Martin Feldstein has predicted recently that we will see a protracted period of sluggish growth and potentially lower standards of living... “Large fiscal deficits would mean that the government must borrow funds that would otherwise be available for private businesses to finance investment in productivity-enhancing plant and equipment...Without that investment, economic growth will be slower and the standard of living lower than it would otherwise be. Moreover, the deficits would mean higher interest rates and continued international imbalances.”
When the federal government competes with the private sector for funds, it always wins out. The
private sector is not capable of competing with the federal government. They do not compete on an equal footing. It is a very short view of the market that causes the market to hold up under these circumstances...
Saturday, September 26, 2009
Wednesday, September 16, 2009
New information that may explain natural gas prices rising:
Just got a report from Stratfor.. an external intelligence crowd, talking about the possibility that Netanyahu and friends might in fact do something belligerent to the Iranians.. They seem to believe it is more of a possibility than others believe... Just something to be aware of as you make decisions.
Just got a report from Stratfor.. an external intelligence crowd, talking about the possibility that Netanyahu and friends might in fact do something belligerent to the Iranians.. They seem to believe it is more of a possibility than others believe... Just something to be aware of as you make decisions.
Thursday, September 10, 2009
Tuesday, September 1, 2009
“Hey, be careful out there.” Sgt. Phil Esterhuis
Readers of a certain age and gender may remember Sgt. Phil from his days running the squad roll on the TV show “Hill Street Blues” for doing more to make bald beautiful than anyone other than Michael Jordan and Mr. Clean. Readers of both genders may remember his occasional appearances in these missives over the years at times where we became aware of studies that indicated reasons for short--term caution in one market or another.
While many of you have heard us mention the Economic Confidence Model, we have not talked much about the people at
He explained his recent studies that indicated September 2, 2009 and 1053 on the S&P 500 were showing up as important points in their respective continua. Since the S&P 500 recently made a high of around 1037, and you all can find a calendar, we thought we‘d mention this in a Sgt. Phil mode —caution, not panic. Perhaps, some tuning of portfolios may be in order. Some prognosticators are rooting for a target of 1100 on the S&P 500, while some Fibonacci studies we’ve seen indicate a possible target of 1070. All of these targets have one thing in common. They all are based on this being a cyclical rally in a secular Bear market.
We know of at least one individual, who has been participating in the markets since the 1950’s based on his studies of the advance/decline data, who believes that a new Bull has begun. Definitions are somewhat slippery in these things, so we mention it only in passing to show that unanimity of thought is not present.
We are currently involved in a substantial study to determine the areas of concentration among asset classes that seem to make sense over the next number of years. This is on the order of the studies done back in 1997-1998 leading up to the major turning point in the Economic Confidence Model on July 20, 1998. It will take a while, but hopefully, it will be as fruitful as the ‘97-’98 work.
“Keep your eye upon the donut.” We’ll be in touch soon.
Thursday, August 13, 2009
August 13th 2009
"...we'll be back this way again." Hank William Sr.
May 23 2008 was an important watershed date last year in addition to the September bankruptcy of Lehman Brothers. While the Lehman Brothers fall has been pretty highly documented, both at the time and in retrospect, May 23 had more stealth. The only reasonably widely followed fundamental indicator that we have found giving a signal of difficulty at the time was the TED spread beginning to widen more substantially. As you may have noticed in the last post, we included a brief description of what the TED spread is. Today we will expand that definition in order to illustrate why it may have been an indicator of termoil in the bank credit world at that time.
It is stated that the TED spread supposedly measures credit difficulties arising in the international banking systems the differential between rates charged by LIBOR member banks for a given time frame increases relative to the US Treasury rates for the same time frame as expressed by the relevant futures. In other words, if international banks feel a need to charge more for loans they make relative to the US Treasury rate for the same maturity; it is assumed that they are doing so because of a rise in perceived risk in the economy. One such rise in the TED spread began around May 23, 2008.
We use turning points from the Economic Confidence Model (popularized by Princeton Economics Institute) as one of our guidelines for finding points in time that may bring interesting activity in the markets. That model had turned down around February 25, 2007; conveniently the TED spread does not move in straight lines. We are speaking more of significant changes in the near-term trend.
Continuing the trend noted above, the TED spread began to narrow around the next upturn in the model, roughly March 23, 2008. Two months later (May 23, 2008) without an observable change in direction by the model, the TED spread began to widen again more considerably. In fact, by mid-October, 2008 the spread had widened to a five year high. From that point to February, 2009, there was a general decline in the spread, followed by a short move wider into March 9, 2009. Since then the general trend has been narrower up to the present date.
