Feb 22, 2009

Nationalize The Banks

February 22, 2009

“It depends on what the meaning of the word ‘is’ is. If ‘is’ means ‘is and never has been’ that’s one thing-if it means ‘there is none’, that was a completely true statement.”-Bill Clinton, former President, during Grand Jury deposition, 1998

Weekly percentage performance for the major indices
Based on last Friday's official settlement...

INDU: -6.2%
SPX: -6.9%
NDX: -5.2%
COMPQ: -6.1%

Tuesday’s market action was similar to the entry point I discussed in Monday night’s letter, a big spike in capitulative selling. I upped my long exposure this week from 5% to 8%. I also made a chicken buy and sell on the QLD, so my exposure was a touch higher for about three hours. As you know I have been suggesting adding exposure when the market eases towards the lower end of its range, and now that we are down near the November lows, I’d say that it is time. I’ll be looking for quality names to increase my long exposure, and hope I don’t get blitzed in another series of new lows.

This quote was from midday Tuesday, courtesy of David P. Nicoski at Vermillion Research:

“I just want to inform you all that the breadth of the volume is 25 to 1 on the downside. This is an extreme level based on historical volume breadth ratios. On November 20th of 2008 the ratio was 100 to 1 on the downside. I would consider this to still be an extreme level as concerns regarding the stimulus and financial bailout continue with more unanswered questions.”

Nationalize The Banks!
Christopher Dodd said it, but others have repeated it, and the market certainly took it as a bad omen this week. The thought of nationalizing the banks drove the financial stocks down dramatically during the week. If you owned one share each of Citigroup, Wells Fargo, and Bank of America, you wouldn’t have enough money to buy lunch at McDonald’s for a family of four. Eighteen months ago this same basket of stocks would have allowed you to buy a nice steak dinner for two, a bottle of wine, and still have a couple of shekels left over to tip the valet.

Remember, in a bear market it’s never too late to sell!

Politics as Usual?
I was fortunate to be invited to lunch last week with former Tennessee Congressman Harold Ford, Jr. Mr. Ford provided great insight into the ongoing political struggle faced by the new administration. Mr. Ford feels the new team really needs to get more on its game in coming weeks, since they have been “called for delay of game twice without leaving the huddle” so far. Let’s hope Mr. Obama can get things going now that he has his recently approved stimulus package in hand.

A good start would be keeping Mr. Geithner away from the microphone.

Bailout in Pictures
The chart below, from Bloomberg and the NY Times, was recently posted by Barry Ritholtz. I’m not sure it needs much explanation.

The Empire Manufacturing index was down 34.7 vs. a -23.8 estimate and set the market into a tailspin Tuesday morning. This is the lowest level of manufacturing in New York since this measure began in 2001.

Capacity utilization (shown below) came in at 72%, roughly in line with consensus. As you can see from the chart, capacity utilization is down near the lowest levels of the past 40 years. Idle manufacturing capacity typically coincides with excess workforce capacity and layoffs. I consider this to be a lagging indicator.

Producer prices climbed 0.8% (0.4% ex food and energy) vs. expectations of 0.3% (0.1%) in January, following a 1.9% drop in December. Autos, communications gear, and pharmaceuticals showed priced increases in the face of slumping sales. The year over year change was a decline of 1% vs. an expectation of -2.4%. The core (ex food and energy) year over year change was an increase of 4.2% vs. the 3.8% expectation.

CPI was flat year over year vs. an expectation of -.1%, and was up 1.7% ex food and energy vs. expectations of 1.5%.

First time jobless claims of 627K we basically in line with expectations of 620K, however, continuing claims are now nearly 5 million.

The Leading Economic Indicators (see chart below) increased 0.4% vs. expectation of 0.1%. This January figure is the second straight increase, although November and December were revised down this week. The second half of 2008 declined at a 3.7% annual rate. Once again the largest contributor was the growth in money supply (see last week’s M2 chart, http://weeklymarketnotes.blogspot.com), then interest rate spreads, consumer expectations, manufacturers new orders for capital goods, and new orders for consumer goods. The negative contributors were unemployment claims, building permits, average weekly manufacturing hours, stock prices, and supplier deliveries. The index would have dropped without the increase in money supply.

Roughly 80% of companies in the S&P 500 have reported earnings so far this quarter, and profits on average are down 33% over a year ago. According to Bloomberg, this will be the sixth straight quarter of decreasing profits, the longest streak ever.

The auto makers were back in the spotlight this week as Chrysler and GM went back to Capital Hill in an effort to get more funding from the government. In a rare act of contrition for a politician, former President Clinton said “Has the union made mistakes? Of course. But also the world changed, and frankly the political system kept ratifying the status quo for them. And I’m not pointing fingers. I was a part, we all have been.”

I have seen estimates as high as $100 billion to keep these two going.

Digital TV
The long awaited cutover to digital TV from analog finally occurred and, as expected, not one of my TV’s worked after the cutover, and they are all digital. The cable guy, who was obviously an inspiration for Jim Carrey’s role several years ago, informed me the timing of the failure had nothing to do with the cutover to digital, but instead was a result of my electrician installing the wrong amplifier. I felt like a college kid on an illegal substance when my coffee spewed out of my nose while I tried not to laugh uncontrollably. After I regained my composure and control of my coffee-soaked sinuses, I started looking in his tool bag for a hidden camera. You can’t make this stuff up.

Trump Card
We couldn’t call this a recession without a Trump entity filing for bankruptcy, and right on cue Trump Entertainment filed bankruptcy this week, four years after the predecessor company did the same. The Donald wasn’t around for this filing, having quit the board a few days before the filing.

Gold Performance

While the government reassures us that printing billions of dollars, taking on trillions in new obligations, and allowing the deficit to soar with a new stimulus package are in no way inflationary, the market seems to be ignoring this reassurance. The price of gold has risen 48% off its October low. Readers who have been with me since the fall will recall that one of my long running suggestions (along with high quality stocks) has been a healthy allocation to gold to protect against what I feel is an inevitable inflation and/or debasement of the dollar. The chart below is the GLD ETF, which corresponds to 1/10th the price of an ounce of gold.

Tax Revolt?
From Kevin Depew at Minnyanville.com:

“In the U.S., as bailouts and "economic stimulus packages" continue, and ultimately fail, inevitably the question will arise as to why it makes sense for, say, the citizens of one state to subsidize via federal tax payments foreclosure relief for citizens in other states, or banks located hundreds of miles from them, or auto companies, or the airline industry. The list goes on and on. There are individual counties in the state of CA right now asking that very question about the state government right now.”

