Trading & Hormonal Levels.

I first saw this over at the "Big Picture" before I left town. Thought it was an interesting read.

“Traders are succeeding not so much because they are rational, but because they have certain biological traits, including confidence, an appetite for risk, search persistence, and speed of reactions,” all of which are derived from prenatal exposure to testosterone.”-John Coates, University of Cambridge neuroscientist and former trader.
“Coates examined the digit ratio of 44 male “high frequency” traders in London who buy and sell securities, sometimes in amounts greater than $1 billion, but hold their positions for minutes, sometimes only seconds. He found that traders with a longer ring finger than index finger made more money.
“We were on the trading floor taking samples for another experiment, and I read an article about digit ratio and sports,” says Coates. “I didn’t put too much stock in the measure, but we thought, ‘Why not look at fingers?’ We were shocked by the results.”
Exposure to high levels of testosterone before birth appears to make men more sensitive to the hormone as adults. In addition to playing a role in sexual functioning, testosterone has been associated with aggressive behavior and enhanced risk taking, and has been shown to predict performance in certain competitive sports.
Coates’ findings are consistent with a Harvard study of testosterone and financial risk taking that appeared in the November 2008 issue of Evolution and Human Behavior. Using an investment game, the Harvard researchers found that higher testosterone levels correlate with financial risk-taking behavior.
“Research on digit ratios in relation to a number of behavioral and psychological traits has exploded in the past 10 years, but many of the findings have not been as convincing [as Coates’],” Coren Apicella, lead author of the Harvard study, said in an e-mail. “Further study of biological markers and their relation to economic attributes will ultimately lead to a more comprehensive understanding of economic science.”
>
Source:Stock Market Success May Stem from Prenatal Hormone Levels also see link. http://www.ritholtz.com/blog/2009/03/trading-prenatal-hormone-levels/

My comment: "My hands are tiny...hmmm."

Madoff: An Insider's View Conclusion.

"Madoff Employee Breaks Silence" By Lucinda Franks, The Daily Beast {Excerpt-Link & final comment @ the end of the article.} This article originally appeared 3.23.09.

BERNIE, ‘OBSESSIVE COMPULSIVE’ “Yet take the 18th-and 19th-floors: Bernie was obsessive compulsive about the floors where the legitimate businesses were,” he said. “Everything had to be black. The computers, the tables, even the picture frames. If he saw a kid’s picture in a silver frame, for instance, he would order the offender to get a black frame. If you had a jacket over the back of your chair, he would take it off....“Now that I look back on it, I wonder whether he wanted the proprietary and market-making businesses to appear perfect, to create the impression that they was really profitable and legitimate.”
Why was the messy 17th floor so antithetical to Bernie’s weird passion for neatness and uniformity? "Maybe he just didn’t care,” said the employee, “as long as they did their job. He let Frank Di Pascali run it.” Di Pascali, a longtime Madoff employee, has reportedly refused to talk to investigators. “He was a very off-putting man,” the employee said. “Rough, not very friendly. He had a thick New York accent, not a very cultured manner. When we were at one of the Montauk beach parties, his son was there and he used the word ‘Guinea’ to describe him.”
Bernie was only around about half the year, according to the employee: “The other half he spent at his houses in France, Palm Beach, wherever he and Ruth landed.”
The 19th floor, where the employee worked, was where the proprietary-trading business was located. The 18th-floor stored all the trades and the emails, and of course the 17th floor was the nexus of the Ponzi scheme. “But the three businesses seemed comingled. There were two men on the 18th floor offices who I think knew what was happening,” said the employee. “They made huge salaries. The 17th floor not only produced the falsified statements, they did the accounting for our office on 19. Emails of both the legitimate and illegitimate businesses were handled and stored on the 18th floor.
What should have been a red flag, the employee said, was that the 17th floor’s statements detailing the financial output of his four-man computer unit often did not match what they calculated for themselves.......
ROLE OF OTHER MADOFFS When Bernie was away, were members of the family the ultimate bosses who oversaw the illegal operations that Di Pascali allegedly ran? Some employees are wondering now whether they were because, outside of Mark and Andrew, none of them seemed to do what they were ostensibly hired to do. “I didn’t even know that Peter (Madoff’s brother) was the firm’s compliance officer,” the employee said......“Shana Madoff , the compliance legal counsel, Peter’s daughter who was married to an SEC compliance officer, only spent half time in the office. When she was here, she seemed to work on human resources rather than compliance.”
Ruth was the firm’s bookkeeper: “But I only saw her walk through once or twice,” Some friends of the employee, in hindsight, have said that Andrew and Mark must have known or suspected that things were not kosher. “They were educated guys, one of them had gone to Wharton, I think. They saw the balance sheets. We were making no money, some years losing it, and the brothers, I heard, were getting $4 million annually. That just didn’t track.”
“But I don’t want to believe that they knew or were involved,” the employee said. “I believe they're innocent. They were really nice guys, they looked very straight.....When I told them I wanted to leave, Andrew tried to persuade me to stay and when I declined, he let me work only four days a week so I could start up my computer business.
‘IT WAS GOOD TO WORK FOR BERNIE’“We all joked that the motto of the place was that ‘it was good to work for Bernie.'
“We assumed Bernie was a billionaire and we didn’t understand why he didn’t leave his money in safe investments and just collect interest. Why did he support this lousy business? It didn't seem worth it for a billionaire.” In court, Madoff admitted that at one point he put $250 million of clients’ money into the legitimate businesses.
“But it was drummed into us that Bernie was into positions for the long haul, that he believed the stock market was cyclical and that eventually what was down would come up. So I thought that Andrew and Mark just believed what their father said and followed his philosophy......"
When asked how he felt when the Ponzi scheme was revealed, the employee became silent. "At first I was detached. I didn’t have relationships with the Madoffs like lots of others did. I had no emotional connection."
He looked down. "But now, I keep thinking about the 90-year-old man who lost even his house and is bagging groceries. Then I think of the fact that I may have gotten paid with his money."

