Politcs: Just A Thought.

We're now deep into the dog days of summer and everybody is entitled to crazy thoughts. Here's mine. President Obama has a problem with the economy and with the perception that he is anti-business and anti-growth. Many also consider him for more spending, bigger government and higher taxes. In the meantime the economy has taken a breather this summer, the President's poll numbers have tanked and Democrats are worried about getting re-elected. How does he get out of this jam?

Easy! He extends the Bush tax cuts for three years! That's right he doesn't repeal them by letting them expire in 2010 but has them expire in 2013, conveniently after the next presidential election. This is a win-win. There is no fiscal drag by higher taxes next year, perhaps it gives consumers and businesses a confidence boost so they start to hire more people and he can play to fiscal responsibility by giving a date certain when the taxes revert back to their 1990's brackets.

I would give this only a 50-50 chance of happening but one thing in its favor is that nobody ever discusses this exact option. If this little summer fantasy comes to fruition remember you read it here first!

Out For A Few Days.

I'm out for a few days here doing the annual drive to Rhode Island.  Posting will be light until the middle of next week when I return!

Net Market Neutral

Reflecting the short term recent move in stocks and reflect what we've being doing, we're moving the short term rating to Net Market Neutral.  You can click  here to see a definition of that term.

Another Reason Why We've Rallied

Another reason we've rallied is that investor sentiment has just plain stunk! Bespoke Investments pointed this out in this post last week. According to Bespoke: "As shown in the top chart above bearish sentiment among investment advisers (Investors Intelligence) increased {last} week and is now tied for its highest level since April 2009 (35.6%). While bearish sentiment among individual investors (AAII) is not at a one year high, we did see an increase as the percentage of investors considering themselves bearish which now stands at 45%."

Investor sentiment is a notorious contrary indicator. We've looked at this in the past by tracking mutual fund inflows and outflows. While I do not have the exact figures on where money has gone so far this year, I do know that in the past three months there has been a mass exodus away from equity mutual funds over to bond mutual funds. All of this money sitting on the sidelines is a powder keg sitting under stocks. Now I'll say upfront that I don't know when this money will return to the markets. But history indicates that at some point investors will look for returns higher than the almost 0% rate that cash or short term bonds are paying out right now.

These sentiment numbers add to the body of evidence that stocks could rally higher into year end than most people expect. That could especially be the case if we get beyond the seasonal fall weakness. A fall catalyst for an advance could be investors looking towards the fall elections and a potential change in control of Congress. Even if the Democrats maintain their majorities the thinking goes along these lines that the Democrats will be in a much weaker position next year and will have to be more pro-business and more interested in getting the economy {and jobs} recovering.

an tSionna 07.27.10 {SPY Another Look}

*Long ETFs related to the S&P 500 in client and personal accounts.

an tSionna 7.26.10

I have a busy chart for you today that shows a breakout in S&P spyder.   We may chop around now for awhile due to being shorter term over bought by our work.  Probability right now though indicates a reasonable likelihood that stocks could continue their advance for a bit given these breakouts and some of the other indicators we are seeing.  {See Friday's post below}.

At this point I wouldn't discount some seasonal weakness in the August-September period and as always something could come out of the blue {natural disaster or foreign policy crisis for example} to render these thoughts moot.  However again as discussed Friday, we are beginning to see a lot of things fall into place suggestive of better things for the next six months or so.

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

an tSionna {Mystery Chart}

I've pulled up a mystery ETF chart tonight to show you something that I've noticed these past few days. One of our primary shorter term indicator screens is beginning to flash bullish signals. Because I want this to be illustrative of what we're seeing across the board I've blotted out its names and hopefully all reference points as I don't want people to think I'm either buying this or looking to purchase this ETF.

What I do want you to be able to do is see what I see regarding how money is currently flowing into the markets. These patterns are in my opinion indicative of positive flows into stocks and ETFs. I think we are in the process of bottoming out here and at least for the next couple of weeks I think there is the possibility of some sort of summer rally. No guarantees that will happen of course. I simply use this to show you what probability says could happen at this juncture. Note I am not an active purchaser of this ETF although I currently do have some legacy positions in it in certain client accounts. Also I will move the short term indicator back to NET MARKET POSITIVE. You can click here to see my definition of this term.