Smoking & Taxes
Cigarettes may suffer the biggest drop in usage ever due to higher federal and state taxes on smokes. No one tries to stop cigarette taxes from being raised anymore; however, SCHIP (State Children’s Health Insurance Program) expansion will raise the federal tax by $.62 to over $1 per pack. This would push the cost of a pack of cigarettes to over $5. In a microeconomic test of the Laffer Curve, usage should drop enough to threaten $37 billion in municipal bonds now being backed by those taxes.

It has been shown that consumption declines 5% for every 10% increase in cigarette prices. George H. Bush would call that voodoo economics. Is this a government conspiracy to extend life spans so they can tax us longer in an effort to balance the budget?

This is where I Draw the Line!!!

New York, Oregon and at least 16 other states are considering increasing the surcharge on beer, wine and liquor. Kentucky raised taxes on all store-bought beer, wine and spirits. If I were those politicians, I’d reconsider this strategy. While raising taxes on smokes might save lives, raising taxes on booze is going to result in a more sober public, something the pols can hardly afford to face in this economic environment.

Keeping the people stewed and pacified might be a better strategy than balancing the budget.

More Market
From a PM friend who is more bearish than me: “S&P futures this morning are indicating another sharp decline. Year to date, the stock market (using the S&P 500 as a proxy) is down over 13 percent and is approaching the low of 752 last November. I think it's likely the market breaks through this low and continues to slide.

I previously stated that I wouldn't buy into this market unless we saw stabilization in the economic outlook (not yet) or the S&P taking a big decline ... at least below the 750 level. At this point, "at least below the 750 level" means at least "way below." Remember that during period of severe economic stress, the stock market has dropped to below book value. Book value on the S&P 500 is 525, so there is plenty of room to fall. Earnings estimates are continuing to drop, so expectations still don't match reality.”

Even More Market

Miller Tabek put out some potential earnings estimates, price levels, and downside for the S&P 500, and I must admit they are quite scary. Input these into your planning models and try not to reach for the Zantac:
$60 x 11x = 660 -15.27%
$55 x 11x = 605 -22.33%
$50 x 11x = 550 -29.39%
$45 x 11x = 495 -36.45%
$40 x 11x = 440 -43.51%

LDS Applied Analytics is reporting that the delinquency rate of jumbo loans to prime borrowers written in 2008 has jumped to 2.6%. Jumbo loans are those bigger than what Freddie or Fannie back, $417K in most areas but as much as $729K in some areas. The average FICO score for jumbo loans written in 2008 was 762.

Merrill is reporting that home builders have finally aggressively cut their production of single-family homes to a pace “well below underlying demographic demand.” They feel we are finally in the last chapter of home price deflation, albeit a very long chapter.

Video Link
I thought that this three minute video was a bright spot in an otherwise dreary week of news: http://www.youtube.com/watch?v=42E2fAWM6rA.

From the Mouths of Former Fed Chairmen

Paul Volcker said that the pace of global economic deterioration may be even faster than in great depression. Industrial production in most countries is going down faster than in the US. He also said that capitalism will survive this crisis, in most respects.

Disappearing Dividends
Bob Bronson (see link to his site at http://weeklymarketnotes.blogspot.com) said that 4th quarter 2008 dividend reductions in the S&P 500 were a record $15.9 billion. He states further that according to Standard & Poor’s, the record has been broken about halfway into the first quarter, with 26 companies cutting dividends by $16.6 billion. More cuts are on the way (see chart below).

Thank You
I want to thank all the vendors, brokers, independent research providers and of course all the readers who are kind enough to continue sharing information with me to keep this weekly note going. Also, I appreciate everyone’s input, which has been invaluable in creating a knowledge base to share with other readers. Thank you!

I had an email from a reader last week asking why I don’t create a job listing spot on my website. I am happy to do so if there is enough interest. Let me know.

Good luck this week. As always, if you’d like to be removed from this list, just let me know. If you want to see older posts, they are available at http://weeklymarketnotes.blogspot.com.

All the best,


Ned W. Brines
O (562) 430-3232

Feb 16, 2009

February 16, 2009

February 16, 2009

“If the last 15 years has taught us anything, hasn’t it taught us that asset classes can be incredibly mispriced, along the lines of the 35 times inflated earnings for the S&P 500 in 2000?”-Jeremy Grantham

Weekly percentage performance for the major indices
Based on last Friday's official settlement...

INDU: -5.2%
SPX: -4.8%
NDX: -3.2%
COMPQ: -3.6%
RUT: -4.8%

I have long maintained in these notes that we would have a sucker’s rally followed by a pullback, and that is exactly what has occurred as we are moving close to the intraday low of November 21st and erasing the gains of December to early January. The chart of the S&P 500 below shows the trading range of roughly 800-975 we have been facing since the end of September. I have been suggesting fading the market at the top of this range and becoming more exposed near the bottom of the range. While we could experience a breakout in either direction from this range (my bias would be down), I will maintain this range-bound view until the market makes a sustainable move beyond those areas.

With the market falling a whopping 48% from the high of October 2007, many have suggested that the market is now cheap. If you have followed my thought process (I know, sometimes that’s like following a humming bird), you know that I am a proponent of longer term PE multiple compression caused by higher rates (see inflation and stimulus discussion in prior notes at http://weeklymarketnotes.blogspot.com). The chart below, courtesy of Bob Bronson at Bronson Capital Market Research, shows that we entered a period of declining PE ratios in mid 1999, and that he expects this cycle to bottom out somewhere near 7-10 times earnings from a current level in the mid-teens. Bob also maintains that over the past 138 years the movement in PE ratios can explain 50% of stock market returns.

I want to apologize to readers as apparently my political commentary has been interpreted as overly critical of the new President and his team of tax dodgers. I want to set the record straight that while I am a registered Republican, I try to deliver an equal dose of cynicism towards both parties because, let’s face, they are both completely incompetent. I feel that both parties are heavily and equally responsible for the economic mess we are now facing, yet not only will neither party them take any responsibility, they grandstand on C-SPAN while berating other contributors to the crisis. I’m not sure what label I could place on my political views, but I guess that Libertarian would be the closest. I abhor the graft and inefficiencies of the bureaucracy whose only success is in perpetuating itself. This note is meant to be apolitical, really just commenting on the actions of the government which impact the economy and markets.