Link: http://www.thedailybeast.com/blogs-and-stories/2009-03-19/madoff-employee-breaks-silence/full/

My Comment: I've long felt that their have to be many others {most likely the Madoff family especially his sons that have to be in on this. The operation was simply to big & too complex for him to have run it alone this successfully all these years. In the end I think they're all going to jail.

an tSionna: Market Guesstimate

I have tried to do a guesstimate of what I think COULD happen to stocks over the rest of the year. As you know I think we have seen the lows for this cycle and stocks have simply now moved back into the trading range we've experienced since last fall. I think that range is likely to hold for the foreseeable future-meaning we could be not much higher than were we are now by summer's end. I think the end result of that is a market that has an explosive move to the upside sometime in the fall. I think all things being equal we could see the S*P 500 moving back to 1,000-1,100 by years end.

I think this could be a very good trading market for the next 3-6 months and a good market for certain sectors during this time. We'll discuss those sectors at some point in the future.

Remember this is a guess! For all I know we could plunge next week (on new unexpected bad news) or we might blast off much sooner than I'm looking for! I'm simply throwing out from a money flow perspective what I think is likely to happen and what I think probability is dictating at this time. It is also a scenario we're incorporating into the Game plan.

*Long S&P 500 related ETFs.

**Please note that the above stated scenario is no prediction or guarantee of future events or stock price movement. It is our educated guess. Before acting on this or any other event we discuss in this blog please call and have a discussion with us. If you are not a client of our firm you act on these events at your own risk and we strongly suggest discussing this first with your own financial advisor.

Madoff: An Insider's View Part II

Part II Madoff Employee Breaks Silence By Lucinda Franks Excerpt. Link to Follow.

NEVER DAWNED ON ME...“It never dawned on me that Bernie was running a criminal operation down on the 17th floor. I thought he was just a quirky guy. Now, in hindsight there are a lot of things that point to illegal activities. The emails, for instance, were clearly handled that way so that nobody could access them. They didn’t want any record if someone got suspicious and wrote so to a colleague, for instance, or you pressed the search bar and the word Ponzi came up.”
The salaries, said the employee, also in hindsight, were so large because Madoff wanted to keep people happy;....“Nobody left because they could never get another job that paid as well as this one. Some people, after his arrest, speculated that it was kind of like hush money; nobody asked any questions because the Madoffs were nice, protective, generous.
"The Madoffs had all of us out to Montauk for yearly weekends....."It was a family affair, everyone brought their spouses and children, but on the beach, the Madoffs socialized with themselves. The employees stood apart.
THE SECRETIVE 17TH FLOORThe employee says he only saw the 17th floor, where the fraudulent Investment Advisory operation was located, about two times. He noticed the out-of-date computers and the old-fashioned dot-matrix printers that printed out paper with green and white stripes. The computers he saw were about 15 years old, including one system that “is not even around anymore—miles away from modern Windows technology. And the statements I've seen from victims don’t look like my statements from Fidelity. They had primitive typefaces, as though they had been typed on a typewriter. Nobody sends statement like that, so maybe it was done to create the illusion of old-fashioned transparency.”
He learned that those who staffed the 17th floor were less than knowledgeable, often uneducated, often appeared incompetent. .....Looking back, he speculates that the faked statements were essentially done manually. He thinks two people did research as to what a blue-chip stock historically traded for and a similar price was chosen and the fake trades entered into a computer, the statements printed out and sent to unsuspecting clients. “I wonder whether everyone’s statements were basically the same, just varied a bit, because if they weren’t that would be a lot of work for the employees down there.”
Annette Buongiorno’s unit was in a separate part of the office. Two assistants who worked for her have reportedly told investigators that they were told to help generate the false trades.....
The firm’s odd way of being run was chalked up to Bernie’s quirkiness. “We just thought he was a brilliant eccentric man.” The 17th floor, for instance, to the shock of the employee, was messy. Papers strewn on desks, people in jeans, a sense of organized chaos.

http://www.thedailybeast.com/blogs-and-stories/2009-03-19/madoff-employee-breaks-silence/full/

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Madoff: An Insider's View. {Excerpt} Part I

