From the monthly archives:
Following on last night’s superb ADJ, here’s another magnificent cityscape, once again taken from the Empire State Building, but this time looking East towards Queens, and Long Island, with Long Island City and Brooklyn clearly visible on the other side of the East River. Click on the image to view a 1356 x 1015 version.
Equities wrapped up a positive month and a strong first quarter, but faded slightly at the final bell. The S&P turned in a good performance for the three month period, up almost 4.9% – statistically it’s strongest quarter since 1998. No doubt much of this was fueled by some strong 4Q numbers caused by widespread cost cutting, but also evidence that top-line profitability was measurably improving. For those fans of “off-the-low” numbers, the S&P 500 is up 72.9% from the March 2009 bottom. The Dow was up 5.1% on the month, and 4.1% on the quarter. NASDAQ advanced 7.1% on the month, and recorded 5.7% on the quarter.
Not bad numbers overall, even with the quarter-end window dressing done and dusted.
On the day, a perfect (uptick) end to the quarter was marred by an ADP report showing some modest losses – negative 23,000 jobs which was enough to trigger some end of session selling. Research in Motion slipped at session end, missing their estimated earnings by one penny ($1.27 vs $1.28). In a typically blind short term view, traders completely missed the 37% increase in net income, and lightened positions causing a one point drop in-session, closing at 73.95, but losing a further 3 points in after-hours action, putting the stock in a pre-opening position of 70.55.
The Bureau of Labor statistics are due for Friday release, a day on which the markets are closed. As one trader noted; “If something drastic comes out, come in with your football helmet on Monday.” Oh yeah – I can almost see it! 
In other news, Treasury 10 year notes broke a two day gain, as fears of plans to sell a jaw dropping $82.2 billion of notes and bonds next week fueled concerns that supply will outstrip demand. $3.4 billion of (taxable) debt issued by California (the world’s eighth largest economy) sold at it’s lowest cost since November, as buyers grabbed 30% of the issue according to Bloomberg. It’s pleasant to note that California is better thought of by investors than Greece. Sheesh.
Hey, it’s coming up for the holiday weekend, why not have a little fun? This might well become a regular feature, since your intrepid correspondent is completely and incurably crazy about catZ.
End of 1Q, have you covered your shorts? Folks are gonna let it all hang out today, so let’s go!
The bond market is setting up for a major move – to the downside. (Barron’s)
Bill Gross thinks the multi-decade bull market in fixed income is finished (Bloomberg)
More frequent recessions imply that buy-and-hold is dead (Tech Ticker)
A long term look at credit spreads (NBER)
Short selling (d’uh) increases before credit downgrades (SSRN)
Ireland is ahead of the curve in cleaning up its banking problems (WSJ Market Beat)
OK, that’s six – Have a profitable day everyone!
This is just simply lovely. I had to share it with you all. It’s a view south from the Empire State Building, with the Verrazano Narrows bridge nicely visible in the background. Look in the foreground center, and there’s the iconic and beautiful Flatiron Building. (The triangular building), which will have its own featured gallery in the not too distant future)
Click on the image to view a 1935 x 2746 version, the viewer will scale to your screen size & resolution, but if you right click and then choose “view image” in your browser, magnifying as needed, you’ll see the entire cityscape in all its breathtaking glory.
The most recent issue of the Journal of Institutional Economics has an excellent exchange of ideas on organizational economics. The issue begins with an essay by Richard Posner:
The essay directly and indirectly touches on all kind of questions: What are comparative similarities in governance between private versus public organizations? What role do incentives and compensation play? What is organizational economics? Are executives overpaid? Many of these issues are discussed in the context of looking at two government organizations — the intelligence community broadly, and the FBI.
Even cooler than the essay itself: more than a dozen scholars were asked to write essays in response to the above, and they also raise a host of new issues: Who are actors and entities, what are markets? What is the role of intrinsic versus extrinsic motivation? Do theories readily apply across various contexts — for example, across different types of organizations? Where is mainstream economics versus more heterodox approaches? etc. The responders include Elinor Ostrom, Bruno Frey, John Roberts, etc. And, Posner then in turn responds to these comments.
Just to whet your appetite, here’s his abstract:
This paper applies the principles of organization economics (an offshoot of organization theory and a cousin of the New Institutional Economics) to a variety of organizations, mainly public ones. Organization economics seeks to understand and improve the ways in which organizations overcome agency costs, information costs, and other obstacles to efficiency. The private organization discussed in the paper is the modern publicly held (that is, dispersed ownership) business corporation, and the particular problem on which I focus is excessive executive compensation as a symptom of weaknesses in corporate governance. I then discuss two public organizations involved in national security – the US intelligence ‘community’ (a kind of mega-organization) and the Federal Bureau of Investigation in its role as the nation’s principal domestic intelligence service. Both exhibit significant dysfunction that organization economics can help us to understand and overcome. I then discuss two types of public organization that have been more successful in overcoming obstacles to organizational efficiency: the judiciary of common law nations, such as the United States, and the very differently structured judiciary of civil law nations, such as France, Germany, and Japan.
Madly cool stuff!!
I’m pleased bring you this week’s “Outside The Box” newsletter from John Mauldin. For newcomers and regular readers alike, please read John’s introduction, bio, and subscription information here
It has been some time since we have looked at stock market valuations and expected future returns. I made a large point in Bull’s Eye Investing that long term returns are closely correlated with the valuation of the stock market upon entry. In fact, I argue that secular bull and bear markets should be viewed in terms of valuation and not prices. The market clearly goes from high valuations to low and back to high again over very long periods of time. The average length of a secular bull or bear cycle is 17 years.
Based on valuations, we are still in a secular bear market. But clearly we are in a bull phase, which within long term secular bear cycles are quite normal. They make for good trading opportunities. But should you invest now with a view to holding for 10-20 years?
This week’s Outside the Box from my friend Prieur du Plