Chart Of The Day Housing Prices Part II

From Chart Of The Day:

{I} t was reported {late last week} that the median price of a single-family home dropped 2.3% in August. The stock market sold off on the news. 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 are currently 30% off their 2005 peak. In fact, a home buyer who bought the median priced single-family home at the 1979 peak has seen that home appreciate by a mere 4%. Not an impressive performance considering that three decades have passed. Over the past two months, single-family home prices have resumed their decline and remain (until proven otherwise) in an accelerated downtrend.

Ultimately I think this is bullish because this decline is making a home more affordable for more people. I've noticed a lot more young people around my town lately and that is presumably due to the fact that a home is now more affordable for them. However, it is still a drag on the current economy & is likely to be so until probably some time late next year.

Link: https://www.chartoftheday.com/ {Subscription required}

*I am long certain homebuilder ETFs for certain client accounts.

an tSionna 9.28.09

Double click to enlarge. Market structure on a daily basis based on last night's close. This is an updated chart last posted here on 9.18.09. Here is a link to that last chart: http://lumencapital.blogspot.com/2009/09/tsionna-91809.html {Note: this chart will also have links to earlier charts in this series if you want to see them}.

*Long ETFs related to the S&P 500 for client accounts.

ETFs: Advantages & Uses.

Here is a basic list of the advantages of ETFs from Wikipedia. Highlights are mine.

ETFs generally provide the easy diversification, low expense ratios, and tax efficiency of index funds, while still maintaining all the features of ordinary stock, such as limit orders, short selling, and options. Because ETFs can be economically acquired, held, and disposed of, some investors invest in ETF shares as a long-term investment for asset allocation purposes, while other investors trade ETF shares frequently to implement market timing investment strategies. Among the advantages of ETFs are the following

Lower costs - ETFs generally have lower costs than other investment products because most ETFs are not actively managed and because ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. ETFs typically have lower marketing, distribution and accounting expenses, and most ETFs do not have 12b-1 fees.
Buying and selling flexibility - ETFs can be bought and sold at current market prices at any time during the trading day, unlike mutual funds and unit investment trusts, which can only be traded at the end of the trading day. As publicly traded securities, their shares can be purchased on margin and sold short, enabling the use of hedging strategies, and traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade.
Tax efficiency - ETFs generally generate relatively low capital gains, because they typically have low turnover of their portfolio securities. While this is an advantage they share with other index funds, their tax efficiency is further enhanced because they do not have to sell securities to meet investor redemptions.
Market exposure and diversification - ETFs provide an economical way to rebalance portfolio allocations and to "equitize" cash by investing it quickly. An index ETF inherently provides diversification across an entire index. ETFs offer exposure to a diverse variety of markets, including broad-based indexes, broad-based international and country-specific indexes, industry sector-specific indexes, bond indexes, and commodities.
Transparency - ETFs, whether index funds or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day.
Some of these advantages derive from the status of most ETFs as index funds.

Source of this article: Wikipedia: http://en.wikipedia.org/wiki/Exchange-traded_fund.

Note: Wikipedia is a free, web-based, collaborative encyclopedia project. It is currently the largest and most popular general reference work on the Internet. Critics of Wikipedia sometimes accuse it of systemic bias and inconsistencies and allege that it favors consensus over credentials in its editorial process. Critics also sometimes take issue with Wikipedia's reliablility and accuracy. We source it here because we believe generally speaking it is a neutral observer in this article and we in general believe in the accuracy on the subject material it is covering in relation to ETFs.

The Great Debate: Bull's Argue Valuation

I heard this the other day on TV and thought I'd pass it along because I think its a great synopsis on the bullish argument on valuation. Here is what's at the core of their thinking.

"Low levels of both core inflation and interest rates suggest that the normalized P/E on stocks should be in the upper teens (18 to 19), not the historical average of 15 times. Consensus earnings estimates for the S&P 500 for 2010 have been moving up in recent weeks, a process that will likely accelerate when third- and fourth-quarter results exceed expectations. Consensus estimates currently stand at around $75.00 for the S&P 500 for 2010 earnings. Therefore, 18 times $75 gets us to 1350, 25% higher than we are now."

Just passing along what I heard. You'll see my take on the bull/bear debate after the third quarter ends.

*Long ETFs related to the S&P 500.

Notre Dame vs. Purdue

I was right that The Irish wouldn't go "opher-Michigan", but just barely. A last second Irish interception in their own end zone closed the door on disaster. ND is a shaky 2-1 going into what should be one of their easier games on the schedule {Purdue is going through a character building year so far!}. I look for this one to be over early in the 2nd half. The Irish are pretty beat up physically right now. They lost their best receiver for the season last week and their QB, Jimmy Clausen came up gimpy. I think The Irish pull away and Clausen gets a breather in the 2nd half!

“Go mbeadh cosa gloine fut agus go mbrise an ghloine.”

