Common Cents

America Uncoupled: Wall Street and Main Street at a Fork in the Road

"Because consumer spending traditionally accounts for 70% of all U.S. economic activity [GDP] and because the U.S. represents 25% of the world economy, it becomes mathematically evident that a frightening 17.5% of the world economy is dependent on the American Consumer".

The above "facts" need to be looked at in a new light.
- Is the US economy still 25% of the world or will it soon be 20%?
- Is the US consumer still 70% of the economy or with increased govt and saving rates is it 60%?
Taking the same math you used and maybe the us consumer is only 12% of the world.

Further
- What percentage of S&P 500 companies is dependent on the US economy? A few years ago it was 80% now maybe it is 50%.
- Within US consumer spending, isn't there an 80/20 situation with the top of the population spending most of the money. Didn't that part of the population go into a fetal position fearing "financial Armageddon" a year ago. Might they open their wallets a little this holiday season?

Net/net -Things are likely bad for the US consumer, and for that matter financial services professionals (i.e. Wall Street types)....but I'm not sure that translates directly to S&P earnings must fall or that the market must fall a lot from here. I've beleived S&P earnings will be forecast to be $80 in 2011. A 15 multiple means S&P 1200 will be seen within the next 12 months. It will not likely be a straight line up from here to there, but I also doubt we will see another huge drop.

The Inverse Relationship Between Performance and Volatility

One other point on the volatility data...I believe this is showing the change between the open and the close of the market. If you were to look at the range from high to low for the day the volatility would be much higher.
It would be higher in all periods but my guess is that taking this view of volatility would show even more volatility in recent years.

Also - ETFs are taking market share from mutual funds. Unlike mutual funds, ETFs trade during the day. Seems to me that can fuel more volatility.

As I said in my earlier comment, increased volatility means "active trading" can be more successful than buy and hold.

The Inverse Relationship Between Performance and Volatility

Good article which provides lots of food for thought.

While recent volatility is abnormally high, I think if you put a "regression" line on the S&P volatility chart above it would show volatility increasing over time. i.e if the average is .6% it looks like "normal" was around .4% 50 years ago and "normal" may be more like .8 or higher now. That makes sense to me when you think about all the computing technology, speed, rapid info distribution, etc that exists now.

While your attempt to "correlate" returns and volatility is interesting, I think what the upward trend in volatility really signals is that "buy and hold" is less effective today than in the past and that more active trading is more likely to be successful than in the past.

Still Wondering: Is S&P 900 or S&P 1100 Next?

Genesis - In general I agree with you that the outlook for hard assets/commodities is bullish. Also, I agree that the role of the dollar in the world economy is changing and should be a factor in an investor's actions. However, while it is easy to see challenges with the US economy and dollar.....it is harder to determine which currency can replace it as the key worldwide reserve currency. There seem to be as many or more issues facing the yen, the euro, the franc, etc, and the Chinese seem to be playing in their own/ different world as it relates to currency. So as I said, while the dollar should be a factor in an investor's thinking, I'm not so sure it is obvious it will become weaker vs. other currencies in the time frame addressed by this article.

WSJ 1930s Articles Show Eerie Similarities

Let me get this right......you find two quotes from the wall street journal ...and conclude that means the world is the same as 1930.

Could there also have been 2 or more "bearish quotes" somewhere in the journal in the same period?
Is there really a good statistical relationship between WSJ articles and stock market performance?
Could everything else in the world be just a "little" different than it was 80 years ago?


Net/net - I think the market's next major move will be lower as well...but trying to substantiate a market move on two 80 year old quotes....can't you do better than that?

Why the Transaction Tax Isn't Such a Terrible Idea

I'm for less taxes, but if we have to tax, I think making the capital gains tax a three tier format could be a good idea.
Something like
- Long term - currently one year - make it three years with a lower rate than today's long term rate.
- Short term - three years to two weeks - with rates similar to today's
- Speculative - less than two weeks - with rates higher than the top marginal rate.
I'm not sure there are too many valid business reasons for hedging/speculating that are less than a month in duration. "Wall Street" would scream but it seems to me it would not hurt the macro picture to slow down the churning of the markets. For example the volume/turnover of shares in C, Fannie...the past few weeks is hard to explain as "normal/good" for business/economy. This type of structure would make it less profitable to trade tick by tick but encourage true long term investing.

S&P: Hyper Exuberance Brings 66% Chance of New Lows Ahead

While I agree with your conclusion that it is a good time for "buyer beware" ...Comparing charts/stats of things that happened 30 and 80 years ago does not seem very valuable to me. Charting/TA/stats "works" because it represent the emotions/psychology/be... of market participants. In "normal" times it seems likely that those human traits recur frequently and hence looking at the charts might be somewhat helpful to traders. However, I'm fairly sure the emotions/psychology/be... of market participants is different today than it was 30 and 80 years ago.

For example, the perceived reason for the drop was different each time, the government's reaction to market drops was different in each case, the pace of information flow is very different, the world is a smaller place today, demographics are different, etc.. Factors such as this will cause market participants to react emotionally/psychologi... differently than in the past. Hence their behavior will be different and the chart will be different.

Your last analogy of a major storm is interesting. I would add that if the house is old and big when the big storm wrecks your house...you are less likely to build it backup.. If it is new and small ...it gets rebuilt...maybe even better than before. The demographics of investors in the US is older now. They may not have the energy/desire/time..to rebuild the house. The demographics of many emerging markets is smaller and younger....they may rebuild a new/better house.....so I'd continue to look outside the US for opportunities.