Please note that what is posted here is solely our market opinion and not a recommendation to buy or sell securities or a recommendation on where the markets might be headed. I post for the benefit of clients and friends of my firm. You should not act on any articles posted here without consulting your own investment advisor or doing your own homework if you are not a friend or client of our firm. Better yet, hire us and we'll show you how we use our investment disciplines!

Technical Analysis

Minyanville article on technical analysis. Our money flow analysis is an offshoot of this.

Investors Relying More on Technical Analysis, Charts. By Josh Lipton Jul 15, 2010 3:35 pm

{SynopsisTechnicians saw the 2008 bear market coming, but analysis doesn't comes with a money back guarantee.}

Technical analysis right now seems to be driving markets more than ever, the Wall Street Journal notes with analysts and investors taking bullish or bearish stances when indexes and stocks hit certain levels or show certain patterns. The increasing inclination of investors to zero in on price action rather than fundamentals, the Wall Street Journal emphasizes, is playing a role in the stock market’s increased volatility.

It’s a point John Hussman, president of Hussman Investment Trust, emphasizes in his latest commentary. “In decades of market analysis, I can't remember a time that I've heard many analysts quoting some support or resistance level as being 'critical' for the market,” Hussman wrote, adding, “The object of discussion has increasingly turned to the implications of this particular chart formation or that, as if some magic number or another absolves investors from having to think about the big picture.”

Why would investors now be so taken with technicals? S&P’s Sam Stovall chalks up the enthusiasm in part, he says, to the fact that technicians proved more accurate in their 2008 forecasts than their spreadsheet-wielding peers, who exclusively concentrated on the fundamentals, meaning economic data and earnings.

“People were so taken by surprise in 2008,” he says. “The technicians saw it. The fundamentalists didn’t. We ended up with a bear market of 57%.” ...When engineering his own investment strategy, Stovall says, he uses a four-pronged approach including historical performance, economic projections, earnings projections, and also looks to see what his in-house technicians have to tell him. "There is that old saying that fundamentals tell you ‘what’ but technicals tell you ‘when,’ ” he says....

Comment: Technical analysis or money flow analysis deals in probabilities. Not in guarantees. It is the same equivalent of being dealt a ten and jack at blackjack while the dealer shows a 16. You might still lose the hand but the probabilities are much lower than some other hand combinations. Technicals and money flows can give you those probability scenarios. It is not a can't miss method to profits. It is a tool that needs to be used with fundamental work and valuation analysis.

Link: Investors Relying More On Technical Analysis

*Long ETFs related to the S&P 500 in client and personal accounts.

China Passes US In Energy Consumption.

From the Wall Street Journal: {Excerpt}

China Passes U.S. as World's Biggest Energy Consumer .

By SPENCER SWARTZ

China is now the world's biggest energy consumer, knocking the U.S. off a perch it held for more than a century, according to new data from the International Energy Agency.  The Paris-based agency, whose forecasts are generally regarded as bellwether indicators for the energy industry, said China devoured 2,252 million tons of oil equivalent last year, or about 4% more than the U.S., which burned through 2,170 million tons of oil equivalent. The oil-equivalent metric represents all forms of energy consumed, including crude oil, nuclear, coal, natural gas and renewable sources such as hydropower.

The figures reflect, in part, how the global recession hit the U.S. more severely than China and hurt American industrial activity and energy use. Still, China's total energy consumption has clocked annual double-digit growth rates for many years, driven by the country's big industrial base. Highlighting how quickly its energy demand has increased, China's total energy consumption was just half the size of the U.S. 10 years ago. ....

....China's voracious energy demand helps explain why the country—which gets most of its electricity from coal, the dirtiest of fossil-fuel resources—passed the U.S. in 2007 as the world's largest emitter of carbon dioxide emissions and other greenhouse gases.

The U.S. is still by far the biggest energy consumer per capita, with the average American burning five times as much energy annually as the average Chinese citizen, said Mr. Birol, who has been in his current role for six years.....

....Prior to the recession, China had been expected to become the biggest energy consumer in about five years, but the economic malaise and energy-efficiency programs in the U.S. brought forward the date of that superlative, Mr. Birol said.....

....Mr. Birol, previously an economist at the Organization of Petroleum Exporting Countries, said China is expected to build over the next 15 years some 1,000 gigawatts of new power-generation capacity. That is about the total amount of electricity-generation capacity in the U.S. currently, and the construction of all those gigawatts occurred over several decades. "This demonstrates the major growth we are talking about" in energy demand and capacity growth in China, Mr. Birol said.