Doug Kass: Measures of Risk Extended

Doug Kass over @ TheStreet.com penned this observation the other day citing a First Boston September research report:

"On Dec. 31, 2008 the risk appetite index bottomed and has been climbing since, increasing from two standard deviations below its long-term mean to two standard deviations above its long-term mean in the last eight months. This upward trend in the risk appetite index accurately predicted the current low-quality rally we have experienced since the beginning of the year. The CRX index is currently two standard deviations above its long-term mean. The index has only reached this level three other times in the index's history (going back to March 1980) and has never remained at this level for longer than three months. Given the currently elevated level or risk appetite and the mean-reverting nature of this time series, we believe that the low-quality rally is loosing steam. If we are correct and we see a subsequent fall in risk appetite over the coming months, we expect outperformance of low-beta, low-volatility, low-earnings variability, large-size and cheap valuations. -- First Boston research, September 2009

Kass went on to note that "speculation often moves to an extreme, and time invariably destroys the speculation of investors and traders. Nevertheless, while today's interest in low-quality and high-beta stocks does not necessarily signal an immediate market top and is not binding to a lower market, it is a warning sign of possible consequence."

http://www.thestreet.com/b/dps/te/theedge1.html {Subscription required}.

an tSionna: Market Structure-Monthly Distribution

This chart shows the S&P 500 trading structure via months traded within a certain range. Here are the numbers since I think they are hard to read on the chart.

Months S&P has spent trading below 800 for a significant amount of that month's time = 2. {Note both of these were within the last year}.

Months S&P has spent trading between 800-950 = 27. This are distributed more evenly in 3 distinct periods across this monthly chart. We have been trading in this range for most of the last year.

Months S&P has spent trading between 950-1115 = 24. We are currently trading within this range.

Months S&P has spent trading between 1115-1300 = 54. The majority of months since the Gulf War in 2003 have been within this range.

Months S&P has spent trading between 1300-1540 = 44. Almost evenly split between two periods: 1999-2001 & 2006-08. Both in retrospect were seen as periods of highly speculative stock market activity that eventually led to significant declines. Each was associated with a speculative bubble. (1st period: technology, small cap stocks; 2nd period: housing/real estate, financial paper speculation.)

Months S&P has spent trading above 1540 = 1.

From a long term market structure perspective the market has spent the majority of its time since 1998 trading within a range of 950-1300.

In retrospect, the historical period since 1997 when the market has traded below that range (ie below 950) then it has historically led to very good risk/reward scenarios.

In retrospect historical periods where the market has traded above that range (ie above 1300) have historically led to very poor risk/reward scenarios.

Note: For definitional purposes some months have been double counted. Also note that there is nothing to suggest nor should this be construed as a guarantee or prediction of any future stock market behavior.

*Long ETFs related to the S&P 500

ETFs: What They Are.

As an introduction this is Wikipedia's general discussion on ETFs.

An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.[1][2]
Only so-called authorized participants (typically, large institutional investors) actually buy or sell shares of an ETF directly from/to the fund manager, and then only in creation units, large blocks of tens of thousands of ETF shares, which are usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares long-term, but usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday market price approximates the net asset value of the underlying assets.[3] Other investors, such as individuals using a retail brokerage, trade ETF shares on this secondary market.
An ETF combines the valuation feature of a mutual fund or unit investment trust, which can be bought or sold at the end of each trading day for its net asset value, with the tradability feature of a closed-end fund, which trades throughout the trading day at prices that may be more or less than its net asset value. Closed-end funds are not considered to be exchange-traded funds, even though they are funds and are traded on an exchange. ETFs have been available in the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs.[3]


1.http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20080610006204&newsLang=en, Business Wire (June 10, 2008).
2. The Impact of Exchange Traded Products on the Financial Advisory Industry: A Joint Study of State Street Global Advisors and Knowledge@Wharton (2008).
3. Exchange-Traded Funds, SEC Release Nos. 33-8901, IC-28193, 73 Fed. Reg. 14618 (Mar. 11, 2008).

Source of this article: Wikipedia: http://en.wikipedia.org/wiki/Exchange-traded_fund.

{Note: Wikipedia is a free, web-based, collaborative encyclopedia project. It is currently the largest and most popular general reference work on the Internet. Critics of Wikipedia sometimes accuse it of systemic bias and inconsistencies and allege that it favors consensus over credentials in its editorial process. Critics also sometimes take issue with Wikipedia's reliablility and accuracy. We source it here because we believe generally speaking it is a neutral observer in this article and we in general believe in the accuracy on the subject material it is covering in relation to ETFs.

an tSionna: Market Structure.

Double click on chart to make it bigger.

*Long ETFs related to the S&P 500.

ETFs: Introduction.

I'm going to start a series on the basics of investing in Exchange Traded Funds {ETFs}. Eventually this fall we'll transition this to my concept of risk in investing. We're going to start tomorrow by looking at the basics of ETFs.

A few points to note as we get started:

I will try to source as much independent literature as I can find. This is important since I'm talking my book when it comes to these investments. Often however, the sources that we will use have their own points of view. For example some of the basic information we are going to cover comes from an investment website called ETFguide.com. While I think they bring up many valid points, it is hard for me to claim that they are unbiased. These sites will be noted at the bottom of the posts. Any comments I want to make will be at the end of the article and look like this.

While I prefer ETFs to Mutual Funds, there should be no implication that mutual fund investing, especially if it is based on a sound investment strategy cannot achieve desired client results over time. While many mutual funds underperform the markets or their benchmarks, their are many that do quite well over time. I think we will see that for the most part clients pay excessive fees for that outperformance but then so do investors in hedge funds.

Therefore nothing here should be regarded as saying that mutual funds are always poor investments. We'll have more to say about this over time.