Global Trade
It’s no secret that global trade has been slowing. John Mauldin of Millennium Wave Advisors, LLC produced the chart below showing the percentage change (quarterly) in global merchandise exports and global industrial production. As you can see, the rate of change has fallen to almost -15% since late 2007.

I have discussed the Baltic Dry Index (“BDIY”) in many prior notes. Bloomberg is reporting that the BDIY has bounced over 100% this year, fueling the currencies of commodity based economies such as Canada, Norway and Australia as investors look for some signs of economic strength. The BDIY has long been considered a leading indicator for commodities and may be being benefitting from the economic stimulus now being implemented in China. While the bounce is impressive, the BDIY is still 85% off its May 2008 peak of nearly 12,000.

Congress approved a $787 billion bailout plan which includes $500 billion in new government spending and $280 billion in tax breaks. While there was much grandstanding about stacking $100 bills to the moon, the reality is that the plan was really rushed as Congress and the Administration 1) want to look like they are addressing the problem and 2) are absolutely quaking in their boots that the economy might turn around without any of them taking action and therefore not being able to claim victory. Too Machiavellian? OK, then they wanted to rush in so they can’t get blamed for inaction if the economy takes another major leg down.

Tim Geithner, one of the men who will be spending your tax dollars (not his own since he doesn’t actually pay his tax bills) announced the “details” of a $2 trillion plan to unlock credit, although he neglected to provide any specifics. Part of his discussion revolved around a $1 trillion fund to buy illiquid assets and another to issue credit to consumers and businesses. He also discussed providing additional funds to banks, but this time with limits such as not using the money for corporate airplanes or bonuses. The biggest question, as with the initial plan in the fall, is at what price will these assets be sold? In general, the whole thing looks like a bigger version of last fall’s plan, but with a new name (Financial Stability Plan).

While we haven’t seen the details of the plan, one feature being discussed is a strategy to subsidize interest rate reductions by the mortgage loan servicers who handle mortgage payments. This would allow them to lower payments without shortchanging investors. If you remember, I suggested a similar plan in a note last fall, however, my twist was to make the investor eat some of the rate cut since it would probably be offset by the increased value of their mortgage pool now that the odds of default would be lower.

One of the scary aspects being discussed is that the administration would like to allow judges to change loan terms, effectively eliminating contract law, one of the backbones of our free markets. This so called “cram down” authority would kill the secondary mortgage market and raise rates for any new borrower since mortgage investors would require a higher interest rate to compensate for their inability to foreclose in the case of non-payment. The loans would effectively move from a classification of secured loan to an unsecured loan, and therefore would have to carry a higher interest rate to compensate the lender for the increase in credit risk.

I just want to double check my math here. The plan calls for $800 billion in stimulus to create or save 4 million jobs=$200K per job, at a cost of $26K per family over the next 10 years. How about this plan for stimulus: save ½ and give the 4 million people who will get these jobs $100K each. That should help get consumer spending going and keep them in their homes.

This week’s embarrassment had to be the perp walk of top bankers, who were getting ripped by Congress of all people. One Congressman berated the CEOs and asked why they haven’t been prosecuted. I mean, really, Congress is doing their best to blame the rest of the world for problems they helped to cause by their lack of oversight and their own greed, and yet have the nerve to go on TV to grandstand and attempt to humiliate (if that’s possible) these CEOs?

In response to the haranguing, Citi cancelled a $50 million jet that was already ordered, killing off more jobs at Lear or one of the other manufacturers. I guess we can surmise that the corporate jet market is definitely not one of the preferred businesses that the government wants to save in its new jobs program. Additionally, in a threat to my free beer and peanuts with baseball tickets I discussed last week, Citi is being pressured to end their naming rights deal with the New York Mets’ new stadium.

Expert Commentary

The second part of Jeremy Grantham’s year end commentary is now available, and I suggest reading it if you have time. There is a link on my site (http://weeklymarektnotes.blogspot.com) that will take you directly to Jeremy’s site. You will have to create a log-in ID to read the report entitled “Obama and the Teflon Men, and Other Short Stories” part 1 & 2.

Last week I included a chart showing the rapid rate of job losses during this recession. The chart below shows the unemployment rate since 1948 and how it has spiked in the past six months to 7.6%. Many experts feel the “real” rate is closer to 13%, but I think that you can see we are approaching nose bleed levels with no signs of abatement.

The Federal Reserve is looking to add more primary dealers to prepare for the surge in treasury issuance that will be coming later this year, possibly up to $2.5 trillion versus $892 billion in 2008. Primary dealers are banks that deal directly with the Fed on new debt auctions, and are required to bid at these auctions. The number of dealers has fallen recently with Lehman, Bear Stearns and now Merrill Lynch exiting the pool. The number of dealers peaked at 46 in 1988, but has since dwindled to twelve.

Misc Quote
One reader sent in an email this week with the following comment: “My brothers have a boat dealership in Florida and sales for December were only 10% of their December average for the last ten years. Fortunately, they started to see a substantial uptick right after the first of the year but things are still relatively slow...just not as catastrophically slow as they were.”

Credit Market Thaw?

Bloomberg is reporting that high-yield issuance was approximately $2.4 billion this week, the highest since the week ended June 26th. Spreads on junk are the lowest they have been since October, but still sit above 1600bps (16%), with the absolute yields in the 18% range. According to Merrill, the yield on investment grade debt is 520 bps over treasuries, the lowest since October 7th. Could this be another (see last week’s note for a discussion of the TED spread and other credit market leading indicators at http://weeklymarketnotes.blogspot.com) sign that the credit markets are beginning to function more rationally?

It shouldn’t be a surprise that capital is moving given the massive increases we have seen in M2 growth. The chart below shows the year over year change of M2.

Not that the ratings agencies are worth a darn, but it is interesting to note that Amazon.com had their debt upgraded to investment grade this week. I can’t remember the last time I saw that occur for any company.

Consumer Credit
Citi announced that their charge-off rates on loans jumped to 7.8% in December from 4.2% in December 2007. American Express’s charge-off rate rose to 7.2% from 3.3%, and BofA’s rate increased to 8.5% from 5.2%. The new stimulus plan may push for more consumer lending, but with charge-off rates climbing, it appears that only the government itself would be foolish enough to extend consumer credit in this environment.

