Wisdom-Seeker

Dow Theory Revisited

So, what you're saying is, you think the market will go higher - unless it goes lower. Unless you'd care to put probabilities on those two outcomes, such as by posting the historical rate of occurrences of false Dow buy signals early on in a recessionary/bearish environment, you haven't said a damn thing. But still, nice window dressing on that tautology!

What Credit Crunch?

You're missing a few crucial quantitative details. First, the growth of credit should be adjusted for inflation and also per-capita, to get a sense of whether it's really growing or not in terms of an individual's actual purchasing power. Second, if you look at the Fed's G.19 source data you can see that the trend has keeled over dramatically. After increasing at an 8.0 percent rate (annualized, seasonally adjusted) in Q3 of 2007, consumer credit growth dropped to 4.0 percent in Q4, and over the last three months (Dec/Jan/Feb data), it is now down to just 2.8 percent AT A TIME WHEN INFLATION IS SPIKING.

My take on this is that consumers, reaching the end of their rope in the mortgage, HELOC and refi arenas (not part of this data set), grasped at as much credit as they could in the 3rd quarter and then ran out of room to borrow in the 4th quarter (remember, Christmas retail sales were awful).

My prediction is that you'll see the credit crunch show up in your data in the next 2 quarters.

7 Reasons March Was Not the Bottom

For DooDah, a clue brick: learn to read a bar or candle chart, and then look at any chart other than the Dow. Don't forget to try China and Europe. Unless and until we start to see higher highs and higher lows on the real indexes, the smart money bet is that March was just a minor rally and bull trap.

Value Traps and Market Bottoms

Bullshit. You can't figure out a company's value without estimating the forward earnings (for multiple years). You can't do that without making assumptions and forecasts about the future of the economy in general.

Your prediction about the earnings of XYZ will look a lot different if your macro forecast anticipates a recession with 5% less GDP than if you anticipate a growth period of 5% more GDP. Remember, net earnings are a derivative quantity - revenue minus expenses - and we can have a lot of GDP with zero net corporate earnings.

And don't forget the black swans that you can't anticipate at all!

That forward earnings analysis is the same analysis, with the same sorts of assumptions/forecasts, currently being used by those trying to call a bottom in the market. The only difference is the size of the business being analyzed. There are some things that get more complex at the macro level but also many that get simpler.

But either way, picking "good stocks at a cheap price" or picking "the index at a cheap price", you are bottom-picking. The only difference I see is that with individual companies you might get some benefits from simplicity (especially if you're Warren Buffett, but not if you're Bill Miller right now) and you also get the benefit of averaging over a lot of picks.

You might counter that you don't have to be exactly right, you just have to make some money over the long term. To which I'll counter that the bottom-pickers don't need to be right either, they just have to be in for the eventual recovery, to make moeny over the long term.

A Far Cry from "Hooverville"

No, blame Bush for bringing in a regulatory team that would rather look the other way than fix the obvious abuses that crept into the system over the past 7 years. You can blame Congress too, though - there's certainly going to be enough dog poop to spread around.

Have Recent Crises Blown a Hole Through Modern Financial Theory?

Phrasing the no-pricing/bad-ratings... issue in terms of information and continuity is very insightful; thanks for the article!

But I think the prescription at the end is incorrect. Less important than building a more sophisticated academic-intellectual model is getting back to basics in the real world. The less information is needed to understand something, the more continuity of liquidity will be improved. What we need are simpler and more transparent real-world securities, so that (a) less information is required for buyers to establish pricing points, (b) it's harder to commit fraud because everyone can see what they're getting, and (c) it will be harder to lose investor confidence in the next panic. The current bubble was built on the antithesis of all three of these points, and the global investing community, having been burned badly in so many ways, is now holding Wall Street's feet to the fire until it gets what it wants. I suspect the first major financial company that "gets" this will have a huge competitive advantage for the next decade.

Updated January '08 Case-Shiller Housing Data

Read Ritholtz and you'll realize the Bespoke guys can't tell a "better than expected" number from a "worse than expected but spun like mad" number. An objective look at the slightly fresher but much less objectively valuable information from the Realtors *really* shows that February was *not* an improvement. The real impact of the Case-Shiller numbers is that they show the real estate crash was (still) getting worse even faster in January -- except in Boston.

Where's the Bottom?

Alas, with a recession now underway, household income is going to be falling right along with those home prices.

For instance, the Michigan and Ohio markets aren't getting clobbered because the homes are too expensive ($70,000 is a recent median home price in Youngstown Ohio!); they're getting clobbered because they're on the leading wave of the recession and people don't have jobs.

Bloomberg Updated Consensus Estimates Weaker Than Expected

Who wants to bet against the claim that there's been a glaring sign error on those GDP estimates?