From the Daily Beast. by Lucinda Franks. Part I

.... An employee of Bernard Madoff’s legitmate brokerage operations, which were described by the fraudster in his plea agreement as being “successful and profitable,” has told The Daily Beast that they were in fact money-losers that acted as a front for his Ponzi scheme.
He said that these businesses, the proprietary and market-making arms on the 18th and 19th floors of Madoff Securities, were designed to lure investors in, especially highly placed figures in society, and to fool the SEC into thinking that he had a large and impressive galaxy of businesses.
But behind the façade, these businesses were a shambles. They were excessively staffed with grossly overpaid people, and run with marked inefficiency, he said.....
....The employee....was a member of an elite group that designed sophisticated computer-trading programs....His description of how the legitimate arms of Madoff Securities were run sounds like a skit out of Monty Python. “The three managers who ran parts of the businesses were getting $500,000 to $750,000 a year and they didn’t even know anything about modern computerized trading,” the employee said. They knew only the antiquated methods of talking to clients and trading in the stock market by phone. They mostly socialized, read the news. They would have been unemployable on the outside.”....“A senior computer programmer would make $350,000, where in most comparable firms they would be getting $200,000 to $250,000. The customer-relations people, who just handled complaints from clients, were making six figures. There wasn’t anyone who wasn’t paid in the hundreds of thousands,” he said, adding: “There were twice as many people as were needed and there was rampant inefficiency.
"The company could have been profitable but the Madoffs didn’t seem to care. The business model made no sense,” said the employee. "In actuality the trading groups were generating profits and the company had enormous potential."....Sources in the Madoff investigation confirm the losses that the employee described to me....
....ANDREW AND MARK MADOFF’S ROLE: In contrast to most Wall Street trading firms, where traders work hard and the atmosphere is intense, tumultuous, and fast-paced, Andrew and Mark Madoff, Bernie’s sons, ran the operation “like a peaceful valley,” he said...."The sons were not around a lot,...but when they were, they were nice guys, good to their staff.”
....The day after Bernie was arrested, Andrew and Mark came to work, surprising everyone. Staffers who had lost money complained to him and Mark said, according to a friend of the employee: "I’ve been advised by my lawyer not to make any statements." Then he added "You're not the only victim here." (Noteworthy, as it suggests the brothers must have gotten a lawyer right away.)
Regulations require a company to preserve all emails and firms normally archive them in the hard drives of their computers. But Madoff, the employee said, had ordered that all emails be printed out and then deleted.

Link: http://www.thedailybeast.com/blogs-and-stories/2009-03-19/madoff-employee-breaks-silence/full/

Seven Thoughts From Doug Kass

Real Money commentator and Hedge Fund Manager Doug Kass has been right as rain in not only calling for last year's decline {although I don't think he expected its magnitude} and now for calling the bottom of this year's rout. He now thinks stocks are entering a much better environment and is not expecting us to revisit this month's lows. In fact he calls these a generational bottom. Below I've listed seven of his most current thoughts on why all of this is so.

From Doug Kass: Real Money.com "Seven Points I Want To Make", 3.26.09, 2:50 PM EDT.

1. The strength in stocks is impressive, especially within the context of the greatest political circus ever televised.

2. Stocks are not improving because of the government; they are improving despite the government.

3. The current rally is different this time as evidenced by the recent pattern of end-of-the-day strength.

4. The Nouriel Roubini Market Bottom of early March will likely be a generational low.

5. I expect the S&P 500 to rise above 1,000 by the summer.
6. Call this the George Costanza Market; it does the opposite of what everyone thinks it should be doing.

7. A surprising housing recovery will cure a lot of the banking industry's problems.

Link: http://www.thestreet.com/b/dps/te/20090326/theedge1.html {Subscription Required}

*Long ETF's related to the S&P 500.

Vacation

I'm going to be out for a few days over my kid's spring break. Expect posting to be light until I get back.

Trading Longs from 3.08.09

Just as a note. I sold the rest of my trading longs from 3.08.09 today. These were sold at a profit although I offset some of these with other losses.

Chart Of The Day Housing Prices.

From the folks at Chart Of The Day. (Link to Website. Subscription based service: http://www.chartoftheday.com/)

For some perspective into the all-important US real estate market, today's chart illustrates the US median price of a single-family home over the past 39 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased – increased. That brings us to today's chart which illustrates how housing prices have dropped 33% from the 2005 peak. In fact, a home buyer who bought the median priced single-family home at the 1979 peak has actually seen that home lose value (1.6% loss). Not an impressive performance considering that nearly three decades have passed. It is worth noting that the median priced home has moved back to the top of a trading range that existed from the late 1970s into the mid-1990s.

Bad Political Moment: Marcy Kaptur

One of the things that this crisis has exposed is how poorly we have been represented at all levels of government by the political class in this country. As a person who has listened to many hours of congressional testimony over the past 6 months, I am constantly appalled by how little understanding the people we elect have of how our economy runs. This is not limited to either political party. Both have let us down. I believe these people need to be shown in their elements. That's why we are introducing a new segment on the blog to be known as BPM or Bad Political Moment. Our first candidate. Marcy Kaptur. Kaptur is the most senior Democratic Congresswoman on the influential House Appropriations Committee. As such you would think that she would know the difference between then Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Apparently she did not. Here she is last year mistaking the two before a committee hearing. http://www.youtube.com/watch?v=JwnQZFJ8Q3o&feature=related

an tSionna 3.26.09 Stock Price Action

Stocks are in the midst of their largest price rally in years. The S&P is on track for a double digit monthly gain in March and is up better than 25% from its bottom price of 666.79 on 3.6.09.

What clues to look at going forward? Well for one thing stocks are back trading within the range they broadly established after their 11.26.08 bottom. They are actually trading above that number by about 4% right now. Another clue is that stocks have successfully penetrated their downward sloping trend lines-some of which go back to last summer. They have also penetrated their 50 day moving average which is a good shorter term indicator of equity buying interest.

It is the end of the month and quarter so it is possible that we are simply seeing end of quarter/month mark ups. But the evidence is starting to accumulate that perhaps the worst is behind us (again unless something new that is not foreseen by investors washes over the transom).