DigiTimes reports that Taiwan-based thin-film photovoltaic (PV) module makers are being asked by clients to renegotiate contract prices to lower levels because prices for thin-film PV modules on the spot market have dropped to levels 20-30% lower than the contract prices, according to industry sources. Spot prices of amorphous silicon (a-Si) thin-film PV modules have slipped to $1.5-1.6/watt for energy conversion rates of 5-7% and to $1.7-1.8/watt for those of 8-10%, the sources pointed out. As most of the existing supply contracts of a-Si thin-film PV modules were signed in the first half of 2008 when spot prices for such products stood at $2.5/watt at least, Taiwan-based makers are being asked by clients to lower the prices of their existing contracts, the sources indicated. While bad for the manufacturers, this decline in pricing could drive solar towards grid parity (i.e. the price point where solar is as economical as natural gas powered electrical production) and eventual mass adoption.

More Harvard
The university’s $29 billion endowment fund sold 67% of its stocks in the 4th quarter of 2008. From July-October the fund lost 22%, and may have fallen over 30% for the year ended this coming June.

Advanced retail sales climbed for the first time in 7 months, up 1% and up 0.9% ex autos. Spending on food, clothing, and a rise in gasoline are being credited with the increase. Declines were noted at building materials stores, furniture outlets, and department stores. Online and catalog sales rose 2.7%. Consumer spending is anticipated to drop again this quarter, which would be the first time purchases declined three quarters in a row since record keeping began in 1947.

The average cost of regular gasoline rose by $.10 to $1.78 a gallon. If you live in California, you know that gasoline is quickly running back towards $2.50. Add to that the discussions in Sacramento about raising taxes all over the board, and I’d say that any tax relief you may receive from the Federal relief fund is going to go straight to Sacramento. Tax increases now will kill any chance of recovery in the Golden State, whose politicians may be more corrupt and incompetent than those in the US Congress. In response to the weakness in tax receipts, the Governator has threatened eliminating 20K state employees, joining the long list of corporate layoffs we have been witnessing.

Jobless claims once again worse than expected, 623K vs expectations of 610K. Business inventories dropped 1.3% vs. expectations of a 0.9% drop. The University of Michigan consumer survey came in at 56 versus expectations of 60.

Email Exchange
This is a quote from an email exchange I had with another PM. The comments are my response to a market positioning question. “I'm actually 5% net long. I'm not pretending we are in a bear or bull market, just a range bound market whose direction will ultimately be determined by the prospects of the economy-which I feel are better than three months ago but still very poor. I think we are past the "crisis", at least the most recent one, and have probably seen the lows in the market (assuming there aren't anymore systematic shocks coming), however, this doesn't mean we are anywhere close to either an economic or market recovery. In my view, the actions of the Fed and now the new bailout plan will have little impact on the economy, but will sow the seeds for long term currency devaluation, higher taxes, lower growth, and inflation. All of these will impact the long term multiple of equities and make credit much more expensive, placing a damper on any equity market or real estate recovery. I believe that stock picking will be very important, especially given the indices probably won't provide any meaningful return for a long time.”

I have commented a number of times in prior notes about those pesky Somalian Pirates and their devilish activities. It seems they may have recently met their match this past week as a Russian warship captured three of them off the Somali coast. According to Captain Igor Gygalo, the “detainees were in a state of narcotic intoxication.”

More Baseball
Spring training travel package sales are down 25% from last year. I don’t think that will bode well for the MLB given some of this year’s blockbuster pay packages. Something tells me my free beer and peanuts are going out the window fast.

The upcoming week is packed with economic releases and option expiration. The markets have been down five of the past six weeks, however, the VIX has calmed down and the selling doesn’t seem to be panicked. I’d rather see some panic selling in order to increase my long exposure. I’ll keep my very slight long position and add to it when either the market shows some intermediate signs of capitulation or it moves to the lower end of the more recent trading range.

Have a great week. Remember to check the link to Jeremy Grantham’s quarterly letter at http://weeklymarketnotes.blogspot.com.



Ned W. Brines
O (562) 430-3232

"The problem with socialism is that eventually you run out of other people’s money." -- Margaret Thatcher

“An economist is someone who sees something happen, and then wonders if it would work in theory.”-Ronald Reagan

Feb 9, 2009

February 9, 2009

“The problem with America is that it’s run by investment bankers, mostly from the same bank. How can Americans stand for it? Is Barack Obama from Goldman Sachs too?”-Sumit Kotari, Malaysian cab driver, in a conversation with William Pesek of Bloomberg News.

“During difficult times, the government should pay people to dig holes and then fill them up again”-John Maynard Keynes

Thank you to the twenty-eight of you who emailed asking why this week’s note didn’t arrive last night and to those who asked if I was alright. I am fine, thank you. My family and I went to Mammoth last Thursday, and didn’t get back until this evening. The snow was great, and the crowds were sparse. Also, to the one very funny email I received asking for a subscription refund, I’m sorry but my wife spent your $1 this weekend. You can try to get it from her, but after 15 years of marriage I have found that once a dollar gets into her hands, it isn’t coming back. Good luck and please let me know if you figure out how to get it back from her.

Economic Woes
Mammoth wasn’t all play for me this weekend; I was also working hard for all of you. I spoke with numerous locals, retailers and seasonal employees regarding the local economy, and the feedback was uniformly bad. Restaurants and shops started closing late last spring, and that trend has accelerated recently. It appears to me that about 1/3 of the retail doors in the Village were out of business. Intrawest (“IDR”), which recently purchased Mammoth from the McCoy family and another investment group, is apparently really struggling under the debt load they placed on the resort. Their response to the softness has been to lay off employees at the mountain and raise prices dramatically, which has further stymied the visitor count. I wouldn’t be surprised to see the family or another group step back in and buy the mountain back for a fraction of what IDR paid three years ago. In another twist to the story, IDR was purchased in 2006 by Fortress Investment Group, an alternative asset manager who has seen their market value plummet from a high in February 2007 of nearly $4 billion to $750 million as of today’s close.

The economic data points continue to limp in, however, based upon the market’s reaction (actually, it’s lack of reaction) it appears that some of the economic ugliness may finally be priced into the market.

Employment is an absolute disaster as initial jobless claims came in at 626K vs. 580K expectation, and the unemployment rate spiked to 7.6% vs. 7.2% in the prior month. How bad is the employment picture? Take a look at the chart below (courtesy of Barry Ritholtz) showing how the job losses this recession compare to those of prior recessions.

