Week Ending November 14, 2008

Note: I, Bill Valentine, pledge to make these week-ending comments available on or before the end of business on Fridays. 

Why hasn't the Stock Market made more progress?  Last week, I gave you one part of the equation: the Market really doesn't like what it sees from our Government.  (The Market's down 13% since the election of just 10 days ago--that's Change You Can Grieve In).  You see, the Market fears the amount of control being given to one party, and is unnerved by what it's hearing from the current administration as well.  At this point, the best thing you can hope for is a reversal in the trend of public funds used to shore up financial and auto companies and the like.  Let them fail.  The power of Creative Destruction is our best hope for the long run.

But the other aspect of stock weakness comes from investor response to the Market trauma this year.  Over the years, I've shown how financial loss can be as traumatic as personal loss, and successfully applied the Five Stages of Grief (from Elisabeth Kubler-Ross) to understanding market cycles.  Let's look at each of the stages overlaid on the current Bear Market, as I think we're transitioning stages right now.

• DENIAL  (10/07 - 7/08) The Bear began in October of 2007 and it wouldn't be until July of 2008 that a 20% decline, the agreed upon definition of a Bear, was in place.  We didn't recognize it at my firm until just two months before then. 

• ANGER  (7/08 - 10/08)  While the first 20% decline took 9 months to achieve, the next 20% came in just 3.  And investors got angry.  Some responded by selling out, others stuck with it begrudgingly.

• BARGAINING  (10/08 - 11/08??)  Bargaining in this context is the logic that says, "I'll stay with my stocks because I know I shouldn't sell, and wait a little longer for the recovery."  But ultimately the Bargainer is doomed to sell...not in the first round with the Anger seller, but in the re-test, because the Market didn't recover in time.

• DEPRESSION  (??)  Depression occurs when the investor believes the Market's never coming back.  There's an old saying, "When's the Market going to come back?  When you stop asking."

• ACCEPTANCE  (??)  The Bear Market will be over when all those that can be convinced to sell, do, and those that can't are at peace with their long term mindset of riding it out.

THE RICH LIFE:  We've begun the season of birthdays at the Valentine house.  By February, our boys, now 4, 6, 8, and 10 will be a year older, each.  Where has the time gone?!   I'd give anything to change a diaper or do a 2:00 am feeding one more time...wait, what did I just say?!?

Week Ending November 7, 2008

The two days following our National election saw the Market fall by 10%.  What's the rationale?  According to CNN, the run-up to Election Day was in anticipation of an Obama victory...and the sell-off was due to global recessionary concerns.  I think they got it backwards (CNN is amazing, isn't it?)...the Recession was a known entity, but the outcome of the election was only appreciated as of Wednesday.  The Market's not so much voting against Obama's victory as it is not thrilled with the idea that one party effectively controls the Executive and Legislative branches.  While there's not a technical super majority in either chambers, it's close enough to scare many of us.  (I watched the Market swoon as it was announced that Merkley was declared the winner in Oregon, moving the Dems another step towards 60).

There is indeed a new sense of hope and optimism in the country that even us McCain voters share.  And Obama has a tremendous job in front of him, and an unrealistically high expectation placed on him.  His first press conference was a minor disaster.  In the span of about 15 minutes, he wiped 200 points off the Dow.  His delivery was uncharacteristically rough.  He bridged his thoughts with protracted "aaaaahhhhh"s, took a disrespectful swipe at Nancy Reagan, referred to himself as a "mutt," and implied he still thinks it's prudent to raise taxes.  Not very inspiring nor Presidential.  But we'll cut him some slack--we're all Trainees at first.

On a different note, let me express my formal feelings of gratitude to our nation's Veterans.  My generation was never called to serve and I can't really know the strife of war.  But as best I can, I try imagine.  And when I do, it sure highlights how easy it's been to be an American for the last 30 years (except for those great men and women who volunteered to serve in Iraq and Afghanistan).  Thank you, Veterans.  Thank you!

THE RICH LIFE:  I am not the athlete in my family...not by a long shot.  My wife Jessica is not only the most dedicated athlete I know, but a constant source of inspiration.  Watching her exercise every day is the best motivation I have for getting off my fat ass.  Without her, I'd twice my size.  A couple of week's ago, she knocked off the Nike half marathon without breaking a sweat.  Keep on truckin, honey!  I love you!

Week Ending October 31, 2008

Great to see the Market make forward progress.  This snapback has played out predictably--and I wonder when normal events become too readily expected, and thus by definition disappear.  In this case, I'm referring to how the bounce evolved: capitulatory purge (10/10),   super-snapback (10/13), rollover and retest (10/14-10/27), no-violation leading to a rally (10/28-10/31).  Played out just like other crisis bottoms--and just like everybody said it would--which leads me to believe that's less likely to happen in the future (consensus expectation leads to diluting phenomena).

Given that the nadir in credit conditions was three weeks ago, it begs the question as to why the Market hasn't made more progress?  It's all the more vexing considering that the prices of gas and oil have been cascading (remember when stocks and oil moved inversely just a few months ago?).  I have a couple of theories:

• The markets' ambivalence to government intervention is tipped to disfavoring it.  There's an important balance between regulation and free markets, and too much of the blame for the Housing Bubble and Credit Crisis is being dropped at the feet of a lack of oversight and regulation.  Markets want reform, but not overreach. 