I don't think stocks are going up in a straight line and I think its possible that we see some sort of pullback next week as April begins. But I also think we need to consider that any short term correction will be bought and I think we have to begin to entertain the possibility that 900 on the S&P is a realistic goal in the next 3-6 months. Again there is no guarantee that this will happen but it is beginning to emerge as a very likely scenario and one we must now incorporate into the game plan.

*Long ETFs related to the S&P 500.

Barrons: Why China Can't Save The World.

Why China Can't Save the World By KOPIN TAN {Excerpt-Link To Follow.}
Counting on China to jump-start the global economy is wishful thinking, unless its massive population magically morphs into a nation of spenders......

...Too Big to Ignore: China holds $1 trillion in U.S. debt. Premier Wen Jiabao has offered the U.S. advice on economic policy. Global investors see this as a good omen -- and hope the world's third-largest economy can rebound strongly enough to jump-start the global economy....With gobs of cash and relatively stable banks -- two things in scarce supply around the world right now -- China could emerge from this crisis as a stronger economic power. Warming up to that role, Premier Wen Jiabao has already taken to publicly admonishing the Obama administration to do more to safeguard China's $1 trillion investment in U.S. government debt. He is also encouraging expansion abroad, and relaxing rules to help Chinese companies make overseas acquisitions.
BUT FOR ALL THIS FLEXING, the Chinese economy isn't big enough to save the world, and counting on it to do so is simply wishful thinking. ....Despite its decades-long growth, it accounts for just over 6% of the global gross domestic product. "At best, China is an up-and-coming supereconomy in good fiscal shape that will suffer a period of slowed growth over the next few years, but will be fine," says Jeff Lick, who co-manages Boston-based Galt Investments. "At worst, it is an overbuilt and overinvested economy that relies too much on exports to the Western world."....

....Whether China can even save itself is uncertain. In February, exports plummeted 25.7% from the year-earlier level, and the tumble might have been worse if not for Chinese New Year.....The decline in exports already has shuttered factories, displaced more than 20 million increasingly restive migrant workers and offered worrisome signs of too much supply and potential deflation: Producer prices fell 4.5% last month, and real-estate prices are slipping. As exports fell, China's trade surplus shrank to a three-year low -- near $4.8 billion in February, from $39 billion in January -- a decline that, if continued, could temper its appetite for U.S. investments.
THE CHINESE PROPENSITY TO save also is a double-edged sword. Sure, China need not borrow or depend on the kindness of creditors to stimulate its economy, but goading domestic spending -- a key to future GDP growth -- could prove difficult. The absence of a safety net of pensions, public health care and social security drives the population of more than 1.3 billion to save more whenever times get tough, further crimping growth......

.....Can Chinese consumers now pick up the slack from the world's biggest spenders? Americans spent enough in 2007 to drive 18% of global GDP, a staggering number compared with the 2.1% accounted for by Chinese consumers. By Lick's calculation, if U.S. consumption were to shrink just 10%, the decline would already surpass what an entire nation of Chinese consumers currently spends. "And," he asks, "how many of you have cut back your spending 10% in the last three months?"
The Bottom Line: The Chinese economy isn't big enough and its people don't spend enough to offset the sudden thriftiness of U.S. consumers. It might not even be able to help itself....
That's why Stephen Roach, chairman of Morgan Stanley Asia, argues that China must steer its economy from capital spending toward private consumption, while the U.S. must save and invest in infrastructure, alternative-energy technology and human capital. "A post-crisis global economy is likely to struggle for years in the aftermath of America's consumption boom, and in the absence of any dynamism from private consumption elsewhere," he warns.

http://online.barrons.com/article/SB123759876416101475.html

My comment: Western investors simply do not understand China and her needs. In my opinion it is wishful thinking that the Chinese will sacrifice their own self-interest to accomdate us in the long run.

Teen Birth Rates. Not Good Numbers.

U.S. teen birth rate up again, fewer pre-term babies {Excerpt}
Wed Mar 18, 2009 5:28pm EDT
By Will Dunham
WASHINGTON (Reuters) - The U.S. teen birth rate rose for a second straight year in 2007 after a long decline and more babies were born to all mothers than even at the peak of the baby boom after World War Two......In an encouraging development, the rate of premature births and low birthweight babies declined after a long upward trend, according to a report by the Centers for Disease Control and Prevention's National Center for Health Statistics. But Cesarean deliveries rose for an 11th straight year to a new high -- up 2 percent to 31.8 percent of births.
A record 39.7 percent of babies in 2007 were born to unmarried women, including 71.6 percent of black babies and 51.3 percent of Hispanic babies, the report found. The birth rate for teenage girls rose 5 percent between 2005 and 2007, according to the report.
The previously reported increase in 2006 ended 14 straight years of declines. The rate rose again in 2007 by 1 percent over the prior year to 42.5 births per 1,000 girls aged 15-19.....
....The total of 4.3 million babies born in 2007 was the most ever recorded in the United States, topping even the peak of the baby boom in 1957, according to the report.....

Link. http://www.reuters.com/article/domesticNews/idUSTRE52H67H20090318?pageNumber=2&virtualBrandChannel=0

My Comment: I don't have the answers but children having children is never a good thing.

