Market Generalities

When reading Seeking Alpha Friday, I couldn’t help notice that the most popular article was: Why the Stock Market Should Crash, by Charles Hugh Smith. With all due respect to Mr. Smith, and all the other doomsayers out there, I frankly just don’t get it. In my opinion, fear is a negative emotion that causes more harm than good. My favorite acronym for FEAR is: False Evidence Appearing Real.

Over the years, I have warned a seemingly countless number of undergraduates that Fed's hold on monetary independence was tenuous at best. Independence is not guaranteed by the Constitution. Congress made the Fed, and Congress can unmake the Fed. The Fed could only maintain the privilege of independence if policymakers pursued policy paths that fostered maximum, sustainable growth. Deviating from such paths would have consequences.

The Fed is quickly learning the extent of those consequences, as Congress launches an assault on the Fed's independence.

I have had a good day in browsing through the economic news, as I found three very interesting articles which together represent a consistent theme (although I say lucky, I mean only in the finding but not the implications of the content). The first of these comes from Ambrose Evans-Pritchard, the second Peter Schiff, and the last Liam Halligan. For the former, Ambrose Evans-Pritchard, I often disagree with his analysis, but can not dispute that he often identifies some fascinating stories on the economy. Today, I came across an article which is of particular interest, and some highlights are given below:

In a report entitled "Worst-case debt scenario", the bank's [Societe Generale] asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems. [this was exactly my argument at the time the first bailouts were being undertaken]

So, here we are. More than two years into what started out as a credit crisis, one plus year after the Lehman collapse and a question that pertains to the one of the central workings of the equities market cannot be answered.

At last evening's Market Technicians Association Educational Foundation seminar, the question your trusty moderator (that's me) posed to the esteemed panel with its decades of experience was in regards to volume. Specifically, the equity markets' volume as recorded each day for every stock traded. That is, the volume that accompanies the price action that results in the market capitalization of the stock market that results in the market value of every investor's portfolio.

This is a long article on the subject of oil and gas reserves and due diligence.

My purpose is to alert you to the revision of SEC Regulation S-K and Regulation S-X effective January 1, 2010. Concealed in a handful of benign new regs is a financial truck bomb that's going to blow away "proved reserves" as a meaningful metric of oil company assets.

By James Kwak

As everyone knows by now, Neil Barofsky, special inspector general for TARP, has a new report out on the decision by the Federal Reserve Bank of New York last Fall to make various AIG (AIG) counterparties (primarily some very big banks with names you know) whole on the the CDS protection they had bought from AIG to cover their risk on some CDOs. The potentially juicy bit has to do with the Maiden Lane III transaction (New York Fed summary here).

If you talk to someone who is in their early 40s, they are likely to tell you that they have seen two bull markets and two bear markets in their adult lives. Because their experience has conditioned them to expect that cycle to repeat, many of this vintage will tell you it is time for another bull market. In fact, older investors with much more experience may have a completely different perspective. For someone with 40 or 60 years of market experience, there may be a different possibility considered. Based on the longer time frames, the possibility of a long term bubble may be recognized.

Barry Ritholtz at The Big Picture (here) has a telling graph, courtesy of Ron Griess at The Chart Store.

I want to take a break from banking and macro stuff and talk a little bit about technology. I wrote an article about Android a few weeks back. That was a more personal account on why I was switching from a Windows Mobile phone to Android, the latest whiz-bang operating system running mobile phones. (Don’t ask me why I stuck with Windows Mobile for so long – even I don’t know any more). This article is looking at the Android phenomenon more from a strategic perspective.

You may have seen the Verizon (VZ) commercials on TV. They’re everywhere: Droid has arrived. And this happens to be a big problem for Apple Computer (AAPL).

Somewhat surprisingly, the Economic Research Service of the U.S. Department of Agriculture has some great international historical macroeconomic datasets. According to its website:

The International Macroeconomic Data Set provides data from 1969 through 2020 for real (adjusted for inflation) gross domestic product (GDP), population, real exchange rates, and other variables for the 190 countries and 34 regions that are most important for U.S. agricultural trade.

By Lara Crigger

Can USCF's new fund tackle the natural gas contango?

United States Commodity Funds' new ETF, the U.S. 12-Month Natural Gas Fund (NYSEArca: UNL), began trading yesterday, offering investors another easy access point to the natural gas market. But let's hope it sees smoother sailing than its controversial cousin, the U.S. Natural Gas Fund (NYSEArca: UNG).

