Bloomberg Quote of the Day: “The art of being wise is in the art of knowing what to overlook.” – William James, historian and brother of Henry James of ‘single tax’ fame
…today’s show boys and girls is presented by the letters U, V, W, and L. Quite appropriate for the 40th anniversary of Sesame Street…right, Big Bird? Those of us with kids in the early days remember the show be ‘presented by the letter – .“ But the four letters above have much more significance for you and your wealth and well-being, both physical and mental. They are the possible shapes of the economy going forward. The bulls are strongly in favor of a deep ‘V’ while the bears see an elongated lazy ‘L’ with others falling in between. As the quote from Pimco’s Paul McCulley stated on Tuesday, how can the stock market be seeing s V-shaped recovery when the bond market is calling for a ‘U’? Dunno…
But not only does the bond market see a ‘U’ but it sees one with a long bottom. That may or may not be true but as David Rosenberg said on Tuesday…be careful what you wish for. The reason being that at the first sign of a true V or the right side of the U, the Fed will begin to remove liquidity rapidly, and that is not good for an already inflated stock market (not to mention bond market and commodities markets), the benefactors of ‘quantatative easing.’ Remember that the high positive correlation across all asset classes has been positive…and way too positive at 0.7 to be rational or sustainable except with excess liquidity injected. Rosenberg points out that the forward p/e of stocks is now 17.4% – or 17% above the historical average of 14x! This does not mean you should sell but it does mean this is a horrible time to jump in and if you are in – all in – you had better have an exit strategy.
Of course all the big players have an exit strategy and it is the same for all of them – sell at the first sign of tightening…hence the sluggishness before last week’s FOMC meeting. We ignored the fact that the Fed is concerned about asset inflation and the aforementioned correlation of asset returns. But what is the big secret strategy that all the players share? Sell…sell everything…which at the very least might turn a ‘V’ into a ‘W’.
Let’s go through the essential alphabet and see what might happen:
U – where we go down stay down and then stage a strong recovery…this is what TB sees at best…because the consumer is busy paying down debt and saving or trying to. If this is the case, stocks are grossly overvalued (some say by 20%…think S&P 800), and bonds, while not cheap are not risky.
V – as Rosie said, be careful what you wish for…because a recovery of that magnitude would cause the Fed to withdraw liquidity rapidly to prevent asset inflation from spreading to general high inflation. The immediate reaction would be massive selling across all asset classes as investors try to become more liquid – fast. In that kind of sell-off you sell what you CAN sell. You know that feeling as we saw it from September to March…which coincidentally we just surpassed with nervous very slight new highs. A strategy that everyone shares is no longer a strategy but has morphed into a convention. Americans know how ridiculous and futile (national) conventions are in elections.
W – would you care for a double-dip? This would happen if we were mislead by the strength (relative) of the economy, the Fed began to drain liquidity and we plunged back into recession…not unheard of. Think what would happen to stocks if that happens? Particularly since most of the gain in rallies from lows comes in the first six months…we had that…or all of it.
L – and a lazy ‘L’ it would be…where the economy cannot gain traction…the government is buried in debt and we are in Keynes ‘liquidity trap’ Talk about bad for stocks…and other living, breathing things too.
All of these are definitely within the realm of possibility so you have to ask yourself what is the best strategy. TB ahs decided on one that does not require great brainpower: trailing stops or stop losses with tight limits below them. TB is now in the process of raising those limits as he feels we are closer and closer to the top.
Walmart earnings just out and they beat on earnings by three cents but had no change on next quarters earnings forecast. Worse it came from bottom line cost-cutting with revenues about at the lowered levels…but if you take out gasoline sales same-store sales were off 0.5% and for Sam’s Club up just 0.1%. The bright spot? Non-US sales were strong….what did you expect? Stock looks to open down…TB was stopped out on it
Of course one of the strongest areas has been the weakened financial stocks. As readers know TB has liked the ‘good’ bank preferreds for the income while their common stock dividends have been slashed. But there are limits to his love for them…first they are $35 par…second they can be called some as early as 2011 so you have to be aware of that, and third if the common or even the broad stock market gets hit preferreds suffer too – often quite rapidly and sharply as they are much thinner markets.
