Thursday, March 27, 2009
to 7,776, and the S&P 500 parted with 16.92
to end the day at 816. Oil
was down slightly at 52.28,
The VIX rose a little to 41.04.
Yesterday (Thursday, March 26th) was the last day
for portfolio managers to buy before the end of the first quarter. One contributor to this modest pullback: today is the
day after the last day (because of the "three-day rule") that
portfolio managers could buy and sell to dress up their portfolios for the
quarter. That may have had something to do with yesterdays' upsurge and
today's letdown. The official end of the quarter will be Tuesday, so there
may be some end-of-quarter distortions. Then will come first-quarter
earnings reports that, everyone agrees, will be worse than what everyone
is expecting, and since everyone expects that they'll be worse than
everyone expects, the markets may already factoring in this bad news, and
the bad news may arrive on little cat feet..
consumer spending fell in February
Today's economic numbers for February were slightly negative. Real
consumer spending fell 0.2%, leading to a forecast of an
inflation-adjusted 1.3% annual rise: Consumer spending cools with incomes.
This is low but it's positive, and much better than the 4.3% average
decline in last year's fourth quarter.
incomes fell in February
Inflation-adjusted personal incomes fell 0.4% last
month, and the personal savings rate dropped from 4.4% in January to 4.2%
in February. (Note that transfer payments such as Social Security and
unemployment benefits rose 0.8%.)
inflation has fallen about a half point over the past six months, and we
expect to see a more rapid and substantial decline through the rest of the
year given the enormous slack building up in the economy,; wrote David
Greenlaw and Ted Wieseman of Morgan Stanley."
But our bullish guru, Stephan Hadley says, "'The
odds of deflation any time soon are fading fast,' wrote Stephen Stanley,
chief economist for RBS Greenwich Capital. 'At the risk of beating a dead
horse, the empirical support for the output-gap model of inflation is
scant, and those economists, including at the Fed, who are counting on
several years of moderating core inflation even after the economy begins
to recover are likely to be well wide of the mark.'"
the stock market continue to go up from here (with minor pullbacks) or
will it fall to new lows?
a gaping chasm here between the gurus who are claiming that the current
rally marks the beginning of a new cyclical bull market, and those who are
saying that this is still a bear market rally that will be followed by
the next few months we're going to find out who had it right and who
Sometime in April, the first report on GDP changes
for the first quarter should appear. At that point, we should begin to
know which camp is correct. If the GDP is improving and trending toward
the only-2% decline in GDP that's forecast for the third quarter of this
year (as in 0% by the end of September, and slightly positive for the rest
then we'll know the bulls got it right. In the meantime, we'll (or at
least I'll) have to improvise.
Todd Harrison has reminded his readers that three weeks ago,
he was forecasting a market upturn when everyone else was incredulous
regarding such an idea. Now he's urging caution. Sentiment has gotten too
bullish. Institutional cash is returning to the marketplace, meaning that
the crowd is climbing on board the bus: Harrison: Should I stay or should I
go?; Freaky Friday
Potpourri: Slippery When Wet!
Near-term, the indices may pull back to something like
the 800 level on the S&P 500.
Second-quarter earnings might produce some shocks,
although a generous allowance for earnings disappointments may already be
baked into the cake.
It seems to me that there are three future scenarios
that we might define for where the economy and the stock market are going.
The Bullish Case
It seems to me that the bulls are saying that the
economy is showing the traditional signs of pulling out of a financial
contraction. Never mind why. This is what's happening. Their theoretical
argument is (I think) that the U. S. government is pumping, (including the
fiscal stimulus package, the TARP and the TALF), at least two trillion
dollars into the U. S. economy. The Congressional Budget Office has
estimated that the economy will face a GDP shortfall of something like
three trillion dollars over the next two or three years. But $2+ trillion
should fill the lion's share of that gap. But in the end, the bulls' case
is simply that traditional signs of a bottom are appearing, and it's not
for us mere mortals to argue that the storm is going to get worse and
worse when the sky is brightening off to the west.
It's easy to dismiss the bulls as "just not
getting it", but that may not be the case. There are some fine minds
in this world of high-finance, and they may have their own rule-of-thumb
calculations that underpin their conclusions.
In any case, data trumps theory.
We have well-defined meter-stick by which to measure
the bull's case: roughly
change in the 2009 GDP for the April-June quarter,
change in the GDP for the July-September quarter.
According to this thesis, we're approaching, or have already passed the
the rate of decline of the economy peaked.
March 9, 2009, represented the
bottom for this cyclical, several-year market cycle. The economy should
bottom sometime in the third quarter.
