Daily Investment Interpretations

June 30, 2010

2010-6-30:  The markets fell again today, this time taking them below their support levels.  The NASDAQ Composite dropped 25.94 points (-1.21%) to close at 2109.24, below its February 4th low. The Dow declined 96.28 points -0.98%) to close at 9,774.02, and the S&P 500 doffed 10.53 points (-1.01%) to end at 1,030.71. Oil ended down at $75.30 a barrel, while Gold closed at $1,244. The VIX rose 0.49 to 34.62.
    The markets faced more bad news regarding the economy today:
(1) Chicago factories weaken
(2) 'Lame' data on private U.S. payrolls hobble Wall Street, and 
(3) Fed's Evans wary of asset buying.
    This last article is noteworthy in that the Chicago Fed's Charles Evans states that the U. S. recovery is on track, even if slow to recover, and that the Fed doesn't need to go for further "quantitative easing". We'll see.
    This moves the S&P 500 below the 1,040 "line in the sand" drawn by my investment advisory service and by other technical analysts. 
    Todd Harrison observed a few days ago, Where we've been and where we're going, that if the S&P 500 closed below 1,040 (it closed today at 1,130), the next stop would logically be S&P 860
    Mark Hulbert reports that the three Dow Theory newsletters he tracks are, as of today's close, in agreement that a Dow Theory sell signal has occurred: Dow Theory Sell signal? The Dow Jones Transportation Average has closed below the Dow Jones  Industrials Average.
    Portfolio moves you should make now suggests moves into dividend-yielding stocks, and lists some promising candidates.

    I'm personally committed to raising cash for the next day or two until we see where this market breakdown is leading. Eventually, the markets will return to their present levels and surpass them. For my part, I plan to sell what more I can sell, and to hedge the rest of my portfolio by buying deep-in-the-money, January, 2012, puts on one or another of the major indices. (This will be one way to flexibly crash-proof my mutual funds during the day until I can close out both my hedges and my mutual funds at the end of the day. Another way would be to buy a double-inverse fund, like the Proshares Ultrashort S&P 500 ETF: SDS) early in the day that I can sell at the end of the day.)

    Stock market futures are down a little more than Ĺ % tonight.

    This article, Permanent Link to Leading indicators and the shape of the recovery, points out that "
Iíd add that this is a really, really bad time to be relying on conventional indicators. Why? Basically, because in a zero-interest rate world ó the three-month rate was .066% last I looked ó especially one thatís suffered from a collapse of the shadow banking system, conventional indicators donít mean what they usually mean. Increases in the monetary base arenít especially expansionary. The yield curve more or less has to slope up, even if no recovery is expected. And so on."    
    What's significant about this is that the everyday economists who write for the public are arguing that (1) increases in the
monetary base are inflationary, and that its going to come on suddenly any time now, and (2) the yield curve slopes upward, so we're looking at an economic recovery ahead.

    The Paul Krugman squibs below are samples of the estimations he made in January, 2009, of the level of stimulus that would be required to restore the economy to normal operation. As he predicted, when the stimulus proved to be inadequate, their would be assertions that the stimulus didn't work, whereas, without the stimulus, we would be in Depression 3.0 right now.
    There's the notion floating around that we just need to take our medicine. Todd Harrison argues that we can't keep masking our massive indebtedness with "drugs", and "to get through it, we need to go through it". I think that the consequences of getting the government out of the picture and letting banks and other business implode would be unspeakably bad for you and me. As I've said a time or two, on September 15, 2008, Lehman Brothers filed for bankruptcy, and the very next day: 
2008-9-16:  "One harrowing happening after the close today: Money market fund halts redemptions, and Cloud over money-market funds. The financial advisory service Seeking Alpha is advising its clients to immediately transfer their money market funds to U. S. Treasury funds or to Federal Deposit Insurance Corporation-insured deposits at banks. Monies greater than $100,000 are to be split into multiple $100,000 accounts spread among several banks. (This will probably lead to a run on money market accounts as they are converted to Treasury funds or withdrawn and sent to banks.) As an example of how this works, the Primary Fund has an intrinsic loss of about 1.2% because of investments in Lehman Brothers, but because 60% of its investors have already withdrawn their money with no losses, the current level of loss is 3%. Presumably, anyone who withdraws their money from now on will get 97Ę on the dollar. But note that the greater part of the fund's money was withdrawn in the past day at $1 on the dollar by investors who knew something was amiss. In all likelihood, the fund notified insiders and institutional investors so that they could withdraw with no losses, sticking the remaining 40% with the bill. That's how the game is played."

