Dec

8

 The market contest on Friday, December 5th had all the elements of the greatest contests played out in our favorite sport or war. The Lakers versus the Celtics playoff or the Memphis Tennessee NCAA championship, or the New York Giants win over the Boston Patriots or the Tiger Woods - Rocco Mediate or Roger Federer - Rafael Nadal match of this year — or from previous years, the Ali - Foreman boxing fight, the Giants versus Baltimore Colts Super Bowl, or the Dodgers - Giants pennant playoff. The Borg - McEnroe match, as does the battle between Achilles and Hector in the Trojan war, comes to mind. (I would be interested in some nice additions to this list).

It had everything. Magic and disbelief. A beautiful exposition, climax, and resolution. A complete recapitulation of the range of the previous week, a 8% move in the four climactic hours, 880 to 813, in just one day, an earth shattering opening of down 3%, the fourth such 3% or more in five days, a buildup of tension with the worst employment report ever, the lowest oil price in 4 years, the lowest bond yields ever, all following by a day the backdrop of the NBER finally calling it a recession, retail sales falling off a cliff, and news that the automobile bailout was going under and over, the steady drumbeat of negative reports and news, building up to a climax when Hartford forecast better earnings and rose 100%.

The resolution of the climax occurred in the last hour as if following a script from a great story or symphony with the market rising to the week's high, very near the magic 900 level that it started the week at. One should note "that with long term interest rates at 3%, ceteris paribas, the value of mortgage assets held by banks has to have risen by 100% from the levels of a year ago when 6% long term rates were the norm. This has to counterbalance the increase in default rates to a large extent, and increase the return from holding mortgages so that they're much more attractive than most say they are. This has to be counterbalanced by the acceptance by the populace of an industrial policy program by the US, as if the public servants are a better steward for our money than the hedge fund managers, and investment advisers. And the idea that spending on building roads and computerizing hospitals, and making public buildings use solar power, and have grassy knolls and bicycle racks (as Henry Gifford has limned) is a better use for creating jobs than what would have emerged from allowing voluntary exchanges and incentives to take their course. I can only sit back and say, "what a great game it was" after pointing out that the decline in interest rates has to be remarkably bullish, and I predict a Lobagola move back up.

Alan Millhone adds:

On Friday I noted the Market was up even with dismal job reporting. I heard something about a job lost in the US every five seconds! I hope we see many more up tic Fridays as the US economy improves.

You show many comparisons based on battles in sports, the ancients, etc. Makes me think of our national Checker Tournament of 2007 held in Vegas at the Plaza Hotel. The Master's group battled all week back and forth on round points and on the final day of play it boiled down to Dr. John Webster of N.C. and Lubabalo Kondlo of South Africa fighting for the lead. After the last round was played and the smoke cleared we found that both men had the same match points. The referee was Tim Laverty and Tim keeps most meticulous hand written records all week of the player's scores. After careful mathematical calculations it was determined Lubabalo won the Masters and the ACF National Championship by one honor point! Another thin skin of the finger example.

Edward Talisse remarks:

Lower mortgage rates are a boon to the homeowner but a nightmare for the banks. The banks are all short refinancing options as rates move lower and reinvestment options are limited. The banks make money where they underwrite new products. Also, loan assets are on accrual basis rather than mtm so until the securitization markets reopen, its tough to lock in gains. Lower leverage will cap ROE, so if we move back up, it won't be the banks that lead in my view.

Craig Bowles writes:

2008's rallies have come after basic materials and energy have become the weakest sectors and that happened on Thursday when viewing short-term growth rates. Interest rates have shown a lot of relative weakness to stocks, so can move up a bit without being a problem. One fundamental change is inflation indicators have fallen earlier than in the 1973-75 recession. Generally, economists are focusing on economic negatives but none is talking about the positives of low prices. There aren't many economists around who talk up Austrian economic theory anymore which is probably why they all focus on stimulus to support prices rather than the positives of less inflation and declining prices.


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14 Comments so far

  1. legacy daily on December 6, 2008 3:18 pm

    Friday’s move in the face of the job’s report maybe a confirmation of your “Lobagola like move back up” but my question is how long? Has anything fundamental been resolved? The system continues to undergo too many simultaneous changes to be able to tell where country is headed.

  2. Anonymous on December 6, 2008 8:39 pm

    “Has anything fundamental been resolved?”

    The market is a discounting mechanism and as such it will move well ahead of personal expectations, current events and common beliefs of crowds. Just as it discounted on the way down despite the broad confidence of investors. The belief one year ago was that the financial system foundation was strong enough to support the impact of the housing crisis and the weakening economy. Now the belief is that economic growth will be non-existent for years to come and that investors are best served by holding Treasuries that pay virtually nothing.

