Yom Kippur begins Friday night. I don’t buy all the old stockmarket adages. But they’ve been half-working this year. The other famous one is Sell in May and Go Away.
We still have a conflicted stockmarket. Half the people think the world is falling apart. The other half see corporate profits exploding. Hence today’s New York Times article:
For the Bad News Bulls, Adversity Is Opportunity.
LONDON — For the better part of a year, a small band of investors and economists has been arguing that the torrent of grim news on jobs and the stagnating United States economy is shrouding an immutable fact: the recovery is at hand — you just can’t see it yet.
At a time when fear-stricken hedge funds are stocking up on gold, retail investors are fleeing the stock market and gloom-peddling economists like Nouriel Roubini are commanding the airwaves, making a bullish case for stocks can be lonely, dispiriting work.
But therein lies the opportunity for investors like John A. Paulson, the hedge fund executive who made billions by betting on a housing crash, and Bill Miller, the mutual fund manager at Legg Mason Capital Management who is best known for his 15-year streak of beating the Standard & Poor’s 500-stock index.
Mr. Paulson has big stakes in companies like Bank of America and JPMorgan Chase as well as in the French automaker Renault. Mr. Miller is betting on I.B.M. and Citigroup, and says that stock in large American companies has not been this cheap, compared with bonds, since 1951.
“The corporate earnings of both European exporters and U.S. companies have exceeded analyst estimates,” Mr. Paulson wrote in a letter to investors this summer. “The S.& P. 500 now trades at only 13.8 times 2010 estimates, well below the 30-year average of 19.5.”
So far, the returns have been hard in coming.
Mr. Paulson’s Recovery fund was down 9 percent in August, and over the last three years Mr. Miller’s main fund is down 16.5 percent, compared with a 10 percent decline in the S.& P. 500.
For many analysts, the idea that one should ignore the chief economic indicators is absurd — especially when some suggest that the world’s largest economy may be heading into another slump.
“To steal a march on the market, one should follow the leading indicators closely,” Albert Edwards, a well-known bearish strategist at Société Générale, wrote in a note last week. He is forecasting a 50 percent retreat for the S.& P. 500. “These are variously pointing either to a hard landing or, at best, a decisive slowdown.”
The bad news bulls do not dispute that the relentless beat of lost jobs and sagging house sales represents a serious economic threat.
But they argue that in many respects this avalanche of bad news has little bearing for a growing number of corporations that are making money by relying more on technology, borrowing at rock-bottom rates and increasing sales to galloping overseas markets in China, Brazil and India.
“Yes, the job numbers are frightening,” said Michael Hintze, the founder of CQS Management, a fixed-income hedge fund based in London. “But that does not affect a company like Glaxo, which sells a value-added product into markets like China, the U.K. and Indonesia.”
No doubt, the indicators of fear remain powerful.
They include the persistence of net short positions on the broad indexes, meaning that investors have more money riding on a market fall than on a market rise, and, despite low interest rates, the still relatively high cost of financing for banks, which curtails lending. A rising number of large Wall Street banks says the likelihood of a second recession is increasing, and most significant, the notion is still widely held that house prices in the United States will not soon recover.
Mr. Hintze, who manages about $6.8 billion, refers to what is commonly known in financial circles as an “upcrash,” in which a market consumed with negativity finally realizes that things are not so bad. Investors begin to climb the wall of fear, producing a sharp, and in some cases, long-lasting rally.
What Mr. Hintze and other like-minded investors are betting on is that in spite of the combination of high sovereign debt and unemployment figures, global companies with worldwide brands and limited leverage are in a position to drive a longer, more sustained stock market boom.
But for that to happen, they say, investors must break free of a tendency to either stay on the sidelines or to continue selling whenever there is a bad report on jobs or housing.
“Apple does not depend on U.S. housing starts, nor does BMW,” said David F. Marvin, chairman of Marvin & Palmer Associates, an institutional global equity fund based in Wilmington, Del.
Since 2007, Mr. Marvin’s assets under management have shrunk to $4.6 billion, from $12 billion, and he concedes that it has been hard to persuade clients to take risks, given what has happened since 2008.