    And the following day:
2008-9-17:  "Part of what's so unnerving is the fact that three money market funds that had significant investments in Lehman Brothers and AIG are unable to return quite all their investors' money to them. Of course, the elephant in the room is: how much farther will this go? With major banks and brokerage houses suddenly falling away after claiming that the worst was behind them, everyone is wondering who else will fail. Small investors can spread their money among several bank accounts, each of which is insured up to $100,000, but high-net-worth investors can't insure their money so easily."

    By the 18th, $90 billion had been withdrawn from money market funds. I had transferred my money into a Treasury-based money market fund.

    On Saturday, September 20th,,2008, I wrote:
    "Thursday afternoon, if the U. S. government hadn't intervened dramatically, I suspect that there would have been massive sales of mutual funds starting yesterday, and that there might have been runs on our banks starting next week. I know I was worried about what to do to safeguard Tommie's and my savings and investments. Should we open Swiss bank accounts? Buy gold? Are U. S. treasury bonds safe? The Federal Deposit Insurance Corporation is running low on money, and in any case, it wouldn't be possible to instantaneously return all the cash invested in all U. S. money market funds and bank accounts. As some commentators have put it, we were staring into the abyss Thursday morning. And in the abyss was a cratering of the world's economies. Fortunately, the U. S. government is taking dramatic steps to restore confidence in U. S. financial markets."

    If the government hadn't moved to shore up the markets, I believe that by the following week 9/22-26/2008), your (and my) life savings and non-federal retirement accounts would have been gutted by insiders who would have gotten their money out while the rest of us stood around trying to figure out what had happened to us. Banks and pension plans don't keep their money in cash. They loan it out, or otherwise invest it. If the economy crashes, the banks and pension funds would have to try to redeem their collateral at whatever prices the depressed markets would bear. (The Federal Deposit Insurance Fund was running out of money.)
    The speed with which laissez faire ideologues would have come clamoring to the federal government to save their life savings and their retirement funds would have been breathtaking. After all, that's what the investment bankers did.

2009-1-30:  "In Permanent Link to Saving, investment, Keynes, evolution, Paul Krugman laments the lack of knowledge of fundamental economics that is being displayed by some vocal economists... like discovering that some eminent biologists are not only creationists, but 'have never heard of the the theory of evolution and the concept of natural selection'.
2009-1-30:  "In Permanent Link to Damnification, Dr. Krugman mentions the paradox of thrift. While saving money rather than spending it is a good thing for an over-indebted society, it can be a disaster if everyone does it at the same time. If people save rather than spend, consumption and production falls off, leading to layoffs, leading to further cuts in consumption, leading to further cuts in production, leading to further layoffs. This means (1) that people who want to pay down debt won't be able to do it if they lose their jobs, and (2) if prices and wages fall over time, debts become relatively larger and harder to pay off even for those who keep their jobs. Dr. Krugman writes, 'and we're only in the early stages of a slump that, in the words of the Congressional Budget Office director,

    'absent a change in fiscal policy, CBO projects that the shortfall in the nation's
     output relative to potential levels will be the largest--in duration and depth--since
      the Depression of the 1930's.'"

    "He concludes that, 'yes, running up large debts is risky; but dong nothing is even riskier.'"

2009-1-28:  "Permanent Link to Zero lower bound. The Zero lower bound commentary observes that "the House has passed the stimulus bill with not a single Republican vote. Then Dr. Krugman says, 'Arenít you glad that Obama watered it down and added ineffective tax cuts, so as to win bipartisan support?' The second commentary concerns 'the amazing amount of misunderstanding of the basics of fiscal policy, even among people who should know better'."

