Daily Investment Interpretations
January 16, 2009
Today was similar to yesterday. The markets started up, went down, and
then came back to close up for the day. The NASDAQ tacked on 17.49
ending at 1,529. The Dow annexed 68.73
to close at 8,281. The S&P 500 ratcheted up 6.38
to 850. Oil backed up to $36.51 a barrel, and gold
backed down to $839.90 an ounce. The VIX fell to 46.61. So
the rally isn't dead yet.
In the meantime, Paul Krugman has published Permanent Link to The TIPS spread, and Forgive and Forget?. His first article notes the good news that the TED (Treasury/EuroDollar Spread has fallen nicely, indicating a renewal of confidence among banks regarding inter-bank loans. The bad news is the fact that 10-year TIPS (Treasury Inflation-Protected Securities) are forecasting deflation over the next 10 years. Dr. Krugman concludes that the situation looks more and more like the Japanese, with their "lost decade". His second article urges that the Bush administration be held accountable for their actions.
Articles in Marketwatch include Sticker shock for food in 2008 and The 10 most unethical people in business.
Morningstar has two articles that might be of interest: Our Biggest Mistakes in 2008, and Opportunities Abound in the Bond Market. "Our Biggest Mistakes... " is a noble confession, but it's also a horrifying example of just how drastically wrong they were. (Another example is Suntech (STP), to which Morningstar gave a fair market evaluation of $70 a share. It's currently trading for $10.80 a share after dipping as low as $5.36 a share.) It's an object lesson in the fact that you can't depend upon financial experts.
Morningstar is far from alone in missing this hurricane. Mark Hulbert's most accurate market timers got it all wrong, also, and I, personally, relied on their advice to stay invested as the ship sank. And there were a myriad others who failed to see what was coming coming.
Bond funds might be of interest, particularly those which weathered last year's storms with positive results. I would think about PIMCO funds that are managed by Bill Gross, who's been a beacon throughout this economic tumble-down. Bill Gross mentions the fact that "'breakeven inflation rates' are currently signaling a future where the U. S. Consumer Prices Index averages -1% for the next 10 years. Possible, but not likely." In other words, Mr. Gross isn't ruling out Paul Krugman's deflationary scenario, but he doesn't think it's the most probable outcome.
If the stock market goes back up this year, there will be an opportunity to make money using a 2X or 3X ultra fund, but I think market volatility is still too high for even a modest investment in equities. (My experience with China stocks over the past few weeks is a case in point, and I'm being guided there by someone who has at least a yardstick or two to assess where things stand.)
During the previous recessions I've experienced as an investor, with the market pullback in 1970, the 1974 recession, the 1990 recession and the 2001 recession, I never questioned whether the markets would soon rebound. I counted on it happening within a year or so. These were classic "inflationary" recessions controlled by the Fed through interest rate adjustments. But what we're facing now, a deflationary recession, is categorically different. I just finished reading in Kiplinger's Magazine some housing forecasts. In certain areas, there's been little or no decline in housing prices, and in a few places such as Albuquerque, have continued to slowly rise. But the expert forecasts in Kiplinger's call for further housing price declines in overheated markets through this year, finally bottoming in 2010. (The one wild card here is layoffs. Layoffs seem to be getting back into high gear again.)
I think there is true uncertainty about what's going to happen as the irresistible force engages the immovable object. The U. S. government is turning every which way but loose to fight this deflationary monster, and yet, a lower level of consumption and of spending is essential now that we can no longer go deeper and deeper in debt to finance an unaffordable economy.