“When you are burned that badly you get cautious,” he said. “But there is a real boom going on now in emerging markets from China to Korea and India, where incomes are rising and there is demand for the upscale products that LVMH and Mercedes produce.”
In a report on the United States economy published in July, the director of economic research for the Milken Institute, Ross C. DeVol, pointed out that in the second quarter, corporate investment in equipment and software increased at an annualized rate of 24.9 percent as companies made use of available cash and easy borrowing terms to become less reliant on human workers.
“It’s a bit of a disconnect because this will retard job growth,” Mr. DeVol said, “but companies are becoming more efficient.”
Mr. DeVol is forecasting United States unemployment of about 7.7 percent at the end of 2012, a high figure for the country but one that he argues reflects the fact that many people who lost their jobs in the recession will not be qualified to re-enter the work force.
And therein lies the rub. Is the rise of a global corporate elite, increasingly dependent on markets like China, India, Turkey and Brazil, enough to generate a broad-based stock market recovery even as house prices sink and good jobs remain increasingly difficult to find in the United States and Europe?
Hedge funds, generally seen to be the most courageous of investors, remain for the most part on the sidelines. Prime brokers say that many of the big funds, hurt by poor performance this year, are largely unwilling to take on significant leverage and make a bet on stocks.
All of which leaves the bad news bulls in a distinct minority, rarely seen and not often heard — for now at least.
“The prevailing view is definitely negative,” said Byron R. Wien, global strategist for the Blackstone Group, adding that he had begun to observe a tendency for investors to take on more risk. “But that provides an opportunity for optimists.”
Is the stimulus still working its way through the system? There is an argument it is. This piece is from James Surowiecki, The New Yorker’s brilliant financial writer:
When President Obama unveiled an array of new tax-cut and spending proposals last week, one word was noticeably missing from his speeches: “stimulus.” Republicans, meanwhile, energetically set about decrying the plan as “more of the same failed ‘stimulus’ ” and as simply a “second stimulus”—as if the word itself were a damning indictment. The idea of using countercyclical fiscal policy to help get a weak economy moving is hardly radical. But in Washington stimulus has become the policy that dare not speak its name.
This wouldn’t be surprising if we were talking about a failed program. But, by any reasonable measure, the $800-billion stimulus package that Congress passed in the winter of 2009 was a clear, if limited, success. The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7 per cent in recent months. Economists at various Wall Street houses suggest that it boosted G.D.P. by more than two per cent. And a recent study by Mark Zandi and Alan Blinder, economists from, respectively, Moody’s and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above eleven per cent and that G.D.P. would have been almost half a trillion dollars lower. The weight of the evidence suggests that fiscal policy softened the impact of the recession, boosting demand, creating jobs, and helping the economy start growing again. What’s more, it did so without any of the negative effects that deficit spending can entail: interest rates remain at remarkably low levels, and government borrowing didn’t crowd out private investment.
Politically, however, none of this has made any difference. Polls show that a sizable majority of voters think that the stimulus either did nothing to help or actively hurt the economy, and most people say that they’re opposed to a new stimulus plan. The hostility has numerous sources. Many voters conflate the stimulus bill with the highly unpopular bailouts of the banking sector and the auto industry; Republicans have done a good job of encouraging such misconceptions, as when Representative Mike Pence, of Indiana, referred to the “bailout stimulus.” Also, the stimulus—which, to begin with, was too small to completely offset the economy’s precipitous drop in demand—was oversold. The Administration’s forecasts about the recession (particularly regarding job losses) were too optimistic, and so its promises about what the stimulus would accomplish set the public up for disappointment.
But the most interesting aspect of the stimulus’s image problems concern its design and implementation. Paradoxically, the very things that made the stimulus more effective economically may have made it less popular politically. For instance, because research has shown that lump-sum tax refunds get hoarded rather than spent, the government decided not to give individuals their tax cuts all at once, instead refunding a little on each paycheck. The tactic was successful at increasing consumer demand, but it had a big political cost: many voters never noticed that they were getting a tax cut. Similarly, a key part of the stimulus was the billions of dollars that went to state governments. This was crucial in helping the states avoid layoffs and spending cuts, but politically it didn’t get much notice, because it was the dog that didn’t bark—saving jobs just isn’t as conspicuous as creating them. Extending unemployment benefits was also an excellent use of stimulus funds, since that money tends to get spent immediately. But unless you were unemployed this wasn’t something you’d pay attention to.
