Archive for 2011

  • Greg Mankiw & Bill Poole Talk Fed
    , August 9th, 2011 at 12:20 pm

  • Great News! A Very, Very Modest Bounce
    , August 9th, 2011 at 11:21 am

  • Morning News: August 9, 2011
    , August 9th, 2011 at 7:42 am

    ECB Buys Up Spanish and Italian bonds, Yields Fall

    FTSE Enters Bear Market Joining European Index Peers

    Swiss Franc Surges to Record Highs on Slump Worries

    China Again Faces Growth vs. Inflation Conundrum

    South Korea Regulator Bans Short-selling for 3 Months

    Gold Tops $1,770 in Biggest Three-day Rally Since 2008

    Stocks Fall, Oil Sinks

    A Wave of Worry Threatens to Build on Itself

    Behind S.&P.’s Downgrade, a Committee That Acts in Private

    Freddie Mac Swings to Loss, Seeks $1.5 Billion in Aid

    Bank of America Shares Plummet Monday After Lawsuit, US Debt Downgrade

    Dish Reports Quarterly Profit That Trails Estimates on Customer Losses

    MGM Resorts Beats Estimates on Macau Boom

    Tepco Suffers US $7.4 Billion Quarterly Loss

    Brian Shannon: VWAP From 2009 Low – Chart & Comments

    Todd Sullivan: “Davidson” on S&P 500

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  • The Market’s 6.66% Plunge: The Devil Is in the Details
    , August 8th, 2011 at 10:21 pm

    The stock market plunged again today and the numbers are mind-boggling. The S&P 500 lost 79.92 points to close at 1,119.46. That’s a loss of 6.66% which is the biggest one-day loss since 2008. It also eerily evokes the market’s March 2009 bottom of 666. Today clocks in as the 25th-worst one-day loss for the market since 1932 (that’s as far as my records go back). For the first time in 15 years, every single stock in the S&P 500 lost money today. If you’re scoring at home, that’s Bears 500, Bulls 0.

    The S&P 500 first closed at this level on April 2, 1998 which was more than 13 years ago. As badly as the S&P 500 performed, the Nasdaq did even worse. That index lost 174.72 points today to close at 2,357.69. Down volume led Up volume by a ratio of 151-to-1. The $VIX jumped exactly 50% today—from 32 to 48. It’s tripled in a matter of days.

    Once again, the cyclicals bore the brunt of the loss. I know I must sound like a broken record, but this is very important in understanding what’s going on. The Morgan Stanley Cyclical Index (^CYC) dropped 81.22 points today to close at 820.64. That’s a loss of 9.01%. Today was the 17th time in the last 18 sessions that the CYC has trailed the overall market. (Read that sentence again for full effect.)

    What happened today is that cyclical stocks and small stocks (which tend to be disproportionately cyclical) did especially poorly. The larger stocks did better, meaning somewhat less terribly. The Dow, for example, “only” lost 634.76 points or 5.55%. That’s more than 1.1% better than the S&P 500. The Russell 2000 ($RUT), which is a small-cap index, lost 8.91% today. Only three months ago, that index was at an all-time high.

    Among the S&P 500 Sectors today, the Financials did the worst, dropping 9.98%. Bank of America ($BAC) was down more than 20%. The bank faces many significant challenges, not the least of which is that they suck. After the Financials, the Energy Sector was the second-biggest loser with a loss of 8.27%. Then another cyclical group, Materials, lost 7.28%. The Industrials came in fourth-worst with a loss of 6.87%.

    The top-performing group was, not surprisingly, Consumer Staples which lost 3.87%. Next was Healthcare which lost 5.25%. The Healthcare and Staples sectors often track each other. This makes sense since these are areas that will be least-impacted by an economic slowdown. Folks generally don’t cut back on their medical needs or food during a recession, at least not like they do with non-staples.

    Here’s what’s happening: The S&P downgrade of the U.S. isn’t so much impacting Treasury yields. Those are as popular as ever. Instead, what we’re seeing is the impact on everything else. For example, the downgrade is leading investors to think that the government won’t rely as heavily on fiscal policy to get the economy moving again. That implies that there will be more monetary accommodation from the Federal Reserve which means low rates for a longer time.