• It's increasingly likely that Barack Obama will be our next President, and the markets have been held down by the expectation of higher capital gains tax rates as early as next year (as well as other economically and capital-formation retarding tax hikes).

• Finally, markets HATE government absent checks-and-balances.  The outside chance that the Democrats get a super-majority of the House, a filibuster-proof control of the Senate, and the White House is weighing on collective mind of the market.  This isn't a partisan gripe--it doesn't matter which party has controlled the Executive and Legislative branches--markets hate super-majorities and so should you.

Week Ending October 24, 2008

On Monday, Fed Chair Bernanke endorsed another round of fiscal "stimulus" by the Government.  I couldn't be more disappointed.  

• I don't believe the Chairman of the Federal Reserve should opine on fiscal initiatives especially in the throes of a national election.

• Stimuli packages are indicative of a belief that it's the role of Government to prevent or diminish economic downturns.  Hogwash.  Economic downturns ("recessions') while unpleasant are natural, necessary, and ultimately unaffected by stimuli gimmicks.

• If the logic is that giving money back to taxpayers is good for the economy, and that's what the Government wants, then it only should follow that Government should take as little money from taxpayers to begin with.

• The stimulus package last time was inequitable, and I suspect it will be so this time.  The amount of taxpayer rebate had no relation to the amount of taxes paid.  In fact, the less you paid, the more you got back and some of us got nothing back.  In effect, citizens with the highest income gave money to the lowest--wealth redistribution.  If that's the acknowledged objective and intent, then why stop at shifting just $600 between taxpayers?  I'm sure the struggling taxpayer could really put $6000 to use...but hey, why stop there?  Why not give every taxpayer making less than $200,000 a one-time check for $60,000, paid for by the taxpayers making more than $200,000. 

Which brings us back to Dirigisme, the new way of the American Economy.  If the Government can take a portion of the earnings of one citizen and hand it to another, by fiat, we've violated one of the primary liberties we espouse to hold as sacred--the right to your personal property. 

More on Dirigisme, from excerpts of a recent article by the Associated Press:

"The federal government will not be running banks," said White House spokesman Tony Fratto.

Peter Morici, a business professor at the University of Maryland, said that may be a shortcoming — not an advantage. "Unless the government gets involved in the management of banks, we have no assurances that they won't get us into this mess again, that they're really going to start lending money to people who need it," Morici said.

Morici's dirigiste ideas remind me of the antagonist intelligentsia characters in Atlas Shrugged ("The Looters").  His suggestions that we nationalize banks, have Governments run them, and that they aren't interested in making loans to the folks he deems necessary, would be frightening if it had any real support.  But the mere fact that Socialist nitwits like this get quoted is a disturbing sign of the times.

Week Ending October 17, 2008

Another week of fun and games on Wall Street. The S&P 500 recorded it's biggest daily point gain...and it's biggest daily point loss...in the same week!  It's exhausting to watch.  For the week, the Market made a 4.6% gain in prices, but its' still down 36% for the year.  So, we're clawing our way back, and have a long way to go. 

The best development last week was the evidence that the credit market is beginning to thaw.  The handy TED spread (a measure of bank willingness to lend to each other, where a lower number is better), moved down from its 465 basis point record level to 363 bps.  Still way too high, but heading in the right direction.

Focus shifted this week from Credit concerns to broader economic ones.  Rightfully.  The Recession that I've contended started last December will weaken faster and further due to the events of late.  Some of the Government's moves (the TARP, upping FDIC coverage, and the Fed's interventions) have been prudent stopgaps.  Everything else has been unduly excessive and we'll be paying that price for years to come.

We've entered a dirigiste period.  (If your not familiar with Dirigisme, think Socialism without the central planning.  It's heavy handed government intervention into otherwise lassez faire economic systems.  It's most associated with French economic history, especially the early 1980s and François Mitterrand.)  I think the Markets would have recovered much more, were it not for the scope of the Government's involvement.  When Government compels financial institutions to sell them equity, we strike at the core of what's GLORIOUS about Capitalism--property rights and the ability to control ownership.

The Press continues to use the term Bailout to describe the EEAS, despite the fact that they've had time to understand the TARP, which shows an incredible amount of reckless acrimony and/or naiveté, but probably more of the former.  But alas they have papers to sell and a candidate to get elected (don't get me wrong, McCain's not up to the job either--and it's scary and unfortunate that these two candidates are the "best" this country has to offer--let's hope good advisors are chosen).

I expect more volatility, but more forward progress, for the credit, equity, and all investment asset markets in the week to come.

THE RICH LIFE:  I recently had a chance to combine my two favorite things: hanging out with my family and fly fishing.  Lindsay (10) and Cal (8) and I went to the Crooked River to fish for rainbows on nymphs and dry flies.  Between the two boys they caught more than two dozen.  We have an odd tradition in the family of kissing our favorite fish before we let it go.  Here's Linds puckering up to a nice 16" trout he caught below Bowman Dam.

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