Comment:  "Stats" in this article are one of the reasons I am a long term energy bull.

*Long ETFs related to energy and utilities in certain client accounts.  In addition clients of my firm own largely as legacy positions shares in energy companies. 

Link:  China-Energy

ETFs Shelter & Income

Last weekend Barrons ran a special section on ETFs.  One of the strategies they highlighted were ETFs for both growth and income.  We have long focused on this in portfolios for clients particularly those with a more conservative risk/reward posture.  Here's a little of what Barrons said.  They focused on three investment funds that we have consistently used over the years {DVY,DTN and most recently SDY}.  I'll also include the Barron's article synopsis of each of these three.

"Dozens of dividend-oriented exchange-traded funds, like the longstanding iShares Dow Jones Select Dividend Index (ticker: DVY) and State Street's SPDR S&P Dividend (SDY), offer an element that is hard to find these days—a healthy income stream. DVY has been yielding an unusually high 3.94% recently, while SDY has been offering 3.51%....Not that dividend payers are immune to a share-price free-fall, but a 2%-to-4% income cushion can make for softer landings and higher long-term returns. According to Ned Davis Research (www.ndr.com), S&P 500 companies that consistently raised dividends provided an average annualized return of 9.3% from 1972 through May 2010, versus 7.1% for dividend payers that didn't consistently hike payouts and 1.4% for non-dividend-paying stocks.....

With American companies sitting on a record $837 billion in cash, dividend payouts have started up again in earnest, reports Howard Silverblatt, Standard & Poor's senior index analyst–particularly among consumer staples issues. More than half of the S&P Dividend Aristocrats– companies that have increased dividends for 25 years running—have raised their payouts this year.

The only ETF specifically focused on this group is State Street's SDY. Its benchmark, the S&P High Yield Dividend Aristocrats Index, holds the 50 highest-yielding aristocrats of the S&P 1500. Currently in the high 40s, down from its 52-week high of $51.51, SDY is one of the largest, most liquid dividend ETFs, with assets of $2 billion and an average 429,000 shares traded daily.

SDY's prime competitor is the BlackRock iShares Dow Jones Select Dividend Index (DVY), which has $3.7 billion in assets and an average daily trading volume of 510,000 shares. It puts more emphasis on yields than SDY does. Broadly diversified across 10 market sectors, it's currently 28% weighted in utilities and 20% in consumer goods. SDY is similarly configured, but tilts toward consumer stocks more than utilities. Only about 10% of the holdings of either are financial companies. Before the 2008 meltdown, these outfits often accounted for half or more of many dividend ETFs. But since the crisis, many of these companies have slashed or eliminated their payouts.....

If you want to avoid financials, WisdomTree Dividend ex-Financials (DTN) tracks an index of high-yielding U.S. stocks outside that group. Three sectors—industrial materials, utilities and consumer goods—each account for 17% of DTN's holdings. Vanguard Dividend Appreciation is far larger, more liquid and more diversified, but is about 7% invested in financials.


*Long DTN, DVY and SDY in various client accounts.

Link:  Gimmie Shelter & Income! 

On Earnings & Valuation

This from the folks over at Chart of the Day:

With earnings season having kicked off this week, today's chart provides some long-term perspective in regards to the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today's chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low -- the largest decline on record (the data goes back to 1936). Since its Q1 2009 low, S&P 500 earnings have surged (up over 700%) and currently come in at a level that has only been exceeded during the latter years of the dot-com and credit bubbles. Current expectations on Wall Street are that earnings reach the mid-$70 level by the end of 2011 -- a level surpassed only briefly during the tail-end of the credit bubble.

My comment:

Earnings have been coming in above expectations so far into the 2nd Quarter season.  I think we are going to hear more talk about some sort of a slowdown.  While I think that may already be factored into the market I do think it is possible that any slowdown is going to trim both GDP and earnings growth for the rest of the year.  As a result I'm going to lower my year end S&P 500 target range just a bit.  I think we will now end the year in a range of 1,225-1,300.  I will use a 1,260 mid-point and a 1,350-1400 target for year end 2011.  That's still 13-25% higher for stocks at some point over the next 12-18 months from where we stand today.

*Long ETFs related to the S&P 500 in client and personal accounts.

Happy Birthday Mom!

Happy Birthday Mom.  Turned 12 again for the 62nd year!