It seems reasonable to attempt to correlate the moves of the TED spread with those of the stock market. It is our opinion that the TED spread has some coincident negative correlation with the stock market in recent years. That is a widening TED spread seems to indicate a falling market, and vice versa. We do not mean to imply a direct cause and effect relationship, rather that they both may share sensitivity to the same outside forces. Either way, a significant widening of the spread should probably serve as an alert to stock investors. We follow it regularly now.
At times like this when some measures might imply that some of the stock indices are somewhat overbought, we tend to pay even more attention to indicators that may not be directly equity related, but have shown effects on equities. We also pay more attention to weekly charts of both indices and individual stocks. It is important to make use of all sources when considering making decisions. We also use stochastics and Bollinger bands as additional aids along Ibbotson data and data provided by other sources when it comes to tactical asset allocation decisions.
"...we'll be back this way again." Hank William Sr.
May 23 2008 was an important watershed date last year in addition to the September bankruptcy of Lehman Brothers. While the Lehman Brothers fall has been pretty highly documented, both at the time and in retrospect, May 23 had more stealth. The only reasonably widely followed fundamental indicator that we have found giving a signal of difficulty at the time was the TED spread beginning to widen more substantially. As you may have noticed in the last post, we included a brief description of what the TED spread is. Today we will expand that definition in order to illustrate why it may have been an indicator of termoil in the bank credit world at that time.
It is stated that the TED spread supposedly measures credit difficulties arising in the international banking systems the differential between rates charged by LIBOR member banks for a given time frame increases relative to the US Treasury rates for the same time frame as expressed by the relevant futures. In other words, if international banks feel a need to charge more for loans they make relative to the US Treasury rate for the same maturity; it is assumed that they are doing so because of a rise in perceived risk in the economy. One such rise in the TED spread began around May 23, 2008.
We use turning points from the Economic Confidence Model (popularized by Princeton Economics Institute) as one of our guidelines for finding points in time that may bring interesting activity in the markets. That model had turned down around February 25, 2007; conveniently the TED spread does not move in straight lines. We are speaking more of significant changes in the near-term trend.
Continuing the trend noted above, the TED spread began to narrow around the next upturn in the model, roughly March 23, 2008. Two months later (May 23, 2008) without an observable change in direction by the model, the TED spread began to widen again more considerably. In fact, by mid-October, 2008 the spread had widened to a five year high. From that point to February, 2009, there was a general decline in the spread, followed by a short move wider into March 9, 2009. Since then the general trend has been narrower up to the present date.
It seems reasonable to attempt to correlate the moves of the TED spread with those of the stock market. It is our opinion that the TED spread has some coincident negative correlation with the stock market in recent years. That is a widening TED spread seems to indicate a falling market, and vice versa. We do not mean to imply a direct cause and effect relationship, rather that they both may share sensitivity to the same outside forces. Either way, a significant widening of the spread should probably serve as an alert to stock investors. We follow it regularly now.
At times like this when some measures might imply that some of the stock indices are somewhat overbought, we tend to pay even more attention to indicators that may not be directly equity related, but have shown effects on equities. We also pay more attention to weekly charts of both indices and individual stocks. It is important to make use of all sources when considering making decisions. We also use stochastics and Bollinger bands as additional aids along Ibbotson data and data provided by other sources when it comes to tactical asset allocation decisions.
Sunday, August 9, 2009
"A dollar is a dollar; a dime is a dime, I'd sing another chorus, but I haven't got the time."
The title above is from Eddie Hodges circa 1960, and is meant to highlight the theme we see currently in the financial world. By necessity, these comments will be brief.
A bit of history to set the stage:
1895-96 Following the 1893 Depression, the gold supply of the US Treasury dips to perilously low levels. J.P. Morgan arranges a gold loan of over $50 million to save the day, and then does it again the following year when more is required.
1934 FDR and Congress tell the American people to turn in all that clunky gold money they have been carrying around making holes in their pockets, that has a value of $20/oz and receive $35 in nice crisp paper money, effectively devaluing the dollar by a significant amount.
1971 Richard Nixon stops the exchange of gold for paper dollars to foreign sovereign states, effectively placing the US on a floating rate currency standard.
2008 World-wide credit crisis and other financial disruptions and the attendant responses thereto lead to the beginnings of questions as to the ability of the US dollar retaining its reserve currency status.
Those of you with a mathematical bent have already determined that the dates above are approximately 37 years apart. Those of you with an historical bent will note that the happenings described are all related to monetary difficulties of a substantial nature. Empirically, then, one might conjecture that there could be a monetary crisis cycle of some sort occurring roughly every 37 years. Historically, there have been other symptoms that have accompanied these monetary moments of the past.