Finally ETFs ARE NOT RISKLESS INVESTMENTS. ETFs for the most part remove single stock risk from a client's portfolio. They do not remove market risk or execution risk or other types of risk inherent to their functionality. THAT IS YOU CAN LOSE MONEY WITH THESE INVESTMENTS AND THEY ARE NOT SUITABLE FOR EVERYBODY. ETFS are not some "Holy Grail" of investments. They must be used in a strategic and tactical manner. If they are not used this way then they can cause significant damage to a clients investment portfolio. Clients or friends of our firm have been given an explanation of what these are and how we use them in client accounts. Anybody else, especially casual investors should do their own research or consult their own advisers before investing in these type of assets. Also please note that I am describing in this series the ETF market as it stands today and as I understand it. Any future changes to their structure or how they are managed could change my views of these investments over time. There is therefore no guarantee that what exists today will work as well or in the same manner going forward.

Game Plan: What I've Been Doing Lately For Clients

The answer is not much. Much of the market looks overbought but we seem to continue to trend higher. I simply have been adjusting and resetting levels based on what I believe our money flow analysis tells us. We use our proprietary screens to re-adjust our tripwires. Technology, financials, energy and industrials are sectors of interest to us. Only one of these right now looks actionable {and actionable here only for risk oriented accounts} as most of these sectors look overbought as well. Clients and friends of the firm can call or e-mail us if they want more specifics regarding what I've said above. Outside readers should note that nothing here should be construed as a recommendation or guarantee of any sort. You should do your own research or consult your own advisor for more specifics. Better yet, become a client of our firm then we'll go into specifics of what we're doing and what we're trying to achieve in client accounts.

Dylan Ratigan on Government's Highjacking.

I'll have more to say about what Ratigan is trying to convey in the coming months. I believe that there is something to parts of his argument.

The American people have been taken hostage to a broken system.
It is a system that remains in place to this day.
A system where bank lobbyists have been spending in record numbers to make sure it stays that way.
A system that corrupts the most basic principles of competition and fair play, principles upon which this country was built.
It is a system that so far has forced the taxpayer to provide the banks with the use of $14 trillion from the Federal Reserve, much of the $7 trillion outstanding at the US Treasury and $2.3 trillion at the FDIC.
A system partially built by the very people who currently advise our President, run our Treasury Department and are charged with its reform.
And most stunningly — it is a system that no one in our government has yet made any effort to fundamentally change.
Like health care, this is a referendum on our government’s ability to function on behalf of the American people. Ask yourself how long you are willing to be held hostage? How long will you let our elected officials be the agents of those whose business it is to exploit our government and the American people at any cost?
As hostages — was there any sum of money we wouldn’t have given AIG?
Why did we pay Goldman Sachs and all the other banks 100 cents on the dollar for their contracts with AIG, using taxpayer money, while we forced GM and others to take massive payment cuts?
Why hasn’t any of the bonus money paid to the CEOs that built this financial nuclear bomb been clawed back?
And more than anything else — why does the US Congress refuse to outlaw the most anti-competitive structure known to our economy, one summed up as TOO BIG TOO FAIL?
It has become startlingly clear that we as a country, and I as a journalist, had made a grave error in affording those who built and ran those banks and insurance companies the honorable treatment of being called capitalists. When in fact the exact opposite was true, these people were more like vampires using the threat of Too Big Too Fail to hold us hostage and collect ongoing ransom from the US Government and the American taxpayer.
This was no unlucky accident. The massive spike in unemployment, the utter destruction of retirement wealth, the collapse in the value of our homes, the worst recession since the Great Depression all resulted directly from these actions.
Even with all that — the only changes that have been made, have been made to prop up and hide the massive flaws on behalf of those who perpetuated them. Still utterly nothing has been done to disclose the flaws in this system, improve it or rebuild it.
Last fall was an awakening for me, as it was for many in our country.
And yet, our Congress has yet to open its eyes, much less do anything about it. In fact conditions have never been better for the banks or worse for the rest of us.
Why is this? Who does our Government work for? How much longer will we as Americans tolerate it? And what, if anything, can we do about it?
As we approach the anniversary of the bailouts for our banks and insurers — and watch the multi-trillion taxpayer-funded programs at the Federal Reserve continue to support banks and subsidize their multibillion bonus pools, we must ask if our politicians represent the interests of America? Or those who would rob America of its money and its future?
As a country, we must demand that our politicians stop serving those whose business models are based on systemic theft and start serving those who seek to create value for others — the workers, innovators and investors who have made this country great.

Dylan Ratigan hosts the show Morning Meeting with Dylan Ratigan, which airs weekday mornings from 9 to 11 A.M. EST on MSNBC. Prior to that Ratigan was anchor and co-creator of CNBC’s Fast Money.

Link: http://www.huffingtonpost.com/dylan-ratigan/americans-have-been-taken_b_285225.html

The Big Debate: Ritholtz On Why Stocks Could Go Higher.

Barry Ritholtz over at the Big Picture on why stocks could go higher. {Excerpt} Highlights mine.