The ISM manufacturing index came in at 35.6 vs. the 32.5 estimate, which was also an increase from the 32.9 of last month. A measure below 50 indicates that domestic manufacturing is contracting. This month’s indicator suggests that there was a probable broadening of weakness in manufacturing as inventories expanded. Expanding inventories typically lead to further slowing in manufacturing unless there is a dramatic uptick in consumption, which doesn’t seem likely given the employment situation.

The ISM non-manufacturing index was 42.9 vs. the 39.0 consensus (again, under 50 is recession territory) and vs. 40.1 the prior month (December). The market reacted positively to this information as investors began considering that the rate of decline could be slowing. This second derivative of growth is a popular metric the market focuses upon, and one I will monitor closely.

More Keynes

This quote came from NPR: “Prescribing Keynesianism to some politicians is like prescribing crack to a coke addict. In the 1970s, the patient hit rock bottom. The U.S. had high unemployment, and the Keynesian solution stopped working. The national government spent and spent, but unemployment only got worse. Then came inflation, something Keynesians had no answer for.” I bring up Keynes this week since his theories are being relied upon as the rationale for the stimulus package being bandied about Washington.

I have mixed emotions about the stimulus package. At the risk of sounding like a three-handed economist, on one hand I see the need for a coordinated global stimulus plan to keep the global economy from completely seizing. On the other hand I think it’s about time we paid the price for all the over-spending (personal, corporate and government) of the past thirty years, and somehow additional spending doesn’t seem to be the proper cure. On the third hand, anything coming from Washington flat out stinks, except for the hilarious C-SPAN clips of Senators calling Wall Street executives stupid, greedy, and morons. I hope I can say this out loud, but wasn’t it the role of Congress to regulate the financial markets? If Congress had taken this role seriously, we wouldn’t have to endure endless hours of their grandstanding over this stimulus plan.

One of my favorite retail analysts and very old friend Tom Filandro of SIG, said last week that “An additional headwind facing specialists this January is the fact that gift card sales likely declined at a minimum of 5-10% this Holiday season, which meant lower overall post-holiday redemptions. The good news is January typically accounts for only 5-10% of annual sales, and it does appear inventories are well contained, in particular for forward deliveries of transitional spring floor sets. For January, we are forecasting a sector comp decline of 4-6% (vs. -2.7%), which would represent the seventeenth consecutive month of sector comp store sales declines.”


Technology stocks rallied last week in spite of very weak December Semiconductor Industry Association data that showed revenue down 6.5% in December on unit declines of almost 14% and ASP (average selling price) increases of 8%. The worst markets were flash, DSP, and microprocessors, all down in the 35-42%. There were many calls on Wall Street that a turnaround is coming as early as mid-year. Since peaking in January 2006, the Philadelphia Semiconductor Index (SOX-see chart below) has fallen 59% and has also fallen 58% from the July 2007 high. Using either date, it seems highly unlikely that the worst downturn in the history of the semiconductor market would end in such a short time period. During a normal cyclical downturn this would be a logical time to start bottom-fishing, however, as time progresses I think we are all seeing that this is anything but a normal downturn.

Supply & Demand
According to NAND memory (the memory in phones, iPods, etc) maker SanDisk, prices declined by 70% year over year as demand waned and overcapacity continues to pressure pricing.

Crude and gasoline inventories rose last week above expectations in the face of continued softening demand. Crude oil inventory rose by 7 million barrels versus an estimate of 3 million barrels.

The TED spread has fallen under 100bps (see chart below), a level breached in August 2007 during the early stages of the financial meltdown. Remember that the TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) is a measure of perceived credit risk in the economy. When the risk of bank defaults is considered to be decreasing, the TED spread narrows. After peaking in early October at nearly 500bps, the TED spread has moved back towards normalcy, suggesting that the credit markets continue to thaw. Improvements in interbank lending precede improved commercial and consumer lending, although the timing of this improvement is a question.

During January the worst performing sectors were financials -27%, industrials -13%, telecommunications and consumer discretionary -11%. The best performing sectors were more defensive, with utilities and health care each down 1%.

After peaking at 5500 in May 2008, the Dow Transports have fallen 42% to a recent low of 3000. DOW Theory would suggest that these early cyclicals would need to rally along with the Dow Industrials to confirm a new bull market. Although the index jumped a bit last week on news that UPS would be cutting costs in the face of soft shipments, it still hovers near it’s low and hasn’t shown any significant improvement (see chart below).

Housing & the Economy
From the Wall Street Journal: “In the typical severe financial crisis, the real price of housing tends to decline 36%, with the duration of peak to trough lasting five to six years. Given that US housing prices peaked at the end of 2005, this means that the bottom won’t come before the end of 2010, with real housing prices falling perhaps another 8-10% from current levels.”

They continued “equity prices tend to bottom out somewhat more quickly, taking only three and a half years from peak to trough-dropping an average of 55% in real terms”. The S&P has dropped by that amount, but three and one-half years from peak (Sept 2007) to trough suggests a bottoming in early 2010.

Pending home resales jumped 6.3%. in December versus November and 2.1% year over year. Month over month strength was noted in the South and Midwest, while the West and Northeast showed further declines. Year over year the Northeast and Midwest were weak (both down double digits), the South was slightly up, and the West was up 18% on big foreclosure sales. Bank seizures have resulted in 19 million homes in the US standing vacant at year end.

According to Zillow.com, US homeowners lost approximately $3.3 trillion in property value during 2008. Additionally, they report that 1 out of 6 homeowners owe more than their homes are worth. Sounds like more homeowners can be expected to hand over their keys.

Private Equity

I was fortunate to recently be copied in an email thread between some very astute investors. While they have asked for anonymity, they have been gracious enough to allow me to reprint portions of the exchange below (the opinion comments are not mine, but one of the writers):

Secondary private equity funds. Remember the University of Virginia dilemma from a few weeks back about their potential 75% allocation to private equity (EOTM 11/10/2008)? Distressed private equity sellers abound, with discounts at 30% to 70% of net asset value. Discounts reflect deteriorating corporate fundamentals and balance sheets, longer holding periods and the degree of undrawn capital, as capital has become scarce again.

(GTM Query: like the rest of the capital/financing markets, until the secondary markets “clear”, the primary markets will be moribund. Hard to sell a “new issue” at PAR (whether new PE Fund or newly issued HLT Bank Loan or new CMBS) when can buy seasoned, performing securities at 30 to 70....)