*Long three children (a boy 18, two girls 15, 13)

Ireland: Post Script

An Irish Post Script:

We have been so focused on our deteriorating economic condition that we for the most part haven't realized how bad it is most everywhere else. Europe's economic condition is at least as bad as ours and probably worse. Ireland's economy as we've chronicled in previous posts is in the tank. As I've also previously mentioned a year ago I took my family to Ireland as a graduation present to our oldest son. Back then Ireland was booming and the Euro reflected that fact. In fact my conversion price was 20% higher than what I could get today. That means my vacation probably cost me 20% more than it would in 2009! I'll try to find a good chart of this at some point.

They say timing is everything. It's probably a good thing that I never wanted to be a currency trader.

Introducing A New Muse.

Hedge Fund Boy is another of my muses although I have not discussed him in the fact. His day job is to be a fund of funds hedge fund advisor for a large institution. Along with being pretty smart regarding the markets he is a wicked good tennis player. He is part of the WYWEG indicator I introduced to you back in early March. See link: http://lumencapital.blogspot.com/2009/03/new-indicator.html

Hedge Fund Boy and I have a bet. I say the lows printed earlier this month {roughly 666 on S*P 500 won't be revisited in the next two years. He says we'll see those and maybe lower before then. I've listed before why I like my chances {that is absent something unlooked for coming over the gunnels}. I don't know his except he is much more bearish on the economy. We'll see who is right. Payoff date is 3.23.11-God willing we're all still around.

BTW for what its worth stocks are up about 14% since this indicator was introduced. The "Brain Trust" met again last night after tennis. I would characterize its members as still leaning bearish.

*Long ETFs related to the S&P 500.

5% Up Month

The "Big Picture" pointed out yesterday we are on track to have a 5% up month in stocks.

"We have not had a 5%+ up month on the S&P since December 2003 — a streak of abut 62 months. With a week left in March, and the SPX up +9%, we could end that cold streak.
The last such month was December ’03. (Peter Boockvar notes we got close in April ’08 when SPX was up 4.75%). The key question is, does this have any correlation to market bottoms?"

Link: http://www.ritholtz.com/blog/2009/03/first-5-plus-month-in-5-years/

*Long ETF's related to the S*P 500.

An tSionna 3.24.09

There is some profit taking this AM-understandable given the rally we've seen not only yesterday but in the last two trading weeks. Both the DJIA and the S&P 500 have crossed above their respective 50-Day moving averages in the past couple of days. The NASDAQ 100 has spent the last five days above this level. We first hit these in late December early January only to turn tail and run south in the new year's rout. No guarantees that crossing these averages will lead to a new bull market. But these are important psychological levels we are currently testing. The S&P also decisively penetrated its downward sloping trendlines yesterday.

*Long ETFs related to the NASDAQ 100, the S*P 500 and the DJIA.

About That Variant Thought.

So I was thinking this morning about the old saw in our business that "Markets will do what they have to do to prove the most amount of people wrong". Again I keep thinking what is the one thing investors aren't looking for and again I come back to the notion that would be stocks absolutely exploding to the upside. We first touched on this subject here: http://lumencapital.blogspot.com/2009/03/variant-thought.html

News of the Treasury's new bailout plan is rocketing stocks north this morning. I think more and more of us are at least beginning to feel like if nothing more a bottom is in for the market. That is most investors now have to think that until proven wrong the March lows might hold.

Now again I'm not saying that something like getting us back to say 1300 on the S&P 500 will happen. But I can devise a scenario of how it COULD happen as such we must now incorporate that probability (even if it is slight) into the game plan. It is still the one scenario I've heard absolutely nobody discuss. Remember almost nobody saw last year's crash coming. 12 months ago must of us would have dismissed that notion. Does get one to thinking!

*Long ETF's related to the S*P 500.

Bonds Beating Stocks?

Saw this some time ago and forgot to publish it but here is a link to a chart showing that for the first time since Jimmy Carter was President bonds are beating stocks in the total return department.

Link: http://paul.kedrosky.com/archives/2009/03/bonds_beat_stoc.html

Myths Of Stocks During the Depression

I think that strictly speaking the 1930's still looms as the worst 10 year period for stock performance-although at this point this decade may be close. Barrons last week printed an article dealing with stocks during the depression. Excerpt below with link @ the end.

Dispelling Myths About Stocks in the 1930s
By MARK HULBERT

MUST WE LOOK BACK TO THE Great Depression to really understand the current stock market?....It is testament to the severity of this bear market that the consensus opinion has shifted so much that it is now respectable to look to the 1930s for guidance about what is in store for equities.
I'm skeptical, however.....My skepticism instead traces to the small number of analysts and commentators who have really analyzed what an analogy to the 1930s truly entails. And if we are to genuinely learn the lessons of history, we have no choice but to start with an accurate assessment of what actually happened.....Here are some myths about the Depression that should be dispelled.