....However, none of the various metrics we track suggest the rally is about to run out of gas anytime soon. That doesn’t mean it can’t end tomorrow, but we would rather play the high rather than low probability outcomes.Here are 5 most reasons why I think we can have more upside, plus a look at some grim economic reality.
1) Individual investors remain under-invested (See Liquidity/Sentiment Review).
2) Market Breadth and momentum are each positive (i.e., supportive of further upside);
3) Sentiment has not (yet) reached extreme levels;4) The broader investment community believes — incorrectly in my opinion — that a recovery is upon us, profits are getting better.
5) History shows that secular bear markets have deep selloffs and huge rallies; this current rally still has room to run based upon a composite of prior cycles (See Four Stages of Secular Bear Markets).
Now, about that economy. Here is my dirty little secret: FOR ~TWO/THIRDS OF THE TIME, THE ECONOMY REALLY DOES NOT MATTER.I know that sounds insane, but consider the following: In the middle of secular bull markets, economic info seems to have the greatest correlation with market performance. Good data, more profits, better market action.
At market tops, the economy looks great. Valuations are rich, but record profits support the multiple.
Then it all goes to hell.
At bottoms, it looks awful. It looks like these companies will never make another dime, that layoffs won’t ever end, that we can never escape the tar pit.
And then we do.
This must be perplexing, maddening, infuriating to pure economists. But that is Mr.Market’s job — to frustrate the maximum number of players . . .

http://www.ritholtz.com/blog/2009/09/is-the-rally-ending-or-does-it-have-more-to-go/

Irish Take On MSU

Off a crushing loss to Michigan last week, the Irish are home today taking on perennial rival Michigan State. I told you last week that I thought ND could lose that game. I see a win today though. Don't think they'll go "opher the State of Michigan this year." In homage to the picture above here is the band playing the ND fight song. http://www.youtube.com/watch?v=7csGhMQoQms

Go hifreann leat!

Rosh Hashanah

L'shana tova!

an tSionna 9.18.09

Market Structure updated before the market opens 9.18.09. {Double click to enlarge.}

You can reference our previous two posts on this here: http://lumencapital.blogspot.com/2009/09/tsionna-91109.html & here: http://lumencapital.blogspot.com/2009/09/tsionna-90209.html

*Long ETFs related to the S&P 500.

By The Numbers:

From Direxion Funds:

WINNER BY MONTH - The best monthly performance on a total return basis for the S&P 500 over the last decade (1999-2008) has occurred in April, October or November in 9 of the 10 years. The only year that one of these 3 months did not lead the way was in calendar year 2000 when March was the best month. With still 4 months to go in 2009, April’s +9.6% gain is the frontrunner YTD. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: BTN Research).

NOT UP BUT DOWN - Actual worldwide demand for oil in 2008 was 86.2 million barrels a day. Worldwide demand for oil for 2009 is now expected to finish the year at 83.8 million barrels a day. When the year began, global demand had been projected at 88.0 million barrels of oil a day (source: Facts Global Energy).

WAY TOO BIG - It was 1-year ago this upcoming Wednesday (9/16/08) that the Fed bailed out AIG, the world’s largest insurance company, with an $85 billion loan that gave the government an 80% ownership in the company. The Fed believed the critical role that AIG played in the global financial system positioned the firm as “too big to fail.” At the time of its bailout, AIG held $440 billion of credit default swaps (source: Newsweek).

WORK OR LACK THEREOF - There were 14.9 million unemployed Americans as of the end of August 2009, not counting an additional 9.1 million individuals that are working part-time today only because they have been unable to find full-time employment. The number of Americans that fall into this part-time worker category has increased by 3.3 million in the last 12 months (source: Department of Labor).

Source: Direxion Funds "By The Numbers." http://www.imakenews.com/direxion/index000196240.cfm?elq=98ac73344efb40a3bb340d429f2b8f50

The Great Debate For The Bears No Spending. Part I

The post below this one is an excerpt from Barrons talking about consumer spending. I want to spend a moment on this because I think this is an important structural shift that is occurring and one that most in the investment community are not focused. One of the Bear's greatest arguments is that to quote Doug Kass "the consumer is spent up not pent up". I believe there is a lot of truth in this. In my discussions with folks, they tell me that the thing that weighs on them the most is getting out of debt. This takes priority in their minds over investing money in the markets.

First off though let's talk about what in my mind has happened with individuals and their money over the past 20 some years. Ever since I've started in the business economist have discussed the low level of consumer savings. For years I've tried to pin down what exactly this means and surprisingly consumer savings means different things to different economists. However, the consensus seems to be that it only includes cash held in savings accounts or checking accounts.

This of course assumes that today's consumer's emulated earlier generations and decided to keep all of their money in these type of accounts. In the meantime other avenues of investment opened up, most notably money market accounts. It should not be surprising that money gravitated towards these investments since these typically pay a higher rate of interest than banks. It is unclear to me how money market assets are counted when judging the savings rate but for the most part they seem to be left out of that equation. There is something like a trillion dollars today in money market accounts.

There is an old saying that "money goes where it's treated best". Since the early 1980's that has not been a savings account. We as investors very seldom take a longer view of things but it is still true to say that investors who for the most part have held financial assets or real estate longer than 10 years have done very well. Stocks may have spent the last 10 years going nowhere but investors lucky enough to have put money in the markets in the early 1980s have made a fortune on that investment. The Dow Jones Industrials started off 1983 at 1,027.04. It is currently trading around 9,600. That's a gain of over 800% not including dividends. Real estate has seen similar gains for much of that period as well.

Today I believe consumers are undergoing a fundamental reassessment of where to invest their assets. That is I don't believe that currently they believe in aggregate that any of the above will be areas that will treat them the best for the foreseeable future. Hence money that might have been invested is being diverted to do two things: Increase savings and pay down debt.

The debt side is something I believe weighs heavily on individuals. As I mentioned above the first thing most folks I talk to say they want to do is pay down debt. I also think how & why of how they went into debt needs to be analysed. The popular press too often portrays debt levels as mostly due to the American consumer gorging himself on Walmart trips and fancy new cars. The Barrons article will discuss healthcare costs which are increasingly being driven onto individual's balance sheets and away from corporate America. In fact something like 20% of all bankruptcy filings cite unexpected illness or injury as the reason for their indebtedness.

