current economic crisis.

“Soros, however, predicted that China ‘will be coming out of the recession faster than the rest of the world’.

“The billionaire investor spoke highly of the stimulus packages that the Chinese government introduced, which have led to significant expansion of bank lending and a rally in the stock market.”

Source: China View, April 1, 2009.

James Pressler (Northern Trust): Japan – more news about a worsening situation
“Barring natural disaster, Japan’s fiscal year could not have started off any worse. Today’s release of the Tankan survey showed business confidence hitting a record-low level in Q1, and the near-term outlook plunging to new depths as well. The headline index for large manufacturing companies declined to -58 from an already-dismal -24 in Q4, while the index reflecting conditions looking forward continued its freefall from -36 to -51, suggesting conditions will remain horrible this spring. Furthermore, the confidence index came in lower than that quarter’s expectations index for the fifth straight time, undershooting projections by a full 22 points. As bearish as the economic environment seemed last quarter, business managers did not realize just how bad things could get.

“With global demand having all but dried up and the yen unwilling to depreciate significantly, it is readily apparent that Japan is not going to export itself out of its current recession. That being said, any near-term hope is going to have to emerge from fiscal stimulus. With today being the first day of the new fiscal year, it is also the first day under more relaxed fiscal policy and extra government spending. This will offer the economy a little boost while exports remain horribly weak, and possibly ease some of the pain from such a sharp economic contraction.

“From a GDP standpoint, the economy likely posted a year-over-year drop of 6% or more in Q1 due to external weakness. With some fiscal stimulus factoring in to the national accounts, the economy will not contract as sharply starting in Q2, but that does suggest any real economic growth before 2010 – just less pain.”

Source: James Pressler, Northern Trust, April 1, 2009.

Tags: Accounting Standards Board, Array, Asset Classes, Bank Guarantees, Bill Gross, Brazil, Chicago Tribune, Donald Coxe, Economy Business, Emerging Markets, Financial Accounting Standards, Financial Accounting Standards Board, G20 Meeting, Global Economy, Index Prices, Investment Recommendations, Market Commentators, Market Index, O Rama, Policy Actions, Stock Market Performance, Stock Markets, Tailwind, Word Frequencies
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China: Signs of a recovery – already?

Saturday, April 4th, 2009

This post is a guest contribution by James Pressler* of Northern Trust Company.

We are just over six months into this global financial crisis, and most major economies have yet to get back on their feet. Yet somehow, the numbers coming out of Beijing suggest that the Chinese economy has already dusted itself off and is preparing to take off at a dramatic pace. Is such a quick recovery possible, and if so, how do other countries get in on it?

Our first piece of evidence is found within today’s PMI release for March. Given the particular survey methodology behind this index, we do not give the PMI significant attention, although it does carry weight in the markets at large. The overall PMI rose above the breakeven line of 50, and new orders broke above the line for the second consecutive month. These numbers suggest that the manufacturing sector of the economy was in contraction for about five months and below its usual pace for about nine months. Considering the wealth of anecdotal discussion of widespread shutdowns and mass layoffs, it seems odd to think that the worst has passed.

It also seems odd to see that another key category of the overall PMI – export orders – is doing surprisingly well. While neither the export orders index nor the imports index has crossed above 50, they both have come back from horrible droughts and appear set to break the line in April. Again, this is reassuring to see, but it does seem odd that this same kind of turnaround has not been witnessed in China’s main trading partners. For all the energy of China’s export recovery, few countries are showing any increased import demand these days, and those countries that supply China with economic inputs have not been bragging about a recovery in sales.

One indicator that we do pay particular attention to is bank credit, and several sources in Beijing suggest that lending has been dramatic through Q1. The People’s Bank of China (PBoC) reports that lending has spiked since November, with the main indicators exceeding the 17% rate officials are comfortable with. This growth is driven primarily by the government’s fiscal stimulus drive and its call for banks to lend more vigorously to offset the economic slowdown. From this perspective it is difficult to argue against the figures, and we recognize that plenty of entities will be putting large amounts of yuan to work in the coming months.

Our main concern for the near-term, however, focuses on how these funds will be put to use. The Chinese banking system has been improving its balance sheets over the past few months, but a significant amount of non-performing loans and ‘special mention’ loans still weigh on the sector’s ability to generate credit. If this wild growth in credit generation does not ignite self-sustaining economic activity, there is every chance that today’s big loans could become tomorrow’s burdens. For now we remain cautious – more so than the rallying Asian markets – and wait for more signals that can either confirm or refute all this economic activity.

Source: James Pressler, Northern Trust – Daily Global Commentary, April 2, 2009.

*James Pressler is an associate international economist at The Northern Trust Company, Chicago. He joined the bank in 1993 and has been in Economic Research since 1995.