Correlation Among Asset Classes

Reuters article on rising correlation among asset classes and computer-driven trading. Excerpt with my comments at the end. Highlights are mine.

"Correlation among the individual equities in the Standard and Poor’s 500 index has increased to the highest level since 1987, according to research by Birinyi Associates reviewed in the Wall Street Journal. Birinyi Research Director Jeffrey Yale Rubin blames heightened correlation on the increasing popularity of indexing strategies, which he claims have transformed the way the whole market behaves, reducing the dispersion of returns.

Investors increasingly trade in and out of the whole market using broad indices (including exposure offered by exchange-traded funds) rather than picking individual stocks ...

....Increased correlation is not restricted to components of the big equity indices. Significantly heightened correlations are also evident among different commodity futures markets, and between commodities and equities.....

THE RISE OF HFT TRADING

While the correlation research focuses on the impact of {market} indices...it is intersecting with another debate on the impact of high-frequency, algorithmic and computer-driven trading strategies on price formation, liquidity and volatility in equities and derivatives markets.....

IMPACT ON PRICE FORMATION

For supporters, algo/HFT traders are simply displacing traditional market makers as the principal providers of liquidity to financial markets. Supporters claim HFT traders provide liquidity with narrower spreads than used to be available from traditional market makers in the pits, cutting trading costs for other market participants, including commercial hedgers as well as institutional and retail investors.....

For opponents, the liquidity provided by computer-driven trading strategies disappears just when it is most needed, when market conditions get rough, worsening volatility. The similar trading strategies employed by many HFT programmes (such as statistical arbitrage) heighten correlation, ensure trades become crowded, and create a self-destructive liquidation when they go wrong.

Critics focus on unusual market volatility experienced in August 2007 and again during the “flash crash” of May 2010 to show why HFT has increased rather than reduced volatility. The essential similarity among many quant strategies results in trades becoming crowded, and the application of HFT techniques ensures that when they go wrong it results in a disorderly rush for the exits....

.....There has been little thought given to the impact of HFT outside the specialist community, apart from a few lurid stories mostly focused on the issue of flash orders and front-running, and almost no comprehensive statistics and visibility.....

For supporters and critics alike, the next six months will be dominated by a fierce battle to understand and define HFT’s impact of on price formation and volatility, and shape the regulatory response.

Link: Rising Correlation and Computer-driven Trading. Posted origninally on Jul 13, 2010 08:13 EDT

My comment: The rise of ETFs and derivative securities is rapidly transforming investing. Indexing has been around almost since I started in the business. Back then though the ability for most investors to access broad levels of this type of portfolio management were limited to the inefficient and sometimes expensive use of mutual funds. ETFs helped solve that problem. The ability to gain rapid exposure to an asset class by the simple purchase of one security, along with the almost immediate access to information by all investors and the reduced friction in trading (lower commissions and spreads) are also factors leading to this correlation in my opinion.

Finally I believe that another reason for this correlation is ETFs remove the complete "risk of ruin" from the table.  When investing in a stock {or even most bonds for that matter} an investor has to at least consider the possibility that the stock could go to zero. In theory that cannot happen with an ETF. For example investments related to a broad index such as the S&P 500 should be unable to trade to zero. Presumably the underlying value of these assets would render that impossible.

Note I use the term in theory because we cannot know all the possibilities of what can happen. Particularly I can envision a scenario down the road where there are more shares of a very popular index like the SPY than is possible to replicate in ownership by buying percentage shares of all the underlying companies needed. 

But we do know that ETFs were stressed tested during the 2007-09 market meltdown. While ETFs like almost all assets declined substantially in value, as far as I know not a single ETF went to zero or went out of business (note however that some ETFs did lose substantially all of their value and many have since liquidated-either merging with another ETF in the same family or returning the remaining assets to shareholders).

I believe all of these factors have lead to this correlation. I think the confidence that total loss of principal is unlikely gives investor {but especially short term traders} the tools to rapidly gain broad market and sector access and also permits them to trade in larger increments and for shorter periods of time. Thus the convergence.

These factors are one of the primary reasons we place so much emphasis on money flow analysis. We need to get used to this convergence and continue to develop strategies to take advantage of it as this continued correlation is unlikely to change much given how markets are currently accessed and traded.