The other expense is financing higher education. As the parent of a college student I can tell you that you are looking today at four year expenses, all in, hovering between $70,000 and $200,000. Scholarships, aid programs and loans can take out some of that bite. But the fact remains that this is likely, next to a mortgage on a home, the single most expensive item that will affect consumer's budgets. Traditionally parents if they can help it do not want to excessively burden their children with this debt. They tend to try and finance it themselves. This is unlikely being met from current income for most people. Also we are entering a period where students going to college will find that the monies put away by their families (using after tax dollars by-the-way) have at best not appreciated all that much in the past 10 years. The current employment picture is not helping this out either.

Finally Adam Smith's dead hand of economics is coming into play. Consumers are being forced to cut back on their spending habits even if unwilling to do so by the credit markets. Simply put it is almost impossible for many Americans to get credit today and what credit they've had available to them has been curtailed as banks and loan companies cut consumer credit lines. This has been especially prevalent in the credit card industry as card companies continue to contract credit lines to even healthy balance sheets. Simply put they don't want the risk.

So the Bears are probably going to win this argument for the foreseeable future. At some point individuals will be in a position to take more risk but that is unlikely to be until they've substantially repaired their own balance sheets. Stocks I think can continue to rise but it will likely come from monies individuals have already committed to risk (such as IRAs or other types of retirement accounts) and not from their own paychecks anytime soon.

The Great Debate For The Bears-No Spending Part II

Here is the excerpted Barrons article I referenced above. Highlights are mine.

........The very rich, it seems, aren't so different from the rest of us in terms of getting into hock. But regular Americans have little choice but to hunker down, cut spending to pay down debt, just as they have done in every recession.
This time, however, they won't be returning to their free-spending ways as they did after every other downturn. Indeed, the deleveraging by consumers probably has just begun.
What's happening is a matter of simple accounting: If spending exceeds income, borrowing has to increase or assets have to be liquidated......{T}he real median income of American households is no higher than in 1973, after inflation, according to Shadow Government Statistics.
"Recent reporting has shown not only that real growth in household income has failed to keep up with inflation, but that consumer debt and net worth are contracting paces previously not seen in the post-World War II era," writes SGS's John Williams.
Indeed, he adds, "the official numbers show households struggling to make ends meet for at least the last decade. Without adequate income growth, consumers met the consumption needs and/or desires through expanded debt.
"Such activity was encouraged openly by Federal Reserve Chairman Alan Greenspan, and the bulk of economic growth in recent years, as a result, was due largely to debt expansion, not to healthy growth in consumer income," Williams concludes.
MacroMavens' Stephanie Pomboy........charts consumer installment debt rising relative to disposable personal income -- even as employment growth fell off sharply -- early in the decade. ....SGS' Williams shows consumer borrowing is undergoing an unprecedented contraction. "Weak real incomes and contracting consumer credit are not the stuff of which economic booms, let alone recoveries, are made," he observes.
Meanwhile, consumers can liquidate savings, that is, their net worth, to make ends meet, he continues. But the Federal Reserve's Flow of Funds data show a record plunge in households' net worth through the first quarter (the most recent numbers available until second-quarter data are released later this week.)
Since then, of course, the stock market has levitated about 50% in round numbers from its March lows. And the evidence seems to be that at least some lucky people are using the rally to cash in their winnings.
Those would be corporate insiders, according to Trim Tabs' tally. In August, insiders sold $6.9 billion, the most since May 2008, and bought only $240 million worth -- a 29-to-1 sell-to-buy ratio -- "exactly what we would expect at a market top," Trim Tabs' Weekly Liquidity Report says.
For everyone else not fortunate enough to have stock holdings to tap, there's little choice but to tighten their belts.......Spending on essentials -- in food and beverage and drug stores -- is holding up, rising 0.6% in the year to July, while spending on everything else is off 6.2%. That gap of 6.8% is the widest since data began in 1992...
"A gap this wide looks like a real structural shift in spending behavior, as austerity becomes the new normal," they write. {writes Philippa Dunne and Doug Henwood in the latest issue of The Liscio Report cited in the Barons article} "Though Americans have shaken off bouts of prudence before.....it's probably going to take some time before anything resembling extravagance returns."
And extravagance doesn't fully explain the debt-driven consumption of recent years, TLR's Dunne and Henwood add. Much of the spending has been for medical care, apparently as employers shift more of those expenses to employees. Meanwhile, the cost of benefits are rising more slowly than pay for the first time in 25 years -- not because of any slowing of medical inflation but because of higher co-pays or dropped coverage.
....If Americans have indeed changed their spendthrift ways, the standard fiscal stimuli will be impotent to spur the economy. Tax cuts will be saved rather than spent. (Use-it-or-lose-it gimmicks such as cash-for-clunkers or the $8,000 gift to first-time home buyers that expires Nov. 1 may accelerate purchases that probably would be made anyway. After the sugar rush fades, sales revert to form.)
Meantime, the American economy is likely to remain mired in its debtors' prison.

Link: http://online.barrons.com/article/SB125294123836008951.html?mod=BOL_hps_dc {Subscription may be required}

The Great Debate: For the Bears-People Still Scared

I found this today and since it highlights one of the Bears principle arguments I thought I would publish an excerpt along with a link.