  3. Evan McKeown on December 6, 2008 9:46 pm

    For years I have been an investor, always trying to see the positive and believing that free enterprise and capitalism is the path to prosperity. Work hard, save your money and invest in the stock market. I also believed that owning a beautiful home was a good investment as well. There was a time when America was the envy of the world. Now we are the fool. Our financial system as we know it is gone. Lehman, Bear Sterns, AIG, Fammie and Freddie, Merrill Lynch…gone. Citigroup would fail if not for the bail outs and the great Goldman reduced to a bank…record layoffs, record foreclosures and trillions of dollars in 401(K) plans and savings wiped out in a year. Millions of lives have been destroyed. Why would anyone want to invest in this Country that provides no healthcare, where the States are mostly bankrupt themselves and asking for money and can’t even make their unemployment payments to 10 million unemployed, where a bank will kick a family out in the street because a man lost his job and fell behind on a loan payment? We are the laughing stock of the world. Perhaps the market will rebound but why in God’s name would anyone want to invest in this Country is a mystery. No…substantial damage has been done and it will take years for confidence to return. Why leave your hard earned dollars in a retirement account that can lose 6% in less than half an hour? Why buy a house that can lose 50% of it’s value in a year and then risk losing your down payment and foreclosure when the average shelf life of a job is only three years? An elephant stampede lobagola into stocks? Makes perfect sense…elephants have poor eyesight and fail to see what is immediately in front of them. In spite of the impressive Friday reversal and clearing of the 20 day moving average and IBD conviction that we are in a confirmed rally …this market isn’t finished until everyone is wiped out. They say the market foresees the future and rises 6 months in advance of a recovery. Who among us believes that the economy will recover 6 months from today? We are truly in uncharted waters and a drop of 40% from this level on the S&P would take us to the 50 year long term trend line. Perhaps then the risk reward ratio will favor investing in a Country that doesn’t take care of its own people.

  4. David Riffer on December 7, 2008 12:14 am

    When 6% yields –> 3% the only bonds that double up are perpetuals [also known as consols].

  5. Ronald Weber on December 7, 2008 5:00 am

    Basically the market is discounting a deflationary environment, where a 0% nominal yield on 12m treasury could turn out to be a 3% real yield (deflation-adjusted). It's Japan's 1990s-redux, which doesn't necessarily have to be the end of the world, in retrospective the average Japanese hasn't done so bad over the past decade. Result: capital repatriation, postponed consumption decisions from the private sector and an increase in Government's share of GDP just to keep growth in non-negative territory. Negative wealth effect and zero rates lead to forced increases in savings and a search for safe state-guaranteed deposits venues (i.e. Japan Post). One could ask the question: what is different this time? [US now vs Japan in the 1990's]. Positive: Swifter actions (State and private) to deal with the problems, benefit of experience; Negative: less opportunities for exports.

  6. Christopher Tucker on December 8, 2008 10:11 am

    Just a quick note for Vic and Laurel: enjoyed Junto last week but missed the author of a book you mentioned, "Shaking the Money Tree". Was this the one written by Winthrop Knowlton? Thanks.

  7. Vinne Bronx on December 8, 2008 1:04 pm

    Walmart and Lobagola on Black Friday: No disrespect to the man who lost his life, but
    Vic and most of the people on this board are too much the gentleman to mention the amazing metaphor that this creates. Everyone predicted the worst retail season of all time, yet the elephants came out at Walmart it demonic fashion. I hope this is where the metaphor ends, as at Walmart the elephants were rounded up and set back out. (rightfully so of course) I just hope our government doesn't do the same with the stock market.

  8. glenn on December 9, 2008 7:33 am

    geez guys I’m short 5000 mm usd/yen here tues am amd just because congress may have stayed past cocktail hour to drive home 15mmm towards the autoplay… the rally towards 93 looks glossy again…at best any comments. g

  9. jamshed nazar on December 9, 2008 9:24 am

    The sky would not fall down with the current conditions in the financial markets. But short of this, it is a real serious situation.

    - Serious oil shock, after 35 years, caused by real demand concerns

    - US housing correction, after 25 years

    - Global asset securitization losses ~ 500+ billion and counting

    - Systematic risks - CDS / derivative failures - death of the bookie (Lehman)

    - Freezing of the commercial paper market - expected bankruptcies of hundreds of highly leveraged firms

    - Shrinking of global trade / protectionism

    I mean this is just a start.
    I think the equity traders are looking at daily and hourly charts - missing the big picture.