MYTH 1: It took 25 years for the stock market to recover its losses from the high reached just before the stock market crashed in October 1929.
It's easy to see why investors believe this myth to be true: It wasn't until Nov. 23, 1954, that the Dow Jones Industrial Average closed above the level at which it closed on Sept. 3, 1929, the date of its closing high before that year's crash. That's a recovery period of more than 25 years.....The truth, however, is that it took stocks far less than 25 years to recover. According to Wharton finance professor Jeremy Siegel, the inflation-adjusted total return index of the U.S. stock market was just as high in late 1936 and early 1937 as it was at its precrash peak in 1929. That was less than eight years later....
WHY THE BIG DIFFERENCE?
One factor is dividends, which were substantial during the 1930s. At the depths of the Great Depression, in fact, the Dow's dividend yield was in the double digits. Ignoring dividends, which is what investors do when focusing on price alone, therefore, introduces a significant pessimistic bias into any historical analysis.
ANOTHER FACTOR IS DEFLATION: The consumer price index actually dropped by 27% between its 1929 peak and its low in 1933. A stock that dropped by less than this amount in nominal terms over this four-year period, therefore, actually turned a profit in inflation-adjusted terms.
Yet another reason why it took the Dow so long to surmount its 1929 peak: The decision in 1939 to delete International Business Machines from the average. It wasn't added back until years later. According to Norman Fosback, editor of Fosback's Fund Forecaster, the Dow would today be more than twice its quoted level had IBM not been removed from the average in 1939.

MYTH 2: If we're playing out a 1930s script, now would be a bad time for long-term investors to get into the stock market.
Actually, if the stock market were to exactly adhere to a 1930s-like script, equities would provide a handsome return over the next five years.
Once again, this insight relies on data from Professor Siegel. To locate the date during the 1930s that is most analogous to today, he looked for the point at which the stock market after 1929 had -- as is the case today -- declined by around half on a dividend-adjusted and an inflation-adjusted basis. That point came at the end of 1930, just 16 months after the August 1929 stock-market top. (Ironically, of course, the current bear market is just 16 months old too.)
According to Siegel, over the five-year period beginning in January 1931, the stock market produced an inflation-adjusted total return of 7%. That's right in line with stocks' long-term average performance, in fact.
To be sure, this myth does have a big grain of truth to it. Over the first five months of 1931 -- the first five months of this five-year period -- the stock market fell 60%. You read that right: That's a 60% drop on top of a 50% drop over the previous 16 months.....According to Siegel, in fact, an investor who entered into the stock market in early 1931 was made whole again by June 1933, despite digging a 60% whole in the first five months.
MYTH 3: The stock market's recent extraordinary volatility provides a clue to the wild ride that lies ahead if we're playing out a 1930s-like script.
Actually, undeniably large as it has been, recent volatility doesn't even begin to compare to what it was like during the 1930s.
In fact, there were eight calendar months during the decade of the 1930s in which the Dow rose or fell by more than 20%......These monthly changes dwarf what has been seen in the current bear market. The biggest calendar month loss so far came last October, when the Dow fell by 14.1%. The second biggest came in February, when the Dow fell 11.7%....
....The bottom line? If we are indeed playing out a 1930s-like script, we have an incredibly wild ride ahead of us. But for those who have the intestinal fortitude to hang on, such a story would have a surprisingly happy ending.
Mark Hulbert is founder of The Hulbert Financial Digest. He is a senior columnist for MarketWatch.

My Comment. I'm sure there are others who could look at the Depression era statistics and come up to the exact opposite conclusions that Hulbert has. Irregardless I don't think anybody wants to relive that era from an economic or financial standpoint. So far this recession is mild compared to that era. One thing though that is constant with that era is that when stocks finally do recover, I believe people will be surprised as to how fast and far to the upside they do move.

Link: http://online.barrons.com/article/SB123637914471857307.html

NBBT Revisited.

To Which We Revisit the Concept of NBBT. {Next Big Bad Thing-pronounced Nibbit!}.

NBBT is the 500 pound guerrilla lurking in the room. We first discussed NBBT back in June of 2005 here: http://lumencapital.blogspot.com/2005/06/next-big-bad-thing.html Interestingly enough that NBBT dealt with housing {which obviously became a problem} and introduced the possibility of an unlooked for event {a catastrophic earthquake in the southern Midwest}. Eventually as we recover, I am asked what worries me the most. It is a man-made or a natural event such as an earthquake forcing us to spend billions of dollars we currently don't have on the recovery of a city {New York after 9-11}, or region {think Katrina}.

Lots of things are factored into the market right now. I'll guarantee you nobody is thinking about the consequences of this sort of thing happening.

How Recesssions End.

Excerpted article from Real Clear Markets last week:

Recessions Are Self-CorrectingJohn Tamny, 03.09.09, 12:01 AM EDT
The government needs to get out of the way for the economy to fix itself.

Banking giant JPMorgan Chase announced Feb. 23 that it would be cutting its quarterly dividend by 87% to a nickel per share. At face level, this sounds bad, but the savings will speed the process by which it repays TARP funds in order to avoid problematic government oversight; plus, the extra capital cushion puts the firm in a better position to make acquisitions of flagging competitors, should difficulties in the banking sector drag on.
The JPMorgan example is important for reminding us that both individuals and companies frequently respond to economic difficulty in ways that ensure recessions are short-lived. To put it simply, when left alone, recessions tend to correct themselves.
Broken down to the individual, there's a fear factor that is part and parcel of downturns. First off, whether employed or unemployed, we save more and our savings very often flow, through bank lending, to capital-starved businesses eager to grow. There are no profits without saving first, and recessions induce us to save.
That, plus downturns make the individual work harder....In helping ourselves, we aid economic growth.....
....While job loss is always unfortunate, it should also be said that, during periods of rising prosperity, a lot of marginal, inefficient or simply mismatched workers are employed by firms that would not have hired them during periods of sluggish growth.....{I}nvestors aren't paying firms to create jobs. Instead, they're committing capital to the very entities deemed most able to produce as much as possible with as few people as possible....
...From the above equation, the results we actually see are the redundancies and the cost cuts, but the longer-term and very positive unseen is that firms are frequently rewarded by investors for doing more with less. Increased investment in profitable firms ultimately leads to more hiring....The very process that leads to job loss within a company leads to future job creation in same.