2009-1-27:  "Permanent Link to A Dark Age of macroeconomics (wonkish)."

2009-1-27:  "Permanent Link to How late is too late? deals with the question of the timing of the stimulus package."

2009-1-26 (Monday):  "Bad Faith Economics"

2009-1-21:  "In Permanent Link to Give me some men who are half-hearted men Ö, he warns that we'd better not address this crisis half-heartedly... we'll either succeed or we'll fail, with no middle ground." 

2009-1-19:  "In Permanent Link to Economists, ideology, and stimulus, Dr. Krugman deplores the first-rate economists who reject fiscal stimulus on ideological grounds."

2009-1-19:  "In Permanent Link to An alternative economic strategy, Dr, Krugman says, 'The interest rate is up against the zero lower bound; the fiscal stimulus doesnít look big enough; the TARP has been a disappointment. What to do? My wife suggests that we might try sacrificing a few bankers ó central bankers, investment bankers, whatever ó to appease the financial gods.'"

2009-1-19:  "Permanent Link to Getting fiscal. This commentary concerns Nobel Prize-winning economist Gary Becker asking why there's so much interest in fiscal stimulus today compared to 1982. Unemployment peaked at 10.5% in 1982. Peak unemployment today is forecast to hit 9% even if there's no stimulus package, so why should we worry about a stimulus package. Dr. Krugman responds, 'Urp. Gack. Glug. If even Nobel laureates misunderstand the issue this badly, what hope is there for the general public?' 
    Interest rates when the unemployment rate peaked at 10.5% in 1982 were in the neighborhood of 15%. All that Paul Volcker had to do to re-ignite the economy was to lower interest rates to 14%, which is what he did in the second week of August, 1982  Today, with the unemployment rate at 7.2% and the economy falling into the abyss, interest rates are already at 0% to 0.5%, and they can't go any lower. This is a deflationary recession, categorically different from the inflationary recessions that beset us since World War II blasted us out of the Great Depression. The Fed has fired its last, best shot at the bear, and has failed to stop it.
Keynesian fiscal stimulus is one of the only weapons we have left. (Think of this economic imbroglio as an antibiotic-resistant infection.)"

\2009-1-19:  "In Permanent Link to Zero lower bound blogging, he quotes a paper by Goldman Sachs Jan Hatzius. Mr./Dr. Hatzius applies the "Taylor Rule" to estimate how much farther the Fed should cut interest rates to combat the deepening recession through conventional monetary policy alone, and concludes that the rates should decline to -6% by 2011 (and still falling). Since interest rates can't practically go negative, the only alternative is fiscal stimulus or unconventional monetary measures.

2009-1-16:  "In Permanent Link to The TIPS spread, 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'".

2009-1-13: "Paul Krugman's article, Permanent Link to Bang for the buck (wonkish), observes (also crediting Mark Thoma and this) that this kind of money that the federal government borrows isn't wasted, but that the greater part of it comes back to the government in the form of income tax, and of savings that don't have to be paid out in the form of  what I might loosely call, 'job welfare'.

2009-1-11: Update: "Paul Krugman has just published two more 'news bites' dealing with the prospects for a second Great Depression. The first of these, Permanent Link to A scary analogy, quotes Mark Thoma, who likens the stimulus package to driving up an icy hill. If you don't tackle the hill with enough initial momentum, you risk sliding back down before reaching the top.
    "To me, this drives a ten-penny nail into the coffin of the existing Obama stimulus package, and indirectly, into the economy and U. S. stock markets. Better no stimulus package at all than one that fails to slay the bear. Of course, they're probably making it as large as they think they dare.
    "The second news bite, Permanent Link to Specifics, addresses the demand for specific solution suggestions from Paul Krugman. His response: he doesn't have the inside information that he would need to offer specific solution suggestions."
2009-1-10: Update: "Paul Krugman has just published two new articles dealing with the prospects for a second Great Depression. In the first of these: Permanent Link to Risks of deflation (wonkish but important), he extimates that, without intervention, the current crisis could lead to an annual deflation rate of the order of -3.5% a year. He concludes:
    "'So tell me why we arenít looking at a very large risk of getting into a deflationary trap, in which falling prices make consumers and businesses even less willing to spend. Tell me why this risk wouldnít remain high, though lower, even with the Obama plan, which as far as I can tell is expected to reduce cumulative excess unemployment by about a third.'
    "In the second article: Permanent Link to Romer and Bernstein on stimulus, he concludes that the Obama team's estimates of the effects of their stimulus package appear to be within reasonable agreement with his own.
    "Of course, the Obama Administration can generate additional stimulus packages that would make up this shortfall, but you have to wonder about their loss of face and of credibility if they show up on Congress' doorstep in a couple of months asking for another $1.4 trillion.  