On September 25, the US Bancorp 7.875% preferred spiked from another spike of $28 to $30 and then traded below $26 within a couple of days. So…TB put in a sell limit order at $28…didn’t even come close again…on Tuesday, just before the close he was stopped out on all orders at $28 – the high of the day and it closed at $27.41 yesterday. Never thought it would happen but am pleased as there is time for it to fall to $26 or even $25 before the next ex-dividend date, 12/26 (TB’s birthday so that would be a nice present).
He also had buy orders in on an emerging markets debt fund that jumped by 60 cents…he left his order in and last week was filled at his price.
Both of these examples show just how volatile this market is and argue for trailing stops!
Do what you think is right but make sure YOU think it is right…not your broker…TB has talked with several about the win-win of talking to clients about trailing stops – with limits! None has done anything on it…wonder what they are going to tell their clients if and when this market corrects violently…and not make a dime on it…but then doing nothing is worthy of nothing.
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For the second time in a month TB took the day off thinking ALL markets were closed (Columbus Day was the last one). This is due to the notifications on Schwab trading that point out that November 11 was a holiday so trade settlements would be a day later. Being a bond geek, TB just figured stocks would be closed too…he was wrong as he found out when he came home – early afternoon fortunately – and saw that the stock market was indeed open…but the question is WHY???
Does Wall Street think it is so important (after all Goldman Chairman, Lloyd Blankfein sees himself ‘doing God’s work’) that it closing one day to honor our veterans, especially those who gave their lives (and you can bet a lot of them would be very upset at what they gave their lives for) would be detrimental to the U.S. economy. All that for a day with volume of just 1.04B shares – the third lowest of the quarter. TB has no problem with staying open on Columbus Day…although it is a big deal in New York, but aren’t we a bit shallow to have a holiday with little or no meaning to most people? Particularly, not important to those Americans who have benefitted the most from it …don’t you agree Lloyd?…and Steve Schwarzman of Blackstone Group (BX -may his stock rot where it is), who painfully told Congress that if his earnings weren’t taxed at 15% there would be no private equity market…aw….Steve…we feel so bad for you…jerk that you are!
A friend sent letter from a friend of his saying the he just realized he had paid 59% of his income in taxes last year and was thinking about leaving the country or at least not working as hard. Assuming that he works in financial services, TB wrote back that IF he made $1 million and only got to keep $400,000 what else could he do that would earn him more? Or could he in fact work ‘less hard’ in an industry that demands 110% and there are ten guys standing behind you who would eagerly take your spot and pay 59% taxes.
Now don’t get TB wrong….maximum all in taxes should not exceed 50% so that the worker gets at least a 1:1 break. But all of this pales when $102,000 puts you in the top 10% of ALL wage earners and the average American makes around $45,000. What is worse, there are millions of people out there who actually makes something who don’t even make that…and there are doctors that don’t ‘net’ that (even with the ‘gifts’ from the pharmaceutical companies). Is what we in the financial sector do so all important that we should be paid humongous salaries only because it is a high volume industry? You could take just about anyone and make them a securities salesman or trader with the right background. You cannot create a doctor in that manner.
TB read yesterday that in only one area of production is the U.S. number one in the world. If you said financial markets you would partially correct…if you said derivatives you would be very close. But the answer isn’t either: it is venture capital. Isn’t that special? Not in one area of manufacturing are we number one…none…not even agriculture…but venture capital…what does that tell you about our priorities? Also, that despite the financial meltdown we just went thru the majority of Harvard Business School grads want to work on Wall Street…and probably most other B schools too. A pity. Making a career because it pays the most not because you get the most satisfaction from it…and TB would bet that most of those young people would like to get rich quick and retire early…unless they can make it to the top. Money isn’t everything…it isn’t even close. But doing something for your fellow man…as our veterans did is what is special. TB is a vet but he wasn’t killed, maimed, or even wounded so this day was not about him…it should have been about them and the markets should have been closed.
In his meanderings yesterday TB saw just one American flag out…his own.
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © November 12, 2009.