Tags: Array, Bank Of China, China Signs, Chinese Economy, Contraction, Dramatic Pace, Droughts, Export Orders, Export Recovery, Global Financial Crisis, Import Demand, James Pressler, Manufacturing Sector, Mass Layoffs, Northern Trust Company, Pboc, Pmi, Second Consecutive Month, Shutdowns, Supply China, Survey Methodology
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Global Banking: The Changing of the Guard

Wednesday, April 1st, 2009

Ten years ago, the list of the world’s largest financial institutions was dominated by banks from the US and UK. Today, just a handful of the top 20 have their headquarters in the US, still the world’s largest economy. HSBC, at heart an emerging markets bank, is Britain’s sole representative. Ten years ago, Ten US banks sat in the top 20 list; today only three remain.

The real eye-poppers in 2009 are the two Canadian banks (RBC and TD) joining the ranks of the largest Chinese (ICBC, CCB, BoC, Bank of Communications, China Merchants), Brazilian (Itau and Bradesco), and Australian (Westpac and Commonwealth) banks, to be among those that have retained their value.

By the way, that’s after the global haircut that everyone has experienced. Year-over-year, as of March 17/18, ICBC is down -48.7%, CCB is down -15.4%, Bank of China is down -20.9%, Bank of Communications is down -35.1%. RBC is down -17.9% and TD is down -28.6%.

In the long-run beauty contest of global investing it appears that some of the winners will be the top-down country plays and the companies, whose banks are resident in Canada, China, Brazil, and Australia.

1999: Top 20 Banks by Market Capitalization

>

2009: Top 20 Financials by Market Cap

>

Source:
The decade for global banks
Steven Bernard, Jeremy Lemer, Helen Warrell, Cleve Jones, Peter Thal Larsen and Simon Briscoe
FT, March 22 2009

http://www.ft.com/cms/s/0/ea450788-1573-11de-b9a9-0000779fd2ac.html

Hat Tip: Big Picture

Tags: Array, Bank Of China, Bank Of Communications, Beauty Contest, Bradesco, Brazil, Briscoe, Canada, Canadian Banks, China Merchants, Cleve Jones, Financial Institutions, Ft March, Global Banking, Global Banks, Hat Tip, Icbc, Itau, Lemer, Market Cap, Market Capitalization, Poppers, Sole Representative, Thal, Warrell, Westpac
Posted in Emerging Markets, Markets | No Comments »

Institutional Investors Call the Shots

Monday, March 30th, 2009

This post is a guest contribution by Marty Chenard, of StockTiming.com.

Marty Chenard, of StockTiming.com has produced an interesting chart and his thoughts below about the weight that institutional investors wield in the market. He strongly cautions against buying stocks, in general, when trading by institutional investors is still in distribution, and uses a chart based on Investors Business Daily’s Accumulation/Distribution ratings. Here are his thoughts on this:

You will lose money if you go against the action of what Institutional Investors are doing.

Many of you subscribe to Investors Business Daily and pay particular attention to the “Accumulation/Distribution ratings” they show on listed stocks.

Their readers have learned that a stock in “Distribution” is being sold off or dumped, and that it is not a safe buy until “Accumulation” starts.

It is all the more important to apply this concept to the stock market as a whole, because if the stock market is in Distribution, then the majority of individual stocks will also be in Distribution and moving lower.

That is why we report on the stock market Accumulation/Distribution every day.

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We do this by following the action of what Institutional Investors are doing. Since Institutional Investors are responsible for OVER half of the daily trading volume, they turn out to be the deciding force and direction of the overall market.

So, this morning, we will share our Institutional Accumulation/Distribution chart. To get that net result, we take all the Institutional buying on a given day, and subtract the Institutional selling. That gives us the net difference which is by definition, accumulation or distribution.

Below is the Net Accumulation/Distribution chart going back to October of 2007. It is easy to read … if the green bars are above zero, then Institutions were in Accumulation. If the green bars are below zero, then Institutional Investors were in Distribution.

With that understanding, take a minute to look at the Accumulation/Distribution chart, and compare it to the movement on the NYA (New York Stock Exchange Index) chart below it. After observing the chart, it should be pretty clear that the market does NOT go in a different direction of the Institutional Accumulation or Distribution.

So, the message is clear … invest in the SAME direction as the Institutions, and never go against them.

If you are buying when they are selling, you will lose because they are the top dog and top force in the stock market.

Source: Marty Chenard, StockTiming.com

Tags: Accumulation Distribution, Array, Buying Stocks, Index Chart, Institutional Buying, Institutional Investors, Institutions, Invest, Investors Business Daily, Investors Daily, Marty Chenard, Money, Moving, New York Stock, New York Stock Exchange, Nya, Same Direction, Stock Chart, Stock Exchange Index, Stock Index, Stock Market, Stocks, Stocktiming, York Stock Exchange
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Howard Marks: Will it Work?

Thursday, March 26th, 2009

Howard Marks’ letters to Oaktree Capital investors have become as highly renown and anticipated by the investment community as those of Warren Buffett, particularly to denizens of the debt market. Oaktree runs about $50-billion in assets including high yield debt, convertible bonds, distressed debt, private equity, real estate, and about 1.2-billion in equities.

Marks’ March letter is now available; in it Marks discusses the Fed and the government’s plans to get the economy and the credit market functioning normally again, and what the likelihoods are in his highly-esteemed view.