Link: http://www.forbes.com/2009/03/06/recession-correction-employment-opinions-columnists-john-tamny.html

Harvard Portfolio Meltdown.

Saw this piece last week and didn't have time during all the fun to post on it. But Forbes published an inside look at the meltdown at Harvard's endowment last fall. Since these guys are supposed to be some of the best and brightest I think it's a worthwhile read.

Harvard: the Inside Story of Its Finance Meltdown (Forbes.com)

Trading Longs 3.08.09

Just as a note I sold some of positions of the trading longs I initiated back on 2.06.09 today. I did finally make some money on these trades (& I haven't completely closed out these positions) but nobody is going to retire on their gains from these transactions.

Stocks As Crummy Merchandise.

From Jim Cramer's Stay Mad For Life.

"Perhaps the widest gulf that I see between amateurs and professionals s a belief among 'home gamers' that a company wouldn't have a stock if it weren't the real deal. Amateurs don't have any concept that there are whole periods, like the one from 1999 to 2001, when almost every single stock was no good. Pros recognize that there is a lot of crummy merchandise that should never have been created. Amateurs think that when a company goes public it is as good as any other company that goes public. Pros are much more skeptical."

The Irish One Last Thought

We're done now with our thoughts on Ireland-at least until another year. 70 million of us claim some sort of Irish ancestry. I'll argue that number is a lot higher because their are many of Scots-Irish decent who don't know where their forebearers came from. But I will say this. If your lucky enough to be even a tiny part Irish-you're lucky enough!

Ireland: River Dance.

Riverdance is a theatrical show consisting of traditional & modern interpretations of Irish step dancing. It is notable for its rapid leg movements while body and arms are kept largely stationary. Riverdance probably did more to showcase the traditional talents of Ireland than any other single venue in the past quarter century.

Where would the "Great Day Itself" be without Irish Dancers? Here's a clip from Riverdance: http://www.youtube.com/watch?v=W22gpBv00gg&feature=PlayList&p=7594A81282274361&index=0&playnext=1

Happy St. Patrick's Day.

Happy St. Patrick's Day!
Just so you know there were never any snakes in Ireland! Just another myth around "The Emerald Isle's" Patron Saint.

Ireland: Music

For the great Gaels of Ireland

Are the men that God made mad,

For all their wars are merry,

And all their songs are sad.[1]

People often know of Ireland's literary tradition but are sometimes unaware of her other contributions to the arts. U-2, & The Corrs are modern pop artists well known throughout the world. The artist Enya has sold 77 million albums world wide as of this year. The Chieftains and Clannad are principally responsible for the rising interest worldwide in Celtic or traditional folk music. Artist such as Altan & Cara Dillon play to sold out audiences in Europe. Just for fun I've included some Youtube links to some of this music.

The Corrs-Toss The Feathers: http://www.youtube.com/watch?v=UHjS8Oz8Gkg

U-2-Vertigo: http://www.youtube.com/watch?v=YhWZ7bpfQag

Cara Dillon-Craigie Hill: http://www.youtube.com/watch?v=V-oquRLcmAM

Enya: Storms In Africa: http://www.youtube.com/watch?v=JFDodwH2e9s

The Chieftains & the Corrs: I Know My Love: http://www.youtube.com/watch?v=uY-HU2Xh7PE

[1] G.K. Chesterton, "The Ballad of the White Horse", 1911.

A Variant Thought

Here is a variant thought that we'll discuss more in the days & weeks ahead. In the Summer of 07 almost nobody had financial scenarios depicting what we've experienced since then. Today the most talked about scenario is a market that spends the next two-three years not doing much at all. Some even talk about another leg down perhaps to 450-500 on the S&P 500*. Well....

..."Markets do what they have to do to prove the most amount of people wrong". That is one of the first lessons the Consiglieri taught me when I started in the business. The most unlooked for scenario would be a market that rockets considerably higher from here. There is a scenario that could get us to 1000-1100 on the S&P over the next year {or sooner} & 1300 by the end of 2010. This seems "pie in the sky" but the first targets would get us only to where we were early in the fall and 1300 revisits the summer of 08.

I'm not saying this will happen and I would not act on this thought without doing homework first but it is the one scenario that I have heard absolutely nobody discuss. Therefore I think we need to consider its possibility. Look for more discussions on this possibility soon.

*Long ETFs related to the S&P 500.

Ireland: What Went Wrong

From Wikipedia. An recent summary of Ireland's economic crisis.