    As I’ve written before, buying gold is the equivalent of shorting real short-term T-bills. As a result, gold continues to soar. The element broke $1,700 today, and in after-hours trading, gold got as high as $1,723.40.

    I’m at a loss to comment on the stocks on the Buy List. Except for Ford ($F), I like them all. At this price, Ford isn’t looking so bad either. There hasn’t been one single bit of information that’s come out in the last two weeks that could possible make anyone change their mind on any of the Buy List stocks. The earnings reports were very good, and a few stocks raised their full-year ranges.

    This year highlights an important fact about investing: The stock market is not symmetrical and it’s subject to “fat tails.” I’ll explain that again but this time in English. The stock market has a tendency to rise slowly and fall back sharply. Bull markets are long and boring. Bear markets are quick and deadly. In fact, most of the debate about a bear market comes after the low. It moves so fast that folks don’t realize its over.

    By “fat tails,” I mean that the market builds on its own momentum. People start selling because everyone else is selling. That, in turn, causes even more selling. As a result, these awful market days tend to pile on top of each other. Consider that the three worst days of the past year have come in the past week.

    The lesson from this is that we don’t know when the market’s downward momentum will end. Since it builds on itself, it’s like it has become its own monster. The selling will stop, but I have no idea when. These bottoms are often a process. Sometime, like in 2009, it’s a sharp bounce off the bottom. But even that came a few months after the most dramatic news of September 2008.

    In economics, there a division between the financial economy, which is the stuff we mostly talk about here (crazy traders in New York and London moving massive amounts of colored paper around) and the real economy (real people buying and producing real things). These two economies have a troubled relationship, and they don’t always move together. The problem is that problems in one can easily tip over into the other.

    In 1987, the stock market tanked, but if you looked at broader economic data from that time, you’d hardly know anything went wrong. In 2000, the markets soared above and beyond anything that was happening in reality. What we’ve seen over the past few days is a panic of the financial economy. As of now, we haven’t seen conclusive evidence that the real economy is in recession. I don’t mean it won’t happen, but as of now, the solid evidence isn’t there. What we do have is bits and pieces that the economy is slowing down.

    Until there’s more evidence that the economy is headed back in the basement, I continue to like stocks a lot. Bond yields are very low and stock valuations are cheap. This panic will pass.

  • The 10-Day View
    , August 8th, 2011 at 1:57 pm

    The market sinks even lower. The S&P 500 just broke below 1,150. The market is lower than where it was in July 1998. To put that in context, that was a few weeks before Google ($GOOG) was founded.

    The Morgan Stanley Cyclical index (^CYC) is now down to 838. That’s an amazing loss. The $VIX has been as high as 41 today. That’s more than double where it was two weeks ago.

    S&P downgraded both Fannie Mae and Freddie Mac. Also, Bank of America ($BAC) is getting hammered after news broke that AIG ($AIG) is going to sue them over the mortgage debacle.

  • The Summer of Discontent
    , August 8th, 2011 at 10:59 am

    The stock market continues to plunge. The S&P 500 has been as low as 1,154.10 this morning. That’s another 100 points below the close from last Tuesday’s awful market. That S&P 500 is currently down 3.65%.

    Once again, it’s the cyclicals that are getting pounded the most. The Morgan Stanley Cyclical Index (^CYC) is currently at 852.97. That’s a stunning drop of close to 21% since July 21st. The CYC is trailing the market for the 17th time in the last 18 sessions.

    The fact that this sell-off is being led by cyclicals tells me that it’s more due to economic concerns rather than concerns of the debt-ceiling debate. Although financials aren’t doing well, Treasuries continue to soar. That’s an odd thing to see after a downgrade. The Long-Term Bond ETF ($TLT) is up more than 9% since July 14 when S&P warned that it might down U.S. debt.

    Gold just broke $1,700 and the $VIX is now over 40.

    Here’s a look at the cyclical index divided by the S&P 500.