The Economy: Public Still Scared To Death
Posted: September 15, 2009 at 5:34 am

You can fool some of the people all of the time and all of the people some of the time. but you cannot fool all of the people all of the time.....{I}t seems to be proven in a new Washington Post/ABC poll. The survey shows that “Despite fresh signs that the worst may be over for the beleaguered U.S. economy, there has been no let-up in public fears about possible financial hardship ahead and there is broad concern that not enough is being done to avert another meltdown.”
In other words, the average citizen is not buying into expert statements that things are better..... 60% of the people polled are worried about job or pay losses. That number is almost unchanged since the poll was done in February, at the depth of the recession.
The result of the survey may surprise experts who believe that the economy is expanding again....The data points to a deep-rooted concern among people who have to become consumers again for the economy to have a sustained recovery that spending money is risky. The money is dry powder for what may be a prolonged period of relative poverty among the lower and middle classes.

Link: http://247wallst.com/2009/09/15/the-economy-public-still-scared-to-death/#more-46689

Playbook: The Great Debate-Bulls & Liquidity.

This was published over at The Big Picture last week and dovetails nicely with the Bullish argument about market sentiment. Excerpt and link below.

Its seems the general consensus is this rally has to end and that we must correct, if not crash sooner rather than later. Yet Mr. Market remains uncooperative with this widely accepted view. His plan seems to be to take the direction that involves frustrating the greatest number of traders.
Rather than look at what people are saying, let’s see what they have been doing, via how much they deviate from typical equity exposure.....
“Stock price direction is a function of several factors; valuation, future expectations, sentiment and liquidity.”That last component, liquidity, seems to be most dominant lately since buying power (or lack thereof) determines if stocks go up or down.
Typically, liquidity is strongest when expectations are the most negative and people have already dumped equities; It is weakest when expectations are most optimistic.
Why? At market tops, investors tend to be “All In” — their expectations for the future are most optimistic, and that means their liquidity is spent. By the time investors go “all in,” things are about as fundamentally bullish as they are ever going to get, and stocks are fully valued. Indeed, at these “all in” junctures, valuations are typically highly stretched, with no room for earnings misses or weak forecasts.
With investors “all in” there is no buying power left in the aggregate to push stocks higher. The opposite occurs at bottoms: Investors become so pessimistic about the future they move large amounts of cash to the sidelines. We get the added benefit at this point as valuations typically have contracted as well and are now attractively priced.
With large sums of cash moved to the sidelines, valuations attractive and selling exhausted, there is no where to go but up — even if its only for a period of weeks or months.


The chart above looks at how far above or below the 21-year average allocation of 60 % invested in stocks individual investors are presently. As seen above when stock allocations drop 15 % or greater below that 22-year mean, (red circles) which has occurred only 3 times in the last 22 years (1990, 2002 and late 2008/early2009) it has equated into significantly higher stock prices 3/6 months up to several years later.
Even given the extent of the current rally, investors remain 6% below their mean allocation to stocks, and significantly below fully invested levels of 10-15 % above the mean. Sideline liquidity remains strong, investors are still not fully invested, and dips have remained fairly contained......

Link: http://www.ritholtz.com/blog/2009/09/liquiditysentiment-review/

Playbook: The Great Debate-The Bull's Side.

We started talking a few weeks ago about the great debate going on right now between the Bulls & the Bears. Here is a link to the Bear's point of view: http://lumencapital.blogspot.com/2009/08/playbook-great-debate-bearish-view.html

The Bullish argument as I understand it can be stated as follows.

1. The economy has bottomed. We have been saved from a near death experience by the Government's actions. We are in the early stages of seeing at least a bottom in important areas such as housing. The banking system is not going to collapse and interest rates will remain low for the foreseeable future. Unemployment while high, will begin to bottom out in the next 12 months. The personal savings rate is now going up, meaning there will be more American capital to invest. It is likely that the recession has ended or will end before the end of the year.

2. Pent up growth demand world-wide. Business virtually stopped functioning last Autumn. Companies worked through inventories which means that now a massive inventory restocking is currently underway world-wide. Couple this along with a new growth cycle in certain sectors such as technology means that the conditions are primed for corporate growth in profits and sales over the next 12 months. Companies have slashed their budgets to the bone so any increase in profits will fall inevitably to the bottom line, therefore corporate earnings are too low. If this is the case stocks are statistically cheap on a forward looking basis.

3. The government will get out of private industry. Health care reform will be less than meets the eye. Washington will not be as harsh on the financial industry as previously feared. The money invested in the auto industry will make it competitive with Japan and Europe again.

4. Sentiment is too negative. The investment community, burned by two Bear Markets in the past decade is slow to embrace this rally. There is a huge amount of money on the sidelines which is significantly behind the averages on a performance basis. This money will cushion the downside making a "buy the dips" mentality prevalent going forward. People will start to feel better about their own financial situation and be willing to take on more investment risk. This should further add fuel to the fire and provide support for the market going forward.

I'll let Jim Cramer summarize for the Bulls.

"Stocks? The easiest of all: terrific earnings comparisons, great international stories and, most important, the highest demand and least supply of just about everything in 34 years. Stocks are cheap on 2010 numbers. We have great secular growth trends in tech. We have a confidence picking up. We have an amazingly strong consumer given the layoffs. And we have a president who has stopped hurting us."

Link: http://www.thestreet.com/b/rmoney/jimcramerblog/10597544.html {Subscription may be required}.