July Retail Sales: The Economic Storm Is Not Over

I agree with "In January 2009 consumer credit peaks. The consumer finally hits the wall right after Christmas 2008, and is forced to start paying down and defaulting his debt." In fact, I think "the world" hit a wall at the end of 2008, and everything just stopped. Lots of fundamental reasons for this situation, but mostly I think everyone psychologically froze because the fin services industry was running around saying the world will end any day now, and the US govt was in transition with a lame-duck in power and lots of uncertainty about the new guy. So it was "logical" for everyone/thing to go into hibernation and wait for awhile . This created a 2 qtr "hole" in GDP. That situation is passed. As you indicate, the US consumer will have scars from this episode for awhile, but the hibernation period will not turn into an ice age. Even if the US consumer is cautious for awhile, the masses of people in emerging markets won't have found the "financial crisis" to really have had any impact on their their drive for a better life. Their needs will be the engine for growth. Companies which survived during the 2qtr "gap" by drastic cutbacks, will start to have easier "compares" by q4 and less pressure will be felt in corporate America.

So instead of talking about the economic storm, I'd look at things as the hibernation of the US consumer may not be over yet, but many people are out of their caves in the other 90% of the world. Global companies that will provide goods and services to these masses, will be good long term investments and will ultimately provide the jobs/confidence for the US consumer to come out of hibernation as well.

Will the Efficient Markets Hypothesis Survive This Crisis?

EMH is dead in my mind. The proved psychological biases that you indicated and short-term computer drive momentum/manipulation seem to be overwhelming evidence that EMH is dead. How else can double digit percentage moves over the course of a week/month be explained. Information/fundamenta... just do not change at the rate.

While we are taking shots at "theory" I'll put my vote into the camp that says strategies based on "normal" distributions of price movements are not very helpful.

Was the AIG Bailout a Goldman Bailout by Proxy?

I'm not sure it is worth making this into a "conspiracy" theory. My view

GS was "smart" emough to buy "insurance" in a situation that they guessed might explode. AIG was "greedy" enough to sell it.

The govt got caught in the middle.

Dow Surge Ignores the Real Story in Earnings

"the Standard & Poor's 500 Index is likely to bounce around within 200 points on either side of 900 for the next six months or so"

This says the market will be up or down 22% in the next 6 months.....not too long ago people talked about 20% moves as a full bear/bull market....now it is just "bouncing around"

Should We Reinstate Glass-Steagall?

Generally I agree.

Also, if we just repealed this law couldn't we avoid/reduce the next 6 month debate on financial system regulation, and also avoid the cost/burden of the regulation over the next years/decades? Commercial banks would be regulated. Investment banks could be "unregulated" and take the risks/rewards that make capitalism the engine of growth for the world.

Aside from the pain created by "reversing" course, the only argument for continuing on the current path is that "other countries" banks "bundle" commercial and investment banks so US banks would be at a competitive disadvantage. I'm not sure if I believe that, but it does seem it would be better if somehow a global entity (G20, WTO, etc) could sponsor this type of change.

I'm not optimistic if any of this could happen, but it sounds good to me!

The Risk of Global Economic Meltdown

I think Mad Hedge Fun has a good idea upon which to develop some investment themes. Like him or hate him, I don't think you can say Obama is stupid. I think he does go to bed at night thinking about how to win in 2010 and 2012. I suspect the last stimulus that seemed to roll out slowly was purposely targeted to try to make things appear better next year in time for mid-term elections(vs now). Another stimulus could indeed be in the cards to hit the economy prior to the 2012 election. It could be along the same infrastructure/energy, health care, education theme, but I think it is more likely he will need to be package/sell it differently. Hence, I'd be watching to see what new buzz words start to surface and invest in those areas early. As far as inflation, I agree it is coming, but I think it will take much longer for the velocity of money to pick up. I'm not sure that will be the big issue for 2012 elections but probably well before 2016. I don't think investors need to be rushing to buy "inflation hedges" yet. There will be a few more dips in these hedges providing better entry points.

Buy and Hold Is Alive and Well

I'm not in favor of "active" trading, but you have to do much, much better than this analysis to "justify" buy and hold to me.

When "randomly" selecting these stocks in 1989....
Would many of these stocks even have been in the S&P 500 at that time.?
MSft - hmm...did you have a pc? use Windows/Office in1989?
Oracle--hmm- weren't they in the midst of accting scandals then? Wmt - was there one on every major corner, selling groceries in 1989?
Schwab - in 1989, online/discount brokerage must have seemed like a "safe" investment
Qcom - how often did you use your "cell" phone in 1989?

I'm also glad you didn't "randomly" include any great American companies of the 1989 era in your analysis such as ....Enron, Xerox, Kodak, Worldcom, Lehman Bros, AIG, Ford, etc, etc.

Your data seems to justify good stock picking. It does not support your conclusion to "buy and hold" an index.

TBT's Day Has Come

I agree with most of the thoughts above, and think rates have to rise. In q1, I sold most of my tbill holdings and built a position in TBT. That currently seems like that was a good move! (if only all my moves were that good...LOL).

So now what???

On one hand, the story still seems to be in place, rates have not risen too much yet, and tbt seems to mentioned as "a buy" almost everywhere - so momentum is strong. So I'm inclined to hold what I have and even add to the position.
On the other hand, there is always something to be said for taking some profits off the table, tbt seems to mentioned as a buy everywhere ..so perhaps this is getting to be a crowded trade.

While trying to decide my next step, I have tried to do some fundamental analysis to more logically determine an exit point. I'm not convinced I have a good valuation method for tbt. If 10-20 yr treasuries rise to 5 % (roughly a 25% change from here), does that mean a good sell point for tbt would be 50% up from here or somewhere over $70. I can use some technical analysis ..but even then... the history of tbt is limited.

So what do the readers think is a good "price target" or point to start taking money off the table? More importantly, what logic would you suggest to set this price?