Here are some excerpts:

The other day, my son Andrew – college senior and credit-analyst-to-be – asked whether I think Treasury Secretary Geithner is doing the right things. As has happened before, his question elicited a fatherly response that grew into this memo.

Solutions in economics aren’t nearly as dependable as engineers’ calculations, and there may not be a tool that’s just right for fixing an economy. Of course, the toolbox offers lots of possibilities, including interest rate reductions; quantitative easing; tax cuts, rebates and credits; stimulus checks; infrastructure spending; capital injections; loans, rescues and takeovers; regulatory forebearances and on and on. But no one should think there’s a “golden tool,” such that solving the problem is just a matter of figuring out which one it is and applying it. Anyone who holds the problem solvers to that standard is being unfair and unrealistic. There are a number of reasons why, including these:

· Every situation is different, and none is exactly like any that has come before. That means fixed recipes can’t work. Certainly this one has never been seen before.
· Most policy actions aren’t all good or all bad. They merely represent imperfect compromises as to ideology, goals, problem solving and resource allocation.
· Economic problems are multi-faceted, meaning the solution for one aspect might not work on – and in fact might exacerbate – another aspect.
· Economies are dynamic, and the problems are moving targets. The environment changes constantly, rather than sitting still and waiting for a solution to work.
· The main ingredient in economics is psychology, and the workings of psychology clearly can’t be fully known, controlled or fixed.

. . .The Bottom Line

There are so many moving parts to the current situation – and to its causes and what we hope will be its solution – that I’ve tried to boil things down to the essentials. In order to right the system and get the economy moving forward again, I think three main things have to be accomplished:

· Our economy and its component parts have to be delevered;
· The vast destruction of capital has to be dealt with; and
· Confidence has to be restored.

. . .Debt has to be reduced, and it’s happening (other than at the federal level, of course). But the way it happens is usually unpleasant: bankruptcies, foreclosures and debt restructurings. “Debt reduction” sounds like a good thing, but it’s likely to be accompanied by the painful loss of the assets that had been bought with borrowed money.

Many assets are worth far less than they used to be – that’s one of the main reasons why the debt load has become unbearable and has to be reduced. Investors, consumers, homeowners and financial institutions will have to rebuild their capital as they – and the economy – attempt to again move ahead.

And confidence has to be rebuilt, too. The willingness to borrow, spend and invest will rebound only when people believe incomes and asset values will resume their growth.

To read the complete letter, click here.

Source: Howard Marks, Oaktree Capital

About Oaktree:
Oaktree was founded in April 1995 by Howard Marks, Bruce Karsh, Steve Kaplan, Larry Keele, Richard Masson and Sheldon Stone. These Oaktree principals joined together beginning in the mid-1980s to manage high yield bonds, convertible securities, distressed debt and principal investments.

Today, Oaktree is comprised of nine principals and over 530 staff members in Los Angeles (headquarters), New York, Stamford (Connecticut), Amsterdam*, Frankfurt, London, Luxembourg*, Paris, Beijing, Hong Kong, Seoul, Shanghai, Singapore and Tokyo.

About Howard Marks
From the rise of junk bonds to the dot-com collapse to today’s economic crisis, Howard Marks has ridden the ups and downs of the financial markets.

From the day he began his professional career in 1969, Marks has been deeply immersed in sophisticated financial instruments. As the high-yield bond manager for Citibank starting in the late 1970s, he was one of Michael Milken’s first customers. In 1985, he became chief investment officer of investment titan TCW Group Inc., based in downtown Los Angeles. And with several decades of experience under his belt, Marks set out on his own in 1995 and founded Oaktree Capital Management LLC with a handful of TCW executives.

The firm, which now boasts a $55 billion investment portfolio, has become one of the elite investment firms in the Western United States. In building Oaktree into an investment powerhouse, Marks has amassed his own fortune. On the Business Journal’s annual list of the wealthiest Angelenos, Marks ranked No. 29 with an estimated net worth of $1.5 billion, though he acknowledges he’s taken a major hit as a result of the financial crisis.

These days, the 62-year-old Marks is more interested in dispensing his wisdom on the markets than in actively managing portfolios. He oversees the direction of the firm, but spends a good deal of his time penning closely watched memos on the state of the financial industry. Marks recently met with the Business Journal in the firm’s downtown offices to discuss his life, career and the chaos in the markets.

Read more: “Interview with Oaktree Co-Founder Howard Marks – Stephen’s Posterous” – http://stephenlaughlin.posterous.com/interview-with-oaktree-co-foun#ixzz0AvAbB9aP

Tags: Andrew College, Array, Capital Injections, Capital Investors, Compromises, Convertible Bonds, Credit Analyst, Debt Market, Denizens, Distressed Debt, Economic Problems, Geithner, Interest Rate Reductions, Investment Community, Main Ingredient, Moving Targets, Policy Actions, Private Equity, Problem Solvers, Renown, Resource Allocation, Son Andrew, Takeovers, Treasury Secretary, Warren Buffett
Posted in Bonds, Credit Markets, Economy, Gold, Markets, Outlook | No Comments »