    Stocks have a direct relation to earnings potential of the underlying firms + a bullish / bearish bias of Mr. market.
    Traders are applying a bullish bias to an extremely difficult oncoming period for firms.

    The printing of paper money is one way to go and the Fed’s balance sheet is already at 3 Trillion. But thats going to be a bigger mess. How does Bernanke or Paulson know how to “manage” the market than private business? Just throwing more money does not solve the problem.

    Losses in insurance, pension and mutual funds will lead to further deterioration of market conditions.

    I dont see why the markets should be rallying…

  10. glenn on December 9, 2008 9:37 am

    still got the shorts on this am rally might bust my britches but going to stay short through it…damn stubborn again…g

  11. Anonymous on December 9, 2008 2:25 pm

    Mr. Nazar,
    equities have been falling for several months in a row. Your points are valid, but what you present here is nothing new to me or all of my trading colleagues, and probably to most (if not all) readers of this site.

    The question that you should ask is “Has the market discounted enough or does the fundamental evidence calls for more discounting?”

    Also let’s not naively assume that the Chair and other readers of this site participate in the markets “black and white”. One can make directional, non-directional, diversified, spread-like, trending, systematic, non-systematic bets, and the list goes on. There is much more in the world of speculation that you can see from higher grounds…

  12. vniederhoffer on December 9, 2008 11:45 pm

    Mr. Nazar makes some interesting critiques. And he is right, I have much to learn. That's one reason I sponsor this site as the best way to learn is often to teach. However, do realize that the purpose here is a meal for a life time, not for a day, that would be quickly dissipated by past, present and future followers. This way we can all progress to our highest summit. vic

  13. Gary Rogan on December 10, 2008 11:13 pm

    Mr. Nazar’s points are very valid. Yet Mr. Nazar seems to think that the market should be good at predicting the obvious. Clearly this is not the case. In the comments to an article on this site in the early summer, when oil was around $140 and everyone was prediction $150 oil in a matter of weeks if not days and $200 oil by year end, I made a clear prediction that we will see $100 oil before $150 based on price and many “real-world” signals. This has obviously come to pass and then some. It was clear to me that the oil price was in a classic bubble formation, and at it’s peak, and it had nowhere to go but down, but that was a simple case unlike “the market”. Yet in this case “the market” was clearly unable to make anything like a good prediction within a “reasonable” time frame.

    While I am an optimist by nature, now is not the time for Pollyannas. It seems obvious to me that the whole world is headed for a financial collapse. I is not certain by any means, but it seems as certain as anything that’s complex and in the future. Making a leap from that to what “the market” will do in at any particular time in the future prior to the collapse is a lot harder than predicting the price of oil, and even that is much harder today than it was in the early summer.

  14. jamshed nazar on December 11, 2008 6:43 am

    Just to answer to the comments from Anonymous above,

    I have lost a decent amount of money in the markets :-) (2000-2004.) so I can proudly claim that I do know some basics on arbitrage, trading, directionality, long short, PE ratios, earnings calender etc etc.
    This year I have lost money due to the risng dollar vs euro but I am still short dollar.

    In rising markets, almost anyone can make money. In falling markets, its a lot harder - specially when the regulator would, one fine day, just ban short selling.

    What concerns the average Joe is a car, house, credit, job and pension. In the current conditions, all these are undergoing "corrections". The biggest investors in the markets - pension funds, insurance funds, mutual funds are taking big hits. And Hedge funds - maybe 50% would close or liquidate? Does it not point to a long, cold winter?

    On a fundamental basis, unfortunately, the mess is bocoming messier as government intervenes further into markets propping unsuccessful banks and companies more than the good ones.

    Consider the case of GM, Ford, Chryseler,
    Is it not obvious that bankruptcy is the best option for these firms? These firms need to align their cost basis according to the market size and needs.
    The only reason they are being dished out loans now is to save jobs. Jobs that are paying 70$ per hour for the mechanic which cost less that 50$ on a toyota plant for the same skills and no unions.
    Obviously, Germany would intervene for BMW, VW, Daimler, Porsche and France would do the same for Peugeot and Renault.
    When everyone tries to protect their "jobs", and control their markets, this would only lead to protectionism and currency devaluations.
    Japan, in my opinion, is itching to intervene since Yen appreciation will push it back into the lost decade of the nineties. China has already signaled a devaluation for the Yuan.

    The one case for a long term bullish forecast is crazy inflation from Helicopter Ben. But really - are these guys serious?? It took tens years and some serious recession to get the inflation of the seventies out of the system.

    I hope Obama and team will have more foresight to do a better job.

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