The stimulus was also backloaded, so that only a third was spent in the first year. This reduced waste, since there was more time to vet projects, and insured that money would keep flowing into 2010, lessening the risk of a double-dip recession. But it also made the stimulus less potent in 2009, when the economy was in dire straits, leaving voters with the impression that the plan wasn’t working. More subtly, while the plan may end up having a transformative impact on things like the clean-energy industry, broadband access, and the national power grid, it’s hard for voters to find concrete visual evidence of what the stimulus has done (those occasional road signs telling us our tax dollars are at work notwithstanding). That’s a sharp contrast with the New Deal legacy of new highways, massive dams, and rural electrification. Dramatic, high-profile deeds have a profound effect on people’s opinions, so, in the absence of another Hoover Dam or Golden Gate Bridge, it’s not surprising that the voter’s view is: “We spent $800 billion and all I got was this lousy T-shirt.”
Bizarre as it may seem, a less well-designed stimulus might have been more popular, and that would have made it easier for Obama to sell the electorate on his new stimulus proposals. But, given the scope and depth of the recession, it’s also likely that any stimulus would have become a political albatross. As Jonathan Baron—a professor at the University of Pennsylvania who studies the role of psychology in public policy—has discussed, if you take action and things go wrong, you’re often held more responsible than if you do nothing, even when the failure to act would lead to a disastrous outcome. Of course, Presidents are always blamed or rewarded for the state of the economy. But, in pushing through the stimulus plan, the Administration tied itself to the fate of the economy more tightly than if it had done nothing. It’s a harsh lesson: when Rome is burning, trying to put out the fire may cost you more than just sitting by and fiddling. ♦
Videos worth watching. First a serious one.
Then this one about a couple who got married late in life. The sound starts a bit late. Be patient. Click on fakewomen.
Soon there’ll be even more charges for traveling on planes, watch this video. Click on New_Airline_Rates.
If these videos don’t play on your PC, download VLC Media player. It’s free and flawless. Highly recommended. Much much better than Windows Media Player. Click here.
How to handle all your digital photos? I went to my friend’s kids’ wedding. I took some photos. It’s easy and cheap to take photos today. “Film” is free. But there’s a “price.” All digital photos require “processing.” Cropping. Color balancing. Lightening. Sharpening. A Wall Street Journal writer deals with 54,000 photos. He likes an Adobe program called Lightroom 3. Click here. You can read reviews of Lightroom here and here.
You can pick up a full, free, 30-day evaluation copy of Photoshop Lightroom 3 here.
There are two types of cameras out there — cheap point-and-shoot and expensive, heavy single lens reflex (SLR) cameras. They both take great pictures. The BIG difference is “shutter lag.” Hit the button on an DSLR (Digital SLR) and you take the picture instantly. Hit the button on a point-and-shoot (including Canon’s G10 and G11 — see column on right) and it takes a while before the shutter goes off and you get the picture. That shutter lag can cost you the smile. You have to anticipate smiles, make them last longer or carry a brick.
Four weekend wedding photos taken with my Canon G10.Good for a point-and-shoot that fits in my pocket.
Where do red-haired babies come from?
After their baby was born, the panicked father went to see the Obstetrician. ‘Doctor,’ the man said, ‘I don’t mind telling you, but I’m a little upset because my daughter has red hair. She can’t possibly be mine!!’
‘Nonsense,’ the doctor said. ‘Even though you and your wife both have black hair, one of your ancestors may have contributed red hair to the gene pool.’
‘It isn’t possible,’ the man insisted. ‘This can’t be, our families on both sides had jet-black hair For generations.’
‘Well,’ said the doctor, ‘let me ask you this. How often do you have sex??? ‘
The man seemed a bit ashamed. ‘I’ve been working very hard for the past year. We only made love once or twice every few months.’
‘Well, there you have it!’ The doctor said confidently.
Harry Newton who’s off to the dermatologist, again. Why? My dentist told me my nose looked curious. She meant the blemish, not the shape, which, sadly, gives curious a whole new meaning.