Daily Investment Interpretations

March 2, 2009

2009-3-2:    The markets dropped further today, between 3.99% and 4.66%. The NASDAQ jettisoned 55 points (-3.99%) to close at 1,323,. the Dow gave back 299.64  points (-4.24%) to close at 6,723, and the S&P 500 divested itself of 34.27 points (-4.66%) to end at 701. Oil was essentially unchanged at at $40.06 a barrel, while gold shaved off a bit to $940. The VIX jumped 6.3 to end the day at 52.65.
    Michael Ashbaugh published his weekly technical analysis article, The Technical Indicator: Dow industrials poised to venture into the 6,000's, this morning shortly after the market opened. In it, he confirmed what I had suspected: that the VIX is entirely too high to telegraph a new bear market bottom. He also argues that it will be at least five months before a new bull market could occur. Of course, the Dow has penetrated the 7,000 level by 275 points. Meanwhile, Mark Hulbert has thrown in the sponge on the November, 2008, lows being the bottom for this cyclical bear market: Nov. 20 lows failing (First Take).
    No doubt the market is oversold. If this were a normal, inflationary recession--the kind the Federal Reserve can reverse by lowering interest rates--I would probably already be heavily invested, but it isn't. And just a few days ago, some prestigious investment advisors were reiterating that the November lows were the lows, and that smart investors were buying in now before the next bull market thundered out of the gates. (Minyanville's Todd Harrison was even turning optimistic: March Madness: Be prepared for a 20% move.)
    Some additional writings by Paul Krugman include:
    Permanent Link to Dow 6,000! "OK, not quite. But it does look as though the Dow will go below 7K today."
    In Permanent Link to A quick response to Scott Sumner, he tries to straighten out a misconception.
    In Permanent Link to Irrational after all, he quotes another author who has observed that the S&P is now below where it was when Alan Greenspan gave his famous 1996 irrational exuberance" speech. to this he adds the fact that after taking inflation into account, the S&P is about 25% below where it was then.
    In Permanent Link to Capital control memories, he recalls how in 1998, in the midst of the Asian financial crisis, "I came out in favor of temporary capital controls; a bit about that here. At the time it was regarded as a horribly unorthodox and irresponsible suggestion — and I had a long, very unpleasant phone conversation with a Senior Administration Official who berated me for my anti-market ideas. Today, that wild and crazy idea is so orthodox it’s part of standard IMF [International Monetary Fund] policy. There are obvious parallels with the current debate over bank nationalization."
    In Revenge of the Glut, he writes, "The international economic crisis is the revenge of the global saving glut. And the glut is still out there, worse than ever.".
    In Climate of Change, He says, "President Obama’s budget represents a huge break from policy trends. If he can get it through Congress, he will set America on a fundamentally new course."
    I'm still committed to a policy of cash and caution regarding the potential outcome of this current financial pullback. If it drags on for years, with the U. S. stock market pulled down with it, I'd prefer not to be dragged down with it. Under other circumstances, I know from experience that it's awfully hard to time the market. I've lost a lot of money by switching to cash and not knowing when to get back into the market when it moved up again. The "This time it's different" is a famous-last-words litany among experienced investors. Mark Hulbert has just called attention to the fact that "buy-and-hold" advice is finally falling out of fashion, and that this commonly happens at or near market bottoms. And I'm sure he's right, but I'm not sure that this time, the market rules of thumb outweigh the economic fundamentals. Also, one might argue that when Mark Hulbert publishes this observation in Marketwatch, it achieves a certain level of orthodoxy itself. Who knows? This outlying event that only occurs once a century might confound the sophisticated investors who have learned to sidestep the common missteps. Or maybe not. The next few years should tell the tale. 
    But I buy the idea that, maybe, this time is different. 