*Long ETFs related to the S&P 500 in client and personal accounts.  Long SPY in certain client accounts.

an tSionna 7.15.10

Market has made a good show of it since the beginning of the month with the major indices up anywhere from 4-7% in that period.  I think we could get a period of backing and filling now as it would be natural to expect at some point some level of profit taking.  Accordingly I will move my short term read to Market Neutral.  I will keep the longer term views unchanged at Net Market Positive for both.  You can click here  for a definition of those terms.

*Long ETFs related to the S&P 500 in client and personal accounts.  Nothing in this post should be construed as a recommendation to buy or sell any security.   

Happy Bastille Day.

Happy Bastille Day for our compadres in Division 6 at the Hotel California and to Lt. English over in Division 1.  Here's a little something to brighten your day!!!!

La Marseillaise!

Steinbrenner vs. The Market.

New York Yankees owner Georger Steinbrenner died yesterday at the age of 80.  This Smart Money article asks how George did as a money manager particularly versus the S&P 500.  Excerpt:

In 1973, George Steinbrenner headed a group that bought the then-slumping New York Yankees for $8.9 million. On Tuesday morning, Steinbrenner died at the age of 80 following a heart attack. During the years in between, his team made 10 trips to the World Series, winning seven times. In April, Forbes Magazine named the Yankees the most valuable baseball team, estimating its worth at $1.6 billion -- more than 197 times Steinbrenner's original price.

That's obviously a giant increase, but let's take a closer look at what kind of return it is after factoring in time. The numbers can sometimes deceive, after all. Manhattan was famously purchased by the Dutch from American Indians in 1626 for goods worth just over $1,000 in today's money. (Forget the $24 figure that's often cited. It comes from a 19th century estimate, and so must be indexed for inflation.) Manhattan has 14,528 acres, and the choicest acres are probably worth $90 million as unimproved land, according to a 2008 study by the Federal Reserve Bank of New York. Even if we assume that all of Manhattan's acres are as valuable as its best ones (I assure you they're not), that yields a total value for the island's land of $1.3 trillion. That's a 5.6% annual return, compounded -- and the real figure is surely lower. In other words, the Dutch might have overpaid.

Steinbrenner did better. Over 37 years, the Yankees appreciated at a compounded average rate of about 15% a year. That's five percentage points more than the S&P 500 index of large American companies returned during the same period. Just about any money manager would be proud of that record.

There are a couple of valuation issues to keep in mind, however. Stocks have excellent "price discovery" -- the mechanism that tells us what they're worth -- because they're bought and sold each business day. Baseball teams aren't. That makes the $1.6 billion Yankees price a highly theoretical one. It works out to about 3.6 times the organization's yearly revenues, which is higher than the S&P 500's median price/revenue ratio of 1.4......

In 2007, Liberty Media (LCAPA: 45.10*, -0.05, -0.11%) bought the Atlanta Braves from Time Warner (TWX: 30.80*, -0.12, -0.38%) in a complex stock-for-franchise deal that valued the team at $450 million.  Assuming $1.6 billion is the right price for the Yankees, there aren't many stocks that have done better since 1973.......

Link:  Steinbrenner vs. Stocks

*Long ETFs related to the S&P 500 in client and personal accounts.

Credit Scores.

I saw this over at 24/7 Wall Street. {Excerpt with my comments at the end.}

American Credit Scores Crash To New Lows

“Figures provided by FICO Inc. show that 25.5 percent of consumers — nearly 43.4 million people — now have a credit score of 599 or below, marking them as poor risks for lenders. It’s unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use,” according to the AP. ...The recession, tight lending practices by banks, and unemployment have caught up to the consumer credit market, and the trend is likely to worsen.

Banks, particularly regional and community financial firms, are struggling with defaults on both residential and commercial mortgages. To stay out of the clutches of the FDIC, they have become remarkably cautious about lending, even to people with good credit scores. The number of people who have been unemployed for over six months is now in the millions and nearly 25 million Americans are out of work. This population is not likely to see their credit scores repaired for years.

The young, for years targets for credit card companies, are unemployed at higher rates than people over 25. That means that this “feeder” population for credit cards is falling and some of these people now have no credit scores at all. Another trend that has hurt credit scores immensely is the disappearance of home equity loans which were once taken out by huge numbers of Americans who had houses worth more than their mortgages. Now, more than 11 million mortgages in the US are underwater. People are abandoning homes that are being foreclosed upon. Either of those actions severely damages credit ratings.

One of the long-term effects of low credit scores is a likely long-term drop in consumer spending. People often cannot afford to buy things by paying cash. And austerity is the rule of the day.