2009-1-7: "Dr. Krugman notes today that the planned economic stimulus package, to be delivered over a two-year time frame, will deliver, at 3% of GDP, a 3% boost, against the Congressional Budget Office' projected 8%-or-greater shortfall in GDP over the next few years: Permanent Link to More stimulus notes. (See also Lots of Buck, not Much Bang.)"

2009-1-6: "I think it's worth quoting a few lines from Dr. Paul Krugman's latest article, dated Sunday: Fighting Off Depression. In it, he says, 'Letís not mince words: This looks an awful lot like the beginning of a second Great Depression. So will we 'act swiftly and boldly' enough to stop that from happening? Weíll soon find out.'
      "Today, he followed up his article with back-of-the-envelope estimations of the effect that the Obama Team's $700,000,000,000 -$1,000,000,000,000 stimulus plan might have on unemployment, and concluded that the plan might reduce unemployment by as much as 1.7%. He summarizes:
    "'I see the following scenario: a weak stimulus plan, perhaps even weaker than what weíre talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says 'See, government spending doesnít work.'
    "'Letís hope Iíve got this wrong.'

2009-1-5 Update:   "Stop the presses! Here's Paul Krugman's latest article, dated yesterday (Sunday): Fighting Off Depression. What he's concluding, and what I think may well happen, as I wrote below before reading Dr. Krugman's latest article, is that although in principle, the world's governments might be able to stave off a coming Depression, in all likelihood, these remedial measures could become a political football in which the political party that's out of power sabotages the salvage measures of the party in power. (More below.)"

1-5:   "The markets fell just a little today. The NASDAQ gave up 4.18 (-0.26%) to close at 1,628, the Dow slid 81.8 points (-0.91%) to close at 8,953 and the S&P 500 slipped 4.35 about (-0.47%) to land at at 927. Oil ended the day at $48.57 a barrel as OPEC's production curbs began to bite, and gold lost $21.70 to $857.80 an ounce. The VIX remained unchanged at 39.11.   
    "Paul Krugman has bad news: Permanent Link to Is Obama relying too much on tax cuts?. Dr. Krugman's point is that the Obama team may be showing weakness in confronting the Republicans over the incoming administration's economic stimulus plan, and that some leading Republicans and their political consultants may be moving in for the kill. Offer a 40% tax cut and the Republicans will demand 100%. The Republicans will also demand cuts in corporate taxes. Dr. Krugman observes that Republican minority leader Mitch McConnell is already "moving the goal posts". (Senator McConnell has a reputation as a shrewd political tactician.) This could possibly, I should think, lead to a squandering of the $1 trillion economic stimulus program, and a deep Depression. 
    "Obviously, the party that is out of power has every incentive to sabotage the policies of the party that's in power. Would that extend to ruining the nation? I suspect that, as far as some Congressional representatives are concerned, that wouldn't enter into their personal calculations. Witness the former members of Congress who are behind bars, and consider that this is probably just the tip of the iceberg. I would imagine that there are many Congressmen and Congresswomen who are outstanding public servants, but if you pick the worst out of 500... Some of our most successful are apt to be guided by what's best for their power bases and their prospects for re-election. ('What have you done for the Party lately?') So things may not go altogether smoothly for an economic rescue program."