It used to be that if you asked someone how the market was doing, their answer would depend on how it had acted over the last few weeks or months. Nowadays, though, your answer will more likely be a reflection of the last day or even hours. Over the last two years, the mood has become so volatile that the market regularly shifts from one extreme in sentiment to another.

One way to highlight this is by looking at the number of days where a net of more than 80% of the stocks in the S&P 500 move up or down in a given day. These are days where the net differential between up S&P 500 stocks and down S&P 500 stocks exceeds +/-400. As shown below, in the early part of this decade, +/- 400 days were few and far between. While the first seven years of this decade never saw a year where even 10% of trading days were +/-400 days, the frequency in the last three years has all been above 10%. In fact, over the last two years, +/-400 days have made up more than 20% of all trading days.

Regular readers may remember Morningstar’s inaugural survey of advisors’ and institutional investors’ views on alternative investments last year (in partnership with Barron’s). Earlier this week, the firm released the 2009 version – containing some interesting year-to-year comparisons.

As you may recall, we were struck last year by the fact that around half of all respondents felt that alternative investments weren’t just growing in importance, but that they were actually going to be more important than bread & butter staples such as equities and fixed income.

A warning to all you exposed to the dollar carry trade, either directly or indirectly. A group which includes:

• Anyone borrowing in USD to buy short-term assets in another currency.
• Anyone borrowing short-term in USD to buy long-term USD assets, i.e., every U.S. bank.
• Any U.S.-based company selling their product to non-USD consumers.
• Anyone invested in a U.S. company who is borrowing short-term in USD and buying long-term assets and/or selling products in non-USD currencies. That is, anyone long U.S. stocks or U.S. corporate bonds.
• Any U.S.-based investor long any non-USD asset, i.e. any investor in foreign stocks or bonds.

So basically anyone holding anything other than cash.

Be careful what you wish for. For all the leveraged fund critics that either do not like or do not understand daily (or monthly) reset of leverage and want a vehicle without path-dependent performance, your wish has come true. However, unless you bought them yesterday, you will not be getting the exact 2x or 3x index exposure you desire. You can’t have everything.

Five new ETNs (exchange-traded notes), dubbed ETN+, from Barclays began trading yesterday (11/18/2009). When Barclays sold their iShares business, it appears that all their marketing and product naming people were also part of the deal. Here are the official names, but they won’t give you any clue as to the leverage employed:

I emailed the the originator of this list, Eddy Elfenbein of Crossing Wall Street, to see what his parameters for "Top Stocks of the Decade" were and there was but one:

The universe was any stock traded on a US exchange that had a price of at least 50 cents on 12/31/99.

By Patricia Oey

For most investors, we recommend a 20% to 25% allocation in foreign equities, given their diversification benefits within a portfolio. Investing in foreign equities provides a hedge against a weakening United States dollar and allows for exposure to faster-growing economies. Passively managed ETFs that aim to cover a broad regional or country index are an easy way to invest in macroeconomic themes. Investors have enthusiastically embraced this asset class in 2009. For the year to date through October, net inflows into international stock ETFs reached almost $23 billion, accounting for almost 36% of total net flows into ETFs.

Notes made for remarks to the Federalist Society on November 13, 2009:

It’s an honor to be on this panel with all these distinguished people. But I’m afraid I was invited because I’m considered soft on bailouts. That’s a terrible reputation to have. What is it they say about poker? “If you look around the table and you can’t tell who the sucker is, it’s you.”

Mark Thoma is alarmed by our president:

Economist's View: Obama's Wrong-Headed Thinking on the Deficit: Edward Harrison catches this quote from Obama....

I’ve been thinking a lot about what kinds of benefits we enjoy from having large banks. Economics of Contempt has a post arguing that the benefit comes from big banks being able to keep big books, and thus increase liquidity:

You need a very large and diverse balance sheet to be a market-maker in fixed-income products—government securities, investment grade corporate bonds, high-yield bonds, mortgage-backed securities, bank and secured loans, consumer ABS, distressed debt, emerging market bonds, etc. Dealers hold inventories of all these securities because they need to remain “ready and willing” to sell, and because when they buy a security from a client, they need to hold it in inventory until a buyer for the security appears. Dealers are exposed to price movements for the period they hold the security in inventory, and because inventories can grow large in a short amount of time, sharp price movements can result in substantial losses for dealers.