Poor Eddie Hodges had it all wrong. At times like these,a dollar isn't always a dollar, in purchasing power term, at least. One hesitates to insult the dime under the circumstances, although it is somewhat fitting that FDR's visage appears on that coin.
If one had been watching the exchange rate of the US dollar (hereafter referred to as THE dollar) versus a basket of the other major currencies during the recent times, one might have noticed a tendency for the US stock markets to move contra-trend versus the dollar. (e.g., buck up - market down)
We believe this activity would seem to confirm the possibility that a monetary crisis is still passing through, and may continue to have effects on a number of financial entities. A statement attributed to Mark Twain, among others, may be appropriate here - "History doesn't repeat, but it does echo." If history is echoing closely with the past, there are a number of asset classes which will have peroids of out-performance in the future. As usual, timing and judgement will determine who will be among the "quick or the dead," to use a movie promo line.
This experience has taught us that we need to watch the so-called TED spread (the price difference between three-month futures contracts for US Treasuries and three-month contracts for Eurodollars having identical expiration months), which signals credit problems, among other things.
Thinking outside the bun, as Taco Bell suggests, still gets you bitten. Only avoiding mealtime altogether keeps you safe. But, a fellow still has to eat, so the idea is to drop in when the rush is over, collect bargains those leaving just left behind and sell them to the next rush coming in. Repeat as needed. Doing that consistently takes study to stay ahead of the crowd, courage to act against the popular flow, and the knowledge that, when dealing with crowds, every once in a while, your foot will be stepped on.
In closing then, don't touch that dial; things are just about to get interesting. You have a great seat. In the words of a favorite cliche's
"As you wander on through life, brother,
Whatever be your goal,
Keep your eye upon the donut,
And not upon the hole."
A bit of history to set the stage:
1895-96 Following the 1893 Depression, the gold supply of the US Treasury dips to perilously low levels. J.P. Morgan arranges a gold loan of over $50 million to save the day, and then does it again the following year when more is required.
1934 FDR and Congress tell the American people to turn in all that clunky gold money they have been carrying around making holes in their pockets, that has a value of $20/oz and receive $35 in nice crisp paper money, effectively devaluing the dollar by a significant amount.
1971 Richard Nixon stops the exchange of gold for paper dollars to foreign sovereign states, effectively placing the US on a floating rate currency standard.
2008 World-wide credit crisis and other financial disruptions and the attendant responses thereto lead to the beginnings of questions as to the ability of the US dollar retaining its reserve currency status.
Those of you with a mathematical bent have already determined that the dates above are approximately 37 years apart. Those of you with an historical bent will note that the happenings described are all related to monetary difficulties of a substantial nature. Empirically, then, one might conjecture that there could be a monetary crisis cycle of some sort occurring roughly every 37 years. Historically, there have been other symptoms that have accompanied these monetary moments of the past.
Poor Eddie Hodges had it all wrong. At times like these,a dollar isn't always a dollar, in purchasing power term, at least. One hesitates to insult the dime under the circumstances, although it is somewhat fitting that FDR's visage appears on that coin.
If one had been watching the exchange rate of the US dollar (hereafter referred to as THE dollar) versus a basket of the other major currencies during the recent times, one might have noticed a tendency for the US stock markets to move contra-trend versus the dollar. (e.g., buck up - market down)
We believe this activity would seem to confirm the possibility that a monetary crisis is still passing through, and may continue to have effects on a number of financial entities. A statement attributed to Mark Twain, among others, may be appropriate here - "History doesn't repeat, but it does echo." If history is echoing closely with the past, there are a number of asset classes which will have peroids of out-performance in the future. As usual, timing and judgement will determine who will be among the "quick or the dead," to use a movie promo line.
This experience has taught us that we need to watch the so-called TED spread (the price difference between three-month futures contracts for US Treasuries and three-month contracts for Eurodollars having identical expiration months), which signals credit problems, among other things.
Thinking outside the bun, as Taco Bell suggests, still gets you bitten. Only avoiding mealtime altogether keeps you safe. But, a fellow still has to eat, so the idea is to drop in when the rush is over, collect bargains those leaving just left behind and sell them to the next rush coming in. Repeat as needed. Doing that consistently takes study to stay ahead of the crowd, courage to act against the popular flow, and the knowledge that, when dealing with crowds, every once in a while, your foot will be stepped on.
In closing then, don't touch that dial; things are just about to get interesting. You have a great seat. In the words of a favorite cliche's
"As you wander on through life, brother,
Whatever be your goal,
Keep your eye upon the donut,
And not upon the hole."
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