Douglas A. McIntyre

Link: Credit Scores.

My comment: I've long thought that this recession which is similar to the one we experienced in the early 1980's is a great re-ordering of things. One of my main thesis is that this recession is rapidly dividing the country even more into "have's" and "have nots". By this I'll reiterate what I've stated as a thesis before that for the top 60% of income workers {households making in excess of $60,000 per year and including younger people on some sort of age wage adjustment} the recession is over. By this I mean in general that for the above mentioned cadre, if they've survived this far then they are feeling better about their job prospects and have started to spend money again. That spending may be truncated by debt and a less optimistic longer term view but they are spending discretionary income again at this time.

For the bottom 40%, households primarily with lower job skills and lower education prospects, the country is in a depression. These are the people most impacted by what we read above. For that group things are not getting better soon.

The Great Debate-A Technician's Take.

As promised here is Barron's technical analyst's take on the market at this juncture. {Excerpt}

Technicians Await the Bear {Michael Santoli -Tape readers, unlike fundamental analysts who see value in beaten-down stocks, see an enduring downward trend emerging.}


THE CURRENT MARKET ARGUMENT PITS the charts against the cheap, the increasingly worried tape readers who see an enduring downtrend emerging versus the spread-sheet studiers who spy increasing value with every percent decline in the Dow, and contend that stocks are over-anticipating a recession relapse.

The charts, plainly, are delivering cause for concern, a fairly clear downward trend in the major indexes since the April high, and heavier selling on down days than there has been buying on rallies....

....Some, but not nearly all, technicians are either stating that a new bear market is under way or are waiting for a few unmet conditions to kick in before making that call.

One approach to market timing just raised the caution flag. Some advisors watch when the S&P 500 crosses above (a Buy signal) or below (a Sell) its 12-month average at month's end. Last week's June close fell below the average for the first time since July 2009. This approach kept adherents in cash before most of the 2000-2002 and 2007-2009 routs, and they managed to participate in most rallies, but Sell signals failed to predict a further decline most of the time. {My note: We've discussed the golden cross and death cross before. My most recent note on it is here. The best way to study this shows that a death cross has not yet occurred as of this writing.}
Not every study of internal market dynamics is screaming at investors to flee, and it is not yet fully obvious that the markets are sending a reliable foreboding message about the end of a U.S. economic recovery....{For instance} corporate-credit spreads, the excess in their yields to those of Treasuries, would be expected to gap out to much wider levels ahead of a recession, and they have not.
The cheapness of stocks being celebrated by some market fundamentalists can be measured in multiple ways beyond the simple price/earnings ratio.

Citigroup strategists point out that their gauge of stock-bond valuation shows equities at a deep and rare undervaluation versus high-grade bonds. Nomura quantitative strategist Joe Mezrich calculated last week that at present levels, stocks were implicitly pricing in five-year annual earnings growth slightly below zero, going from somewhat overoptimistic expectations at the start of the year to quite pessimistic ones now.

Credit Suisse strategist Doug Cliggott, who deftly foresaw the ongoing growth scare and market setback in the spring, puts fair value for the S&P between 1050 and 1150 for year end 2010, and says below that band he'd look to put cash into the market, albeit in defensive stocks.

Quite clearly, bear markets make cheap-seeming stocks seem progressively cheaper. And with enough daunting big-picture concerns chewing up the cable-news airtime, it might not take much more than continuing popular doubt about economic growth or global financial stability to bring on one of those intense liquidation phases we all recall.

One way to explain the current rush to predict a punishing bear market since stocks fell more than 10% and the conflation of that with a surefire double-dip signal is to note the scarcity of deep corrections and relatively undamaging cyclical bear markets in recent decades. Doug Ramsey, research director at Leuthold Group, made this observation in the firm's client report for June. There have been only two of what he describes as severe corrections of between 12% and 18% between March 1980 and March 2010. In the same period there were six washout bear markets averaging a 34.3% loss. From the 1930s to 1980, those corrections outnumbered true bear markets....Ramsey is sticking for now with the stance that this remains a deep correction, not a fresh bear market. In a chat Friday he said that "it sure seems like we are so close to 1000 [on the S&P] that maybe we've got to go down below there and test" lower levels. That could scrape the index against the trite definition of a bear market as a drop of 20% or more.