This is the essence of the Bulls point of view. I'll give you what I think next in this series and then talk about how I'm working that in the management of your investments.

Q & A: 9/11/09 Memorial.

I have been asked about the Poem that Vice-President Biden read Friday at the World Trade Center ceremonies. It is a poem by Mary Oliver named the Wild Geese. Here it is:

Wild Geese by Mary Oliver
You do not have to be good.

You do not have to walk on your knees

for a hundred miles through the desert repenting.

You only have to let the soft animal of your body

love what it loves.

Tell me about despair, yours, and I will tell you mine.

Meanwhile the world goes on.

Meanwhile the sun and the clear pebbles of the rain

are moving across the landscapes,

over the prairies and the deep trees,

the mountains and the rivers.

Meanwhile the wild geese, high in the clean blue air,

are heading home again.

Whoever you are, no matter how lonely,

the world offers itself to your imagination,

calls to you like the wild geese, harsh and exciting

over and over announcing your place

in the family of things.

from Dream Work by Mary Oliver published by Atlantic Monthly Press© Mary Oliver

In a historical sense the term "Wild Geese" often refers to the Irish Diaspora throughout the world especially to those who left their homes and became soldiers in foreign armies.

ND Vs. Michigan.

Coming off of their 35-0 route of Nevada last week, the Irish venture today into the "Big House".
The Wolverines will be looking to avenge last years largely self-inflected loss. Notre Dame will be trying to figure out if they're a legitimate contender. This & next week's games are two that I think they could lose but we'll see!

Go Bragh!

an tSionna 9.11.09

This is an update of a post we put out on 9.02.09.

You can link it here: http://lumencapital.blogspot.com/2009/09/tsionna-90209.html

*Long ETFs related to the S&P 500 for clients.

9/11 {Then & Now}

The Dow Jones Industrials closed on 9/10/01 at 9605. {Markets didn't open on 9/11}.

Yesterday the "Dow" closed at 9627.

Not including dividends. That's a .23% rate of return. {note the dot in front of the two. I'm not saying 23%!}

*Long ETFs related to the Dow Jones Industrials for client accounts.

9/11/2009 (Eight Years Later)

Today's main post has nothing to do with the markets. If that's what you're looking for than I would stop right here.

In 1941 the Japanese bombed Pearl Harbor and attacked across a wide front throughout the Pacific. It took us and our allies three years & just under eight months to drop the atomic bomb on Hiroshima and Nagasaki. Of course by that time most of Japan's major cities had been reduced to rubble through a massive air bombing campaign. If that hadn't worked, the allies were prepared through two operations (Olympic & Coronet) to invade the Japanese home islands. Allied casualty estimates ranged from 400,000 to two million. General George Marshall thought the allies would sustain over a million casualties and the Japanese civilians 3-5 million.

After the war the main surviving perpetrators of Pearl Harbor were captured. Three of them including former Prime Minister Hideki Tojo were sentenced to death. Tojo was executed 12/23/1948. It is estimated that the Japanese killed between 3 and 10 million civilians during World War II. Historians argue today as that war fades out of memory that in the late 1930's-early 1940's Japan had many grievances against the US. Some now look at the period and make the historical argument that perhaps Japan felt justified in the actions she took in the days of December 7-12, 1941. While I don't agree with that point of view, I believe that those making such an argument would agree that the United States was not at war with Japan on December 7, 1941.

2,386 Americans died at Pearl Harbor {half of these were on the Arizona. Another 1,139 were wounded. Thousands more died in the Philippines & other Pacific islands and strongholds in the ensuing months after Pearl Harbor.

On September 11, 2001 the United States was also at war with nobody. We mostly today remember the dead at the World Trade Center but we should not forget the dead at the Pentagon and those on United Flight 93 who died trying to take back control of their aircraft. 2,774 people died at the World Trade Center, over 400 of these were police and firefighters. They ran towards the fires while everybody else ran away. 42 people including the terrorists themselves died on Flight 93. Another 184 died at the Pentagon. Unlike Pearl Harbor, most were civilians. These numbers include the people on the airplanes as well. Like their compatriots on the ground, these people were spouses, boyfriends and girlfriends, parents or sons and daughters. They started that day doing the mainly mundane routines that make up most peoples lives. In New York City, many of those people simply died when the planes hit the buildings or when the buildings imploded. Some were forced between burning and jumping.

Osama bin Laden was the man that is largely responsible for these attacks. One of the masterminds of this attack was Ayman al-Zawahiri. Bin Laden was sheltered in Afghanistan by the leader of the Taliban, Mohammed Omar. None of these men has ever been brought to justice. We are 8 years into this war. It is reported that we had an opportunity to capture bin Laden at the Battle of Tora Bora in Dec. 2001 but we let him slip through our grasp. We did capture one of the main planners of this event. Khalid Sheikh Mohammed. . He was captured in March of 2003. He has never been brought to trial.

We are now locked into a great debate on what many call either the War on Terror or the Long War. Nobody it seems can decide on what is the right strategy for Afghanistan and we of course have our own problems at home with the economy. But it should not be lost on any of us that our original goals when we went into Afghanistan have not been met and it seems that our desire for justice has somehow been lost.