...With deflation setting in (last Friday's GDP deflator was negative for the first time since 1954), cash maintains its purchasing power, and can be drawn on as risky assets become oversold.
(GTM Parable Proxies: whether its “cash is king” or “keep your powder dry” or (per JPM above) “capital has become scarce” or “cash maintains its purchasing power”, the message continues to stay in liquid, higher-quality, shorter-duration assets in order to avail the opportunities (still to come) when ‘risky assets become oversold’.

My opinion only, but believe high-yield debt (yes, a risky asset) has, in 30 short days, gone from ‘oversold’ to ‘overbought’. I’m taking the 10%-20% ST capital gains, and moving back into the higher Investment Grade debt assets....

Additional update on Secondary Private Equity Funds:
Just got off the phone with JP Morgan and they are “running” to market this month a “NEW $500 million Private Equity Secondary Buyout Fund”. Pouncing on the opportunity they set up below in Geoff’s comment. A bit self-serving on their part, but I would agree with the opportunity given the mad rush by individuals, endowments and pensions to create liquidity. Many forced to raise cash because of the de-leveraging has left them with capital calls they cannot make.

Are You Kidding Me?
I don’t want to bash other managers, but this one is amazing. Bloomberg reported that a particular hedge fund manager (I’ll leave out the name) is planning on starting a new fund after halting redemptions on his main fund. Why did he experience such dramatic redemptions last year? He was down at least 88% last year on his $2 billion fund. Talk about an optimist. If he (or many others in the same boat) is able to raise capital after that performance, then maybe I should attend that open tryout for the Angels next month.

It Must Be Nice
Manny Ramirez turned down a two-year deal with the Dodgers for $45 million with a third year option at $15 million. The Dodgers appear to be the only team making Manny an offer. Scott Boras, Manny’s agent, is the king of extracting big money from MLB owners, but he might want to check the economic condition and advise his client that it might not get any better than this. If Manny doesn’t take the deal, I’ll do it for a measly $15 million and won’t disrupt the dugout. Someone pass that along to McCourt for me, OK?

In an immediate response to the $45 million savings, MLB announced an overall reduction in the cost of beer and peanuts at games. Hmm, let’s see, my choice was cheaper beer or watching Manny pout over only making $22 million? Better pass me another Coors Light. In fact, let’s get rid of every player making over $5 million per year and have the beer and peanuts included in the price of the ticket! Talk about a national pastime.

Six and Counting
In my 2008 predictions I said that one of the candidates would get involved in a scandal. While we didn’t see a scandal directly involving the new President (outside of a couple of terrorists as best friends), he is certainly cavorting with some unscrupulous characters (I know, that’s redundant when talking about politicians). Since becoming President, six people close to the President (Senators Clinton and Daschle, Nancy Killefer, Tim Geithner, Representative Solis and Governor Blajdovich) have been involved in some type of questionable or illegal activity, all of which were greed related. The number of tax evaders on the list is staggering. Tom Daschle forgets to pay $125K in taxes? You or I would already be handcuffed, not returning to our post after giving up a higher profile one. Let’s hope this situation gets better fast.

In his first act as the new emperor, Mr. Obama has mandated a salary cap on executives of companies taking public assistance. Who can blame him? Vanity Fair reported that Merrill paid bonuses equal to 95% of their $10 billion bailout money. They are certainly not alone as Bank of America paid out 75%, Goldman 120%, Morgan Stanley 100%, Citigroup 46%, Wells 32%, and JP Morgan 54%. This represents combines bonuses of $85 billion on $140 billion of bailout money.

In response to the President’s proposal, Goldman Sach’s CFO David Viniar announced the firm would like to pay back their TARP funds.

In a sign of the problems with our government oversight (or lack of), Senator Dorgan of North Dakota wants to introduce an amendment requiring companies that accept bailout money to make their bonuses public. ATTENTION SENATOR, THAT INFORMATION IS ALREADY PROVIDED IN PUBLIC COMPANY FILINGS! In an unrelated story, it appears that Senator Dorgan was recently challenged to a battle of wits, but the challenger later withdrew his request because he felt it unfair to do battle with an unarmed man.

Final Comments
Many readers who have a mandate to be fully invested and don’t have the option to either hold cash or short stocks have asked where the best places to invest would be given those constraints. I have often mentioned fading the market on strength (i.e. cutting back your exposure) and adding on weakness. I have also suggested adding to stronger companies, those which don’t need access to capital for the foreseeable future, those with stable revenue and cash flow streams.

More specifically, I would favor stocks and the debt of companies in defensive sectors (healthcare and consumer staples). If you are more bullish, you would also consider more early cycle sectors such as transports, and if you are more defensive you would consider utilities. Energy and financials are the two wild cards given their unique issues. I would dramatically underweight energy. In my view most financials are nothing more than a crapshoot, although I’d love to hear feedback from you on where you see opportunities in this sector.

I hope this finds you well. As always, if you’d like to be dropped from this list, please let me know. Additionally, if you would like to read older posts, they can be found at http://weeklymarketnotes.blogspot.com. As many of you found out, I posted some of the Super Bowl ads on the website last week. I guess I should do that more often as traffic on the site last Thursday and Friday was six times normal.

Have a great week and enjoy the long weekend. I will be sending next week’s note out on Monday night.


Ned W. Brines
O (562) 430-3232

“The best thing to give to your enemy is forgiveness; to an opponent, tolerance; to a friend, your heart; to your child, a good example; to a father, deference; to your mother, conduct that will make her proud of you; to yourself, respect; to all men, charity.” - Benjamin Franklin

Feb 4, 2009

Super Bowl Ads

Quite a few people asked about Super Bowl ads. The link below, courtesy of Hulu.com, will allow you to watch most of the Super Bowl commercials. Enjoy!

Feb 1, 2009

February 1, 2009

February 1, 2009

“If all the economists in the world were laid end to end, they still wouldn’t reach a conclusion”-George Bernard Shaw

Weekly percentage performance for the major indices
Calculated from last Friday's official settlement...

INDU: -.95%
SPX: -.73%
NDX: .37%
COMPQ: -.07%
RUT: -.19%

I had an annual dinner last week with a handful of friends from Business School. The conversation (and the meal) was great, and I enjoyed learning how my much smarter classmates have been fairing during these rough economic times. A senior investment banker friend made two comments which stuck with me during the meal. The first was how his firm plans major layoffs, which they will time just before bonus payments to avoid having to pay the newly unemployed for their work during 2008. That’s cold! The second comment was that he really felt last week’s note wasn’t my best because “it wasn’t as funny as usual.” As I always remind you, I’m trying, however, I only comment on what I see and sometimes it’s difficult to find humor in this economy, despite the stupid comments that keep coming out of Washington, Wall Street, and Main Street.