The Bearish Case
The bearish case is, I think, the one so ably set forth
by Paul Krugman and John Kenneth Galbraith. This is not a normal postwar
recession. We're staring deflation in the eye and the programs
being instituted by the U. S. government don't look as though they're sufficient to stop the bear. In addition, the level of debt that
has to be unwound, and the degree of dysfunction in not just the visible
financial services system but also, in the unregulated "shadow
banking system" are going to require, given the perceived inadequacy
of U. S. government programs, years of additional pain... at best, a
"lost decade". At a total-debt-to-GDP ratio of nearly 4-to-1,
we're more than twice as indebted as was the case during the Great
Depression, when the total-debt-to-GDP ratio stood at 1.76-to-1. At least so far, the Dow is following
in the tracks of the Great Depression. This contraction won't exactly
replicate the Great Depression-- for one thing, GDP had fallen much
farther at this 17.6-month mile marker in 1931 than it has now--but the
two charts are eerily similar.
In considering the bearish case, I think it's important
to add what, Ray Dalio, the founder of the world's largest hedge fund
(Bridgewater Associates, $80 billion under management), has said. First of
all, he distinguishes between a recession and what he calls a D-process
(what I've dubbed a "deflationary recession"). And, he says,
we're in a D-process.
seems very likely that stocks will get materially cheaper,"
he says. "We
have to go through an important debt restructuring process, and a lot of
assets are going to be for sale, huge numbers of assets. And there's going
to be a shortage of buyers."
He continues, "Too
many people have a systematic bias toward positive economic growth. I
think that what we're going to probably have is an economy that's going to
get worse, with most people positioned for it to be better."
Never heard of Bridgewater Associates? Perhaps that's
because Bridgewater Associates works only with large institutional clients
such as pension funds and sovereign wealth funds (270 of them). It has
never lost more than 2% in any given year. It uses the latest
technological techniques to generate wealth for its clients. Ray Dalio has
assembled a "notebook" with 100-page timelines of the four major
deleveraging episodes of the past century--the hyperinflation of the
Weimar Republic in the 1920s, the Great Depression, the Latin American
crisis of the 1980s and Japan's lost decade of the 1990s. Dalio employs
800 of the best and brightest minds he can find. He depends upon a
proprietary formula that reduces risk by 80%, but scours the world for
opportunities in a broad range of investment areas, but focused in the
fixed-income and currency markets.
It may be worth noting that Dr. James Simon's
Renaissance Technologies is at the bottom of the list, with $20 billion
under management. Dr. Simon is a mathematician who has also assembled a
team of "quants"-- mathematicians, physicists and financial
wizards--who also scour the world for opportunities.
camp holds that what
we're currently witnessing is a quite-strong bear market rally, but the
stock market will hit one or more new lows before it turns around. And
when it does, it won't get very close to its October, 2007, highs for a
number of years.
The Todd-Harrison Case:
The stock market will hit a new low at 600 or lower
before it goes higher. At that point, Mr. Harrison will invest 25% of his
money. Then the S&P 500 will begin a prolonged rally or will enter a
cyclical bull market.
I have no more information than this regarding Mr.
Harrison's vision of the future.
Sometime later this year, the S&P 500 will hit a new low at
approximately S&P 500 = 600, at which point, it will be safe to invest
25% of our money in a bet on a rising market.
By no later than the end of this year, and probably
earlier, we'll know which of these three scenarios fits the facts.
My personal bias is
that present U. S. federal plans
aren't going to work very well, and that the economy and the stock market
will continue to fall. I don't tend to see a recovery starting here in the
U. S. later this year. But I could be utterly wrong, and for this reason,
I'm going to hedge my bets by creeping cautiously back into stocks,
with trailing stops to minimize losses. But beyond that, I'm primarily
going to invest in overseas markets, and particularly, China. For one
thing, I'm picking up vibes that other investors are also deciding that
China is a good investment venue, and that it could be a good wave
to surf until the Chinese market again becomes overheated.
I'll try to provide more on this tomorrow.
Dow: The rally has legs yet This expert points out that with the
markets having come up so far, portfolio managers will want to look good
at the end of the quarter, and will be buying at least through the end of
the quarter (next Tuesday). (But Todd Harrison has stated that many of
these purchases must be made three days prior to the end of the
quarter--which was yesterday, March 26th.
The Cabot China and Emerging Markets Newsletter has issued a cautious
"buy" signal, Brimelow: Rattled by the roiling rally
lists the two stocks that the Newsletter recommends: Shanda Interactive
and Aluminum Corporation of China, ACH,
(try to buy at 15). In the meantime, the Cabot Market Letter is now 25%
invested in three stocks (one of which is a gold
S&P Watch: Testing the Bounce
2009 is no longer looking like such a horrible year for stocks