  • Morning News: August 8, 2011
    , August 8th, 2011 at 6:37 am

    ECB Buys Italian, Spanish Bonds in Strategy to Defuse Crisis

    Global Finance Leaders Pledge Bold Action to Calm Markets

    Japan in Ratings Cross-hairs as Debt in Focus

    Britain, Other Eurozone Countries Face Ratings Cut: Jim Rogers

    Nigeria to Inject $4.5B Into Nationalized Banks

    Crude Oil Drops On US Downgrade; Nymex May Test $80/Barrel

    Gross Praises S&P’s ‘Spine’ as Buffett, Miller Say Rating Company Erred

    Moody’s Says U.S. Needs to Find More Deficit Cuts

    Stock Index Futures Tumble on S&P Downgrade

    VIX Term Structure Evolution Over Last Ten Days

    Reinsurerer Hannover Re On Track For Full Year After Net Profit Rise

    Foreclosure Woes Fuel Wider Loss at Fannie

    Berkshire Makes $3.25B Bid for Transatlantic

    A.I.G. to Sue Bank of America Over Mortgage Bonds

    Epicurean Dealmaker: School for Scandal

    Joshua Brown: Shots Fired: Peter Brandt Says Welcome to the Global Bear

    Brokers With Hands on Their Faces

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  • RIP: AAA
    , August 5th, 2011 at 9:28 pm

    For the first time in history, the creditworthiness of the United States of America has been downgraded:

    A cornerstone of the global financial system was shaken Friday when officials at ratings firm Standard & Poor’s said U.S. Treasury debt no longer deserved to be considered among the safest investments in the world.

    S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn’t do enough to address the gloomy long-term picture for America’s finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein and on par with Belgium and New Zealand.

    The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled sharply. Around 1:30 p.m., S&P officials notified the Treasury Department they planned to downgrade U.S. debt, and presented the government with their findings. But Treasury officials noticed a $2 trillion error in S&P’s math that delayed an announcement for several hours. S&P officials decided to move ahead anyway, and after 8 p.m. they made their downgrade official.

    S&P said “the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.

    So we’re a bigger credit risk than Liechtenstein. Who knew? (Well, S&P I suppose…but still!)

    This is mostly theatrics. Everyone knows the numbers of America’s finances; they’re no secret. The idea of downgrading the debt of a superpower is frankly, a bit silly.

    Think of it this way: America’s creditworthiness is rated every minute of every day. That’s what the bond market is. Any ratings agency can issue a report and say what they want about our debt — that’s no big deal. What is a big deal is that investors around the world are willing to pay absurd amounts to lend to us.

    Ultimately, that’s what a credit rating is all about. If creditors trust us, our credit standing is high. Look at interest rates, not at what a bunch of analysts say in New York.

  • Working Dollars (1956 Cartoon)
    , August 5th, 2011 at 5:00 pm

    Mines in Brooklyn!

  • More Issues With the CAPE
    , August 5th, 2011 at 3:24 pm

    In yesterday’s New York Times, David Leonhardt wrote that stocks are still too expensive. He based this on the cyclically-adjusted P/E Ratio (CAPE) which is similar to the normal P/E Ratio except that it uses the average earnings for the past ten years.

    I’m not a big fan of this metric for a few reasons. For one, it has a poor track record. The biggest reason is that earnings are cyclical and therefore, so is the market. As a result, I don’t see why the cycle needs to be adjusted. Not only that, the cycle is the most important part.

    Also, Robert Shiller (the major proponent of CAPE) uses reported earnings which I don’t think is the best measure. In my opinion, operating earnings give you a better picture of what’s really happening. There were barely any reported earnings in 2009 which artificially inflated P/E Ratios. That glitch will be embedded in the CAPE for several more years.

    Leonhardt notes that the CAPE is currently at 20.7 which is 6% above its 50-year average of 19.5. First, 6% above average is hardly “expensive.” Second, if you followed that metric, you would have been out of stocks for almost the entire past 20 years.

    Leonhardt wrote:

    But the 10-year ratio does have a pretty good track record. In 2007, when many Wall Street traders and economists were claiming that stocks were still a great buy, the 10-year ratio knew better. Likewise, it helped predict the market’s rebound in early 2009, when optimists were not easy to find.

    That’s not correct. By following the 19.5 CAPE rule, you would have missed almost the entire 1990s bull market and would have gotten into stocks only between October 2008 and November 2009. Shiller himself said that the market was fairly valued in July 2009 when the S&P 500 was at 900.