Over the past decade, the Irish government has implemented a series of national economic programmes designed to curb inflation, ease tax burdens, reduce government spending as a percentage of GDP, increase labour force skills, and reward foreign investment. The Republic joined in launching the euro currency system in January 1999 along with eleven other European Union nations. The economy felt the impact of the global post-Dot Com economic slowdown in 2001, particularly in the high-tech export sector – the growth rate in that area was cut by nearly half. GDP growth continued to be relatively robust, with a rate of about 6% in 2001 and 2002 – but this was expected to fall to around 2% in 2003.
Since 2001, GNP growth has been much worse, with an almost threefold decrease in 2001 from the previous year. After a near stagnant year in 2002, growth started to pick up once again in 2003 [2]. By 2005, growth rates had increased to around 5%.
During 2007, Ireland's economic progress was however again affected by a wider global economic slow-down, with the construction sector being particularly affected. During the Summer of 2007, Irish residential property prices fell by over 2% and subsequently continued to fall by approximately 1% per month, leaving property prices down 9% by February 2008. This has impacted consumer spending and investment confidence across the Irish economy generally.
In July 2008, a predicted Eur 3bn shortfall in 2008 annual government revenues[2] led to the announcement of 440m reduction in Government spending[3]. In September, due to continuing revenue shortfalls, the 2009 budget was advanced six weeks to October 2008[4] and Government statistics showed that the Irish economy, with quarterly GDP falls of 0.3% and 0.5%, had entered recession at the start of 2008, for the first time since 1983[5], becoming the first of the Eurozone economies to officially do so during the global Economic crisis of 2008[6]. On budget day, Finance Minister Brian Lenihan said that the General Government deficit would be 7% of GDP in 2008, and would be kept to 6.5% (or E12bn) in 2009[7] in stark contrast to a Government surplus of E5.2bn in 2006[8].

Link: http://en.wikipedia.org/wiki/Economic_history_of_the_Republic_of_Ireland#Recent_economic_circumstances

My Comment. Ireland's problems are the same as those hitting much of the rest of the Europe and the US. That is a problem rooted in the speculation of real estate brought about by very easy access to credit. Their problems are acerbated by an economy that is not as diverse as other parts of Europe and a very small population base. Ireland's major banks are in worse shape than ours and there has been talk that their economy could go the way of Iceland's. I think this is unlikely (although I am hardly an expert) but I think they are in for tougher economic slogging over the next five years than either us or much of the rest of Europe.

Ireland: The Quiet Man

No week of mostly all things Irish would be complete without something from the Quiet Man starring "Himself" John Wayne & "Herself" Maureen O'Hara. Here are the Movie Notes from Wikipedia:

The film was something of a departure for Wayne and director John Ford, who were both known mostly for action-oriented films. Ford read the story in 1933 and soon purchased the rights to it for $10. Republic Pictures agreed to finance the film with O'Hara and Wayne with Ford directing, only if all three agreed to film a western with Republic. All agreed and after filming Rio Grande they headed for Ireland to start shooting. John Wayne would eventually describe the movie as the favourite of his long career.

One of the conditions that Republic Pictures placed on John Ford was that the film came in at under two hours total running time. The finished picture was two hours and fifteen minutes. When screening the film for Republic Studio executives, Ford stopped the film at approximately two hours in: on the verge of the climactic fight between Wayne and McLaglen. Republic executives relented and allowed the film to run its full length. It was one of the few films that Republic filmed in Technicolor; most of the studio's other color films were made in a more economical process known as Trucolor.

The film employed many actors from the Irish theatre, including Barry Fitzgerald's brother, Arthur Shields, as well as extras from the Irish countryside, and it is one of the few Hollywood movies in which spoken Irish can be heard.

The story is set on Innisfree, an island in Lough Gill, County Sligo. Many scenes for the film were actually shot in and around the village of Cong, County Mayo and on the grounds of Cong's Ashford Castle. Cong is now a wealthy small town and the castle a 5-star luxury hotel. The connections with the film have led to the area becoming a tourist attraction. The Quiet Man Fan Club hold their annual general meeting in Ashford Castle each year.
The film also presents John Ford's depiction of an idealized Irish society, with Catholics and Protestants living in harmony, and no social divisions based on class or religion. The Catholic priest Father Lonergan and the Protestant Rev. Playfair maintain a strong friendly relationship throughout the film.

Here is the climactic fight scene at the end of the movie. Everybody should see this movie once!

http://www.youtube.com/watch?v=8Bm0RIs-VJU

Ireland: Bing Crosby

No St. Patrick's Day is complete without some crooning by Bing. Here he is with Barry Fitzgerald from "Going My Way."

http://www.youtube.com/watch?v=EeGvt8uqioY

Ireland: Crosses

Celtic Crosses are another well-known symbol of Ireland. Here are some of those we photoed on our trip!

St. Patrick's Day Parade!

Yes we're marching! Sheila Tulley Irish Dancers. Look for us on WGN between 12:30-1:30.

Ireland: Waterford Crystal.

Waterford Crystal is perhaps Ireland's 2nd most famous export (some might say her first most famous are her people but for now we're talking economic exports). Not only does Waterford make famous stemware but she also makes many of the world's most famous sports trophies. In Ireland the tour of the Waterford factory is a very popular tourist destination. Waterford claims to make only products for the high end market so I was surprised to find Waterford on sale last fall at Costco. Sure enough the economic problems buffeting the rest of the world have also claimed Waterford as a victim.

Waterford Wedgwood plc is the holding entity and parent for Waterford Crystal. The quality of its products are considered wonderful but its financial record has been mixed, and significant cost-cutting has been ongoing for many years. In January of this year parts of the company, including the main Irish and UK operations, were placed in receivership. Its assets are currently being bought by an American private equity firm KPS Capital. Much of its production is scheduled to be sent to Indonesia although some of it will still be produced in Ireland for the time being.

For good or ill globalization is a force that's here to stay and one can argue from a strictly economic standpoint that Ireland's loss is Indonesia's gain. But I'll wager a guess that Waterford's Crystal will lose some of its cachet over time particularly on this side of the pond.