Of course we could look back on other precedents. Take this for example. . Lockerbie Scotland, 12/21/1988. 270 people died. Here there was ultimately one conviction although others were most certainly involved, Abdelbaset Ali Mohmed Al Megrahi was sentenced to life in prison. That didn't turn out so well. Here he is a few weeks ago being accorded a hero's welcome in Libya. http://www.youtube.com/watch?v=JLyRFxMcNlc

Much ink has been spilled since 9/11/01. Truly many brave men have done great deeds in defense of their country and it is possible that given the part of the world we are dealing with that perhaps the best has been done given what we've been willing to throw into the fight.

But the fact remains that the perpetrators of these events are still beyond the bounds of the law. There are those of us who can debate all of the causes or reasons for why this might have occurred. It is likely that many in the Islamic world believe they have cause against those of us that reside in the West. But disputes should be settled either by diplomats or by soldiers. In general the targeting of noncombatants is considered a war crime.

Today we will again remember the dead of 9/11. I'm sure there will be some special about it on the History Channel if they're not to busy running another analysis of World War II. But the dead of 9/11 and their families will still have no closure. Events of that time are rapidly being obscured by other events as history marches ever forward. However as much as we might in our own minds forget these dates our enemies never do. Today, along with 9/11 here are a few other events it seems we've forgotten but I'm pretty sure our enemies haven't:

1983-Marine Barracks Beirut. 299 American & French dead, 75 injured {Military}.1988-Lockerbie Scotland 259 dead {Civilians}
1993-World Trade Center Bombing {6 dead}
1993-Battle of Mogadishu, AKA Blackhawk Down: {18 dead, 73 wounded-all military}
1996-Khobar Towers, Khobar, Saudia Arabia {19 dead}
1998-Embassy bombing, Tanzania {11 dead, 85 wounded-most were local civilians)
1998-Embassy bombing, Kenya {212 dead, over 4,000 wounded again most were local civilians}
2000-USS Cole, Yemen {17 dead}
2002-Bali {202 dead, 240 injured}
2005 London {56 dead, 700 injured}

9/11/2009 (For The Dead)

Can't see nothin' in front of me
Can't see nothin' coming up behind
I make my way through this darkness
I can't feel nothing but this chain that binds me
Lost track of how far I've gone
How far I've gone, how high I've climbed
On my back's a sixty pound stone
On my shoulder a half mile line

Come on up for the rising
Come on up, lay your hands in mine
Come on up for the rising
Come on up for the rising tonight

Left the house this morning
Bells ringing filled the air
Wearin' the cross of my calling
On wheels of fire I come rollin' down here

Come on up for the rising
Come on up, lay your hands in mine
Come on up for the rising
Come on up for the rising tonight

Spirits above and behind me
Faces gone, black eyes burnin' bright
May their precious blood forever bind me
Lord as I stand before your fiery light

I see you Mary in the garden
In the garden of a thousand sighs
There's holy pictures of our children
Dancin' in a sky filled with light
May I feel your arms around me
May I feel your blood mix with mineA
dream of life comes to meL
ike a catfish dancin' on the end of the line


Sky of blackness and sorrow ( a dream of life)
Sky of love, sky of tears (a dream of life)
Sky of glory and sadness ( a dream of life)
Sky of mercy, sky of fear ( a dream of life)
Sky of memory and shadow ( a dream of life)
Your burnin' wind fills my arms tonight
Sky of longing and emptiness (a dream of life)
Sky of fullness, sky of blessed life ( a dream of life)

Come on up for the rising
Come on up, lay your hands in mine
Come on up for the rising
Come on up for the rising tonight

{Bruce Springsteen, The Rising off of the albium with the same name, 2002}

Job Loss.

From Chart of the Day:

{Friday}, the Labor Department reported that nonfarm payrolls (jobs) decreased by 216,000 in August. Today's chart puts that decline into perspective by comparing job losses during the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-2006 (dashed blue line). As today's chart illustrates, the current job market has suffered losses that are more than six times as much as average (20 months after the beginning of a recession). In fact, if this were an average recession/job loss cycle, the number of jobs would have begun to increase five months ago.

Link: http://www.chartoftheday.com/20090904.htm?T

Notre Dame vs. Nevada

We interrupt our sabbatical to note that the college football season begins today. Go Irish!

na heireannaigh a bhantiarna na Notre Dame!

http://www.youtube.com/watch?v=jMXPDmWDM4Q&feature=related

Off To College!

I'll be off taking my oldest back to Providence College this weekend. He is more than happy to be rid of me and going back to the "rigors" of acedemic life. Posting will be light until the middle of next week when we present the more bullish side of the Great Debate.

Stay tuned.

an tSionna: Gold

I want to call your attention to an explosive move in gold the past two days. {Chart is of the gold ETF-GLD. You can double click to enlarge.} A move like this in gold is often viewed negatively by market participants as gold is considered by many to be a safe haven during periods of uncertainty. I don't pretend to know what to make of this other than that it is signalling something. A move to new 12 month highs might be considered another negative for market sentiment. No change to the Game plan that we've discussed recently. I'll simply view this as another signal that things have a higher potential to turn negative here after Labor Day.

*Long GLD for certain client accounts.

For some of our more recent market thoughts go to these links:

http://lumencapital.blogspot.com/2009/09/tsionna-90209.html

http://lumencapital.blogspot.com/2009/09/tsionna-september-1.html

http://lumencapital.blogspot.com/2009/08/getting-little-frothy.html

http://lumencapital.blogspot.com/2009/08/tsionna-while-im-away-part-i.html

http://lumencapital.blogspot.com/2009/08/tsionna-while-im-away-part-ii.html

http://lumencapital.blogspot.com/2009/08/tsionna-post-script.html