Super Bowl
Tonight’s Super Bowl was a lot like the past year in the market-lot’s of records and firsts (100 yard plays, safeties, six-time champions, 39 year old quarterbacks, one team’s first title game in 60 years, youngest coach to win a Super Bowl, etc). There were a lot of people not planning on watching tonight’s game (hello, Boston), and to those I say too bad. Outside of the Patriot-Panther game five years ago, tonight’s game was probably the best Super Bowl I’ve seen. Although there were too many penalties, there were so many amazing individual performances (and of course the great finish) that I marvel at what great athletes these guys truly are. How about a 100 yard interception return for a touchdown? What about Larry Fitzgerald, almost a footnote in the game until the fourth quarter, then showing how amazing he is with two great touchdown catches? And what can you say about Santonio Holmes? Was that an unbelievable catch with triple coverage, fully laid out, on his toes?!!!

Looking at the economics, the game generated roughly $150 million for the local economy, 22% less than last year’s game between the Giants and the Patriots. Long time and well-respected Goldman analyst Anthony Noto is now the CFO of the NFL (I’ve included him on this week’s list), and is facing the first downturn in the league since George Clooney played without a facemask. In a sign of the times, the league has reduced its payroll by 150 employees, and even cut prices on some tickets for this year’s big game. The advertising slate looked full; however, I didn’t see any big zinger, funny ads as in prior years. The only auto ads I saw were from Mitsubishi and Hyundai. Thankfully the Big 3 weren’t taking my tax dollars and spending them to encourage me to buy their product! I may be wrong, but GoDaddy.com seemed to be one of the big spenders of the evening. I’m not sure of the exact numbers, but I have been hearing $3 million (+) for a 30 second spot, of which there were 60 or so.

The Super Bowl stock market indicator says that when an original NFL team wins the Super Bowl, stocks should deliver a positive performance. This year both teams were original NFL teams, but the indicator should get a real challenge for 2009. The Super Bowl indicator stands in contrast to the Trader’s Almanac January Barometer I discussed a few weeks ago, which suggests that the direction of the market for the year is determined by how the market trades in January. This year, January was the worst for the S&P 500 ever, and according to Barron’s the worst for the Dow in 113 years. Although I’m leaning towards a flattish year (see my year end note), I’d say that the January Barometer will hold more sway than the Super Bowl indicator this year.

Stimulus or Politics?
The House of Representatives passed an $819 billion stimulus plan with zero Republican votes. This package is equivalent to 25% of the entire federal budget. The plan includes payroll tax cuts, jobless benefits, education programs, aid to the states, and infrastructure projects. Even in this time of economic crisis, the political infighting continued. The Republicans fought to eliminate cheap condoms for Medicaid recipients, and the Democrats pushed hard to give the National Endowment for the Arts additional funding. The CBO estimates that $526 billion (less than 2/3) will actually get into the economy by the end of 2010, estimating a 1.2-3.5% boost to GDP by Q4 2010. A provision related to my tariff discussions of the past few weeks was included, requiring all iron and steel used in construction projects funded by the bill to be produced in the US. The Senate has not yet voted on their version of stimulus, but should address it this week.

Both houses are motivated to get something done before they take their winter recess on February 13th. I doubt any of them wants to go home to their constituents without some type of plan to discuss.

With a few exceptions, most earnings reports had these comments: 1) we were surprised how quickly demand for our products declined; 2) even though we have zero visibility, we are lowering (or eliminating) our guidance for 2009; and 3) we are reducing our headcount by xx% in the face of declining demand.

American Express- “Our fourth quarter results reflect an operating environment that was among the harshest we have seen in decades... Nevertheless, we met our near term goals - staying liquid, staying profitable, and investing selectively to strengthen our competitive position over the longer term... We remain cautious about the economic outlook through 2009, and card member spending to remain soft with past-due loans and write-offs rising from current levels."

I guess people are staying home to watch movies because Netflix beat both earnings and revenues. These results make sense when you consider the performance of Wal-Mart during 2008, which held up remarkably well as people moved towards the discount chains to save money. Now NFLX is benefiting from a reduction in entertainment spending combined with the ongoing shift away from video rental stores.

IBM announced more job cuts. Texas Instruments missed estimates and guided down, yet the stock went up. Q-Logic also missed as tech stocks in general reported horrid numbers.

McKesson beat numbers and guided earnings higher as healthcare stocks continued showing relatively better results.

Amazon.com beats revenue and earnings estimates on stronger book sales and upside to the sales of Kendle, their electronic book reader.

ISI is estimating that US pension plans were underfunded by 29% as of 2008 year-end. If Aa corporate interest rates remain flat at 6% at 2009 year-end, ISI estimates that the S&P 500 must increase to approximately 1250 by year-end to bring pension underfunding to a more manageable 15%. Just as a reminder, the S&P now stands at 825, so 1250 would represent an increase of 51% from Friday’s close. I have discussed this issue in the past (http://weeklymarketnotes.blogspot.com), and expect continued pension problems to arise, resulting in earnings pressure on top of the pressures being created by weak sales.

Be very careful of your companies with defined benefit plans!

Surprise! GDP was down 3.8%, better than the -5.5% consensus, but that was still the biggest decline since 1982. An inventory buildup cushioned the decline, which otherwise would have been -5.1%. Consumer spending, which was down 3.8% in Q3, was down 3.5% in the December quarter for the first consecutive declines of greater than 3% since record keeping began in 1947. Prices rose 0.6% ex-food and fuel, and declined 0.1% including those items. Home construction slumped 24% in the quarter, while purchases of equipment and software dropped 28%. Nominal GDP (ex-inflation) was down 4.1%, the worst since 1958.

South Korean exports were down 33%, the worst since record keeping began in 1957 and almost 2x December’s decline of 18%. Exports to Korea’s largest trade partner, China, declined by 32% during the first half of January, shipments to the US were down 22%, 47% to the EU, and 36% to Latin America.

Home prices were down 18% in November in spite of government efforts to prop up this market (see Mortgages and Housing below for more comments on housing).

ABC consumer confidence was down to -54.

Durable goods orders were softer than expected, coming in at -2.6% vs. a -2.0% consensus. Ex-transports they were -3.6% vs. -2.7%.