2009-3-2(Mid-Day):  With the S&P's new low of 704, it's now down by 55.3%. The Dow's low of 6806 brings it down 52% from its 2007 high. The NASDAQ's low of 1,328 pulls it down 53.6%,  although it's still 43 points above its 2008 intra-day low of 1,285. Meanwhile the VIX has moved up 10.7% to 51.31... a little bearish, but, I should think, far from a capitulation of the bulls(?). The most bullish thing that could happen would be for panic selling to set in, with the market indices plunging dramatically, followed by dramatic recoveries. On the other hand, if the market just keeps working its way down, partially recovering toward the end of the day, there still won't be (I should think) a bottom in sight.
    Paul Krugman's second article below, Permanent Link to Friedman and Schwartz were wrong, seems to me to be absolutely momentous. The stimulus package will be too little and may well be too late (with no significant effects expected before next year), but there's been the argument advanced by investment advisors that, never you fear, all the money the Fed has pumped into the economy will begin to take effect later this year, and you'll see the economy bottom and turn up. Now Dr. Krugman is signaling that the fundamental thesis that if the Fed had provided ample liquidity to the economy in 1929, the Depression would have been averted, is wrong. It's not working as advertised. And for me, that throws under the bus the claim being made by investment advisors that later this year, the money the Fed is pumping into the economy will turn it around.
    For the past ten days (which is as far back as I can look at trading volume in 15-minute intervals), there has been heavy selling about half an hour before the markets have closed, followed by lesser buying into the close.
    Here are several other commentaries by Dr. Krugman, including his last two editorials.
    In the first of these, Permanent Link to Equilibrium decadence (wonkish), he explains that beginning in 1970, a concept called Phelps volume combined with the concept of rational expectations shook "the foundations of Keynesian ideas about monetary and fiscal policy". The world of economics then split into two camps: one that rejected Keynesian theory altogether, and another that attempted to retain an altered version of Keynesian theory on the basis of empirical data that seems to support it. The school of thought that rejected Keynesian theory quit teaching it, and now, a generation of economists have grown up who don't know anything about Keynesian theory except that it's unfashionable and allegedly wrong. These economists are preaching that the government can't prevent or ameliorate an impending Depression, and can only make things worse by trying.
    I wasn't around during the Panics of the past when there was no government intervention, but what I think we have to remember is that during the Panic of, for example, 1873, most people lived on farms and were somewhat self-sufficient. Houses were still passive shells, with no electricity or running water. There would have been no utility bills, although there would have been property taxes to pay.
    When I was a child growing up in the Depression, parents lived with and were commonly supported by their adult children. That's a lousy arrangement for both the parents and the adult children. There was no such thing as medical insurance, Social Security, unemployment compensation, or insurance on your savings accounts. Show me someone who longs for the good old days, and I'll show you someone who's never lived in them. I give thanks every summer day for our central and automotive air conditioning units and our carefree gas furnaces. (To be continued)

2009-3-2 (Morning):  On a percentage basis, the S&P 500 index has fallen 54.38% from its October 11, 2007, intra-day high of 1,576 to its intra-day low so far today of 719. The Dow has surrendered 51.3% of its 10/11/2007 intra-day high of 14,199 in falling to today's intra-day low so far of 6,917. The NASDAQ Composite has backpedaled 52.7% from its October 31, 2007, peak of 2,862 to today's early low of 1,355. I'm not sure about this, but I think these numbers constitute the largest percentage pullbacks in these indices since the Great Depression. And the reason for mentioning these "record-breaking" pullbacks is that they further underscore the fact that this contraction is a different breed of cat from anything since the Great Depression.
    In this excellent article, Prieur Perspective: Market Refuses to Rally-, Prieur du Plessis updates the inflation-adjusted Dow, including its trend lines,

 similar to the inflation-adjusted Dow that I posted below 
.
in 1998. He also shows that the earnings-per-share peak-to-trough ratio has declined more than at any time since the Great Depression (exceeded only during World War I). He cites two rays of hope in wrapping up his article. The first is that the credit markets are loosening up, and the second is that the Citi  Financial Conditions Index is showing marked improvement, "which tends to lead economic activity such as auto sales".
    In Signs of the market hitting its bottom, Mark Hulbert observes that there are signs that the market may be about to hit its cyclical bear bottom within the next few weeks. (Bear in mind that yesterday morning, Mr. Hulbert presented the case that last November 20-21 represented the cyclical bear market bottom.) I would add the note of caution that this deflationary recession or depression is qualitatively different from any of the recessions since World War II, and that experiential rules concerning the technical action of the equity markets may be overruled by the underlying downward economic spiral.