Tacitus

Tangible Common Equity: How Much Is Enough?

Thanks for a good analysis and a great chart. I think TCE is a valuable gauge of solvency, but to me it has a number of flaws that require that regulators also consider a number of other factors. For example, and frankly contrary to one point you make, an awful lot of common shareholders are also fair weather friends; the buy and hold days are, for most investors, dead and gone. That means that bad news and a panicked sell-off can unfairly drive down TCE on a temporary basis even for the best managed bank imaginable. That fact needs to be accounted for. Secondly, actual deposits on hand have to be considered in assessing the health of any bank. BAC, for example, has nearly a trillion dollars in deposits, of which nearly $850 billion are essentially always on hand. That is not to say BAC doesn't have some big problems, but it puts them on a much sounder footing than Citi or another bank without such a vast depositor base. In my view, it is depositors, not common shareholders, who are more likely to stick with a bank through thick and thin.

Secular Bear Markets and a River in Egypt

You seem to have a short definition of "the long haul." Mine is a lifetime. During that long haul you increase your stock buys during periods exactly like this one, when the market is down, everyone is talking about how equities suck, there's blood in the streets, and great companies are selling for three times earnings, You decrease equities and build cash in periods like 2005-6, when nothing is cheap. Buy now and nine years from now you'll look like a genius. Buy munis or stay in cash and you'll look like an idiot. The market will snap back someday; it always does.

We Are Where We Are

I can't speak to Europe, but for the last two weeks in the US mortgage brokers and bankers have been working around the clock, seven days a week, fourteen hours a day, on new mortgages and refinances in the residential mortgage business. The are having trouble keeping up with demand. Fed policy and the money being pumped into the banks and the economy are beginning to stimulate the flow of credit, and the ice floes are beginning to break up. Another rate cut on 12/16 and we will be past the worst of it. That's not to say the economy will snap back instantaneously, of that we don't still have some major systemic issues to address, but there is beginning to be good news among the bad.

It's Not a Great Time to Get Into Stocks

I believe the bottom is in, but even if you prove correct and the real bottom is at 6800, that's only 700 below the bottom set on November 21 (Dow) or 50 below the bottom on the S&P. Meanwhile, there are excellent companies with hard assets (i.e., not solely financial assets subject to writedowns) selling for one-fifth or less of book value. The downside risk on these companies is negligible, even if the market drops to 6800 Dow or 700 S&P. At least as to companies like these, it's hard to make a very persuasive argument not to buy now.

Moreover, if the government is pumping in 3 trillion and you believe (as I do) that the stimulus is working, why do you feel the real bottom is at 6800? As the stimulus is seen to be working, where is the justification for the market turning substantially south? So far, the market has been discounting bad news and moving determinedly upwards. The only down days have come in response to multiple up days and thus look like corrections in an overall upswing. In addition, many important indices are at unsustainably low levels and simply have no more downside room. The BDI is down to 660 from highs in the 14,000 range. Shipping will simply come to a halt if that doesn't spring back some soon, and that's not in anyone's interest. Credit, which caused the BDI to crash, is already showing signs of loosening up. Mortgage brokers and bankers are already working around the clock on new loans and refinances. We are certainly not out of the woods yet, but the ice floes that have stalled credit are started to break up.

I agree that 15,000 was overpriced and we are not likely to see that number again any time soon, but it wouldn't surprise me if we get back as far as 10-11,000, and maybe even 12,000, some time next year, before things start heading south or at least sideways again.

Uncle Ben Signals the End Game

I've read some astonishing things on this site lately, but the idea that a recession that started in December, 2007, is somehow "Obama's fault" really takes the cake. In December, 2007, Obama was not only not the president, and not only not the Democratic nominee, he was in third place in the race for the Democratic nomination. So how exactly is he responsible for the current recession? Statements like this one do not exactly redound to the benefit of your credibility.

On the Best Time to Invest

I believe Jeremy Siegel's book Stocks for the Long Run had a chapter on calendar effects which discussed the November to April phenomenon, and a stockbroker author named Larry Williams also published a book in about 2002 called The Right Stock at the Right Time, which noted a number of calendar based patterns including this one, though it focused mostly on the decennial pattern of market tops and bottoms. As I recall, Siegel cited some academic work on this issue. I think Williams reported only his own research.

The more interesting issue is why the phenomenon exists. The most persuasive hypothesis I have heard is that the phenomenon is basically tax-related. That is, the end-of-year rejuggling of portfolios for tax purposes causes prices to spike in November, and the need to sell to pay taxes causes prices to drop in April. I suspect that the November buying spike is also associated with mutual fund managers needing to trade to improve on results that will be reported to shareholders in January. However, while the phenomenon pretty clearly exists, I'm not sure anyone will ever be able to prove exactly why it exists.