Initial jobless claims were 588K vs. 575K consensus as the unemployment rate surged over 7%. The chart below shows the weekly initial jobless claims since 1999.

I have discussed some thawing within the credit markets over the past few weeks, but the big test is $245 billion of commercial paper purchased by the Federal Reserve in October beginning to mature this week. If the companies can roll that debt over it may indicate we are actually seeing an improvement in liquidity beyond that funded by our tax dollars. The chart below shows that there are still fears in this market, represented by the large spread in rates between top tier and second tier issuers.

Bad Loans
There has been much speculation about the second part of the bank bailout and what might happen. Some are anticipating a bailout announcement early next week that would include a proposal from FDIC Chairman Sheila Bair (who also wants to run the program) to create a “bad bank” that would take all the toxic loans from the banks onto it’s balance sheet (that bank, by the way, is funded by all of us taxpayers). If the government owns these loans, it gives them the ability to rewrite the mortgages that have created a large piece of the banking problem. Given that 80% of mortgages that have received relief have gone back into default, I’d say the government isn’t viewing this as a prudent investment of our tax dollars but instead an expensive form of social policy.

This over-commitment by the Fed and our government may be contributing to the weakness in the treasury market, which has seen 30 year rates back up significantly from 2.5% just before the year end to 3.6% as of Friday. Remember that I have been a proponent of higher interest rates, inflation and gold prices over the next few years; however, it appears the markets may be starting to recognize the inflationary impact of the Fed’s actions in spite of the current demand void we are experiencing today. The chart below shows gold’s performance (represented by the GLD, the gold ETF which is priced at 1/10th the price of an ounce of gold), which has increased by 5.5% this year.

Remember that inflation and high rates are the great killers of equity returns.

The house has drafted legislation to regulate the credit-default swap (CDS) market. CDS are derivative securities which act as insurance against a bond issuer defaulting. The prices of these derivatives move up and down based upon the perceived risk in the market place of various bonds and issuers. If an issuer defaults or otherwise fails to adhere to their debt agreements, the owner of the CDS is paid the face value of the bond, typically by a third party such as AIG (now you understand why AIG was in such big trouble-many of their issuer bonds were facing technical default, and Goldman was exposed to a ton of the AIG underwritten CDS). The market has evolved to one in which people trade the CDS without owning the underlying bonds, and the house is hoping the legislation will help control this speculation. While good in theory, in my view this only opens the door to other, less well-understood forms of speculation. Creating an exchange for these securities might make more sense. An exchange would at least increase the transparency (Wall Street speak for “seeing what the heck is going on”) into these securities.

Mortgages & Housing

The Wall street journal reported that the mortgage weakness has spread to the jumbo market, with 7% of jumbo prime loans now over 90 days delinquent versus 2.5% a year ago. Florida has the highest rate of delinquencies with roughly 17%, while California is slightly above the average at 8%.

From The Big Picture: “New Home Sales fell last in December 2008 to the lowest level on record — a seasonally adjusted annual rate of 331,000. Month over month, the drop was 14.7% (±13.9%), and year over year, the collapse was an astounding 44.8% (±10.8%) below December 2007. If we take the raw sales data (NSA), the level of home sales in 2008 was 482,000, the lowest since 412,000 in 1982, the WSJ reported.
Other data points:▪ The median sales price of new houses sold in December 2008 was $206,500. The average sales price was $246,900.▪ Seasonally adjusted estimate of new houses for sale = $357,000, a supply of 12.9 months at the current sales rate.▪ This inventory to sales ratio is a new all time high dating back to at least 1963.▪ 482,000 new homes were sold in 2008, a decrease of 37.8% (±2.7%) below the 2007’s 776,000.”
J.P. Morgan reported that more than 55% of borrowers with option ARMs are underwater, i.e., they owe more than their homes are worth. Unfortunately it looks as though housing’s problems will continue as unemployment rises and the economy falters.

Even More Loans
Jim Furey, the former small cap strategist at Lehman Brothers and proprietor of Furey Research Partners (www.fureyresearch.com), commented on the recent weakness in bank lending.
”Yesterday’s Wall Street Journal shouted page one headline: “Lending Drops at Big US Banks.” The article’s tone indicated declining loan balances was a bad thing and unexpected. To the contrary, every single recession has experienced a decline in Commercial & Industrial (C& I) loans. This recession will be no different, TARP or no TARP. We have been waiting for the decline to occur in this recession to indicate the end of the recession is nearer.”
He continued “Our point? Declining C&I loans is bullish. Forcing banks to loan money into the teeth of a recession would be throwing good money after bad.”
Thanks Jim. Check out his website for more information, it is full of Jim’s very rigorous quantitative work.

New Medical Disorder
Investment-deficit disorder is a phrase from this weekend’s NY Times to describe our national preoccupation with current consumption and lack of investment

I added a link to Jeremy Grantham’s 4th Quarter Letter on my site (http://weeklymarketnotes.blogspot.com). Jeremy is a great investor with a wonderful long term track record and is also a terrific writer. The note is long, but I encourage you to read it. BTW-this is the first time I’ve ever seen the word “obstreperous” in a financial note.

Those pirates are at it again, this time stealing a German ship w/ Bahamas flag. Apparently unsatisfied with the fall in oil prices, they have stolen a tanker of liquefied petroleum gas. This is the third vessel hijacked off Somalia this month. Last year there were 43 in all, 10 in November alone. I may not know anything about navigating a ship, but I do know that I would make every effort to avoid the coast of Somalia.

Quote(s) of the Week
Two quotes this week.

“If you want to raise a crop for one year, plant corn. If you want to raise a crop for decades, plant trees. If you want to raise a crop for centuries, raise men. If you want to plant a crop for eternities, raise democracies.”-Cal Schenck

“The difference between genius and stupidity is that genius has its limits”-anonymous

Final Thoughts
January is over, and I continue to recommend fading the market when it rallies and adding to strong positions when the market is weak. I continue to believe we are far from finished with this economic downturn, and that we won’t experience a robust, lasting rally for many years. Buy and hold will be a very difficult way to make money in this environment. If you must be invested, a disciplined strategy designed to take advantage of the markets volatility is prudent. Personally, I am still about 5% net long, but somewhat underinvested at 50% long, 45% short.

Have a great week. Good luck in February, which according to the Hirsch team is the worst month of the market’s best six months (November-April).

As I write this the Hang Seng is down 3%.


Ned W. Brines
o (562) 430-3232