Ramsey, though, figures that the past few years have been so dramatically volatile—a 57% waterfall in 18 months followed by an 80% rally in 13—that it's necessary to scale the next retrenchment according to the size of the rise. He cites, as precedent, what he calls several past "noneconomic" bear markets—those without far-reaching economic implications—in the mid-'30s, 1962, mid-'70s and 1987. promised his Barron's technical analyst's thoughts regarding the market at this juncture.

*Long ETFs related to the S&P 500 in client and personal accounts.

Link:  Technicians await the bear!

The Great Debate {Revisited} No Double Dip

It's been awhile since we've discussed the bullish and bearish arguments. This seems timely since the market is probably as confused as I've seen it since March of 09 on where we might be headed. Barrons highlighted in separate columns last weekend this debate. Today I'll feature excerpts from a bullish writer with a fundamental view argues why last week's job's data likely indicates no double dip recession. Tomorrow we'll give a technician with a more bearish view his turn.

A Second Dip Still Unlikely

By GENE EPSTEIN

DOUBLE-DIPPERS WERE BRIEFLY FORCED to revise their dopesheet in response to key economic data released last week on manufacturing and on jobs. Not only do the data negate the likelihood of an imminent relapse into recession. The monthly figures even suggest that growth in real gross domestic product for the April-June quarter ran a bit faster than its annual rate of 2.7% in the January-March quarter.

Friday's eagerly awaited jobs report for June revealed an increase of 83,000 in private-sector employment. But since any single month's number is highly volatile and subject to revision, the three-month tend helps clarify the picture. For the April-June quarter, monthly gains in private employment averaged 119,000, up from an average of 79,000 in the first quarter.....

The unemployment rate in June fell to 9.5% from 9.7%. In the April-June quarter, the rate of joblessness averaged 9.7%, the same as in the January-March quarter. That shows an improvement from the 10% average in the fourth quarter of last year. But all it indicates is that, over the past six months, the increase in jobs about matched the increase in the labor force. For the unemployment rate to keep declining, employment must grow faster than the labor force.

Speaking of other coming challenges, total nonfarm payroll employment, including government, fell by 125,000 in June. All the decline, and then some, was accounted for by the layoff of 225,000 temporary Census workers. But that leaves 339,000 temporary workers still on the Census payroll, many of whom will probably start looking for private-sector jobs once they're laid off.

The Institute for Supply Management reported on Thursday that its purchasing manager's index of manufacturing declined to 56.2% in June. But that was still solidly in expansion mode, since any figure over 50 indicates expansion. In the April-June quarter, the PMI averaged 58.8%, a bit higher than its January-March average of 58.2%.

Further evidence of improvement in the second quarter comes from private- sector aggregate hours work, tracked in the establishment data. Aggregate hours rose at an annual rate of 3.3% in the quarter, indicating that second-quarter growth in real gross domestic product ran more than that, assuming some increase in worker productivity.

Finally, double-dip dopesters take note: The Credit Suisse probability model of recession, ..... put the six-month probability of recession at zero—and still does.

Link: No Double Dip Recession.

an tSionna 07.07/10

I am still Net Market Positive.  At this point that is my ranking across all three of my investment time frames.  You can click here for a definition of that term.

*Long ETFs related to the S&P 500 in client and personal accounts.

Jobs vs. Other Recessions

From Chart of the Day:

"{Last week}, the Labor Department reported that nonfarm payrolls (jobs) decreased by 125,000 in June -- the first decline in six months. Today's chart puts the latest data into perspective by comparing job losses following the beginning of the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-1999 (dashed blue line). As today's chart illustrates, the current job market has suffered losses that are more than triple as much as what occurs at the lows of the average recession/job loss cycle. Also, today's decline in jobs provides further evidence that the current economic recovery has begun to cool.

Link:  Jobs vs. Previous Recessions.

Some Quick Thoughts

My apologies about posting:  I'm having real problems right now getting the blog to do what I want it to do.  I did see this over at Crossing Wall Street and I think it needs to be considered in light of all of the negativity we currently have with the markets.


Goldman Sachs (GS) has traded as low as $129.50 today. Their book value is $128.33.
Morgan Stanley (MS) is now 17% below its book value.
A two-year US Treasury will yield you about 0.5%. One share of Johnson & Johnson (JNJ) yields about seven times that.

Link:  Crossing Wall Street
 
Long Shares of JNJ in one client account.

PS:   The yield of the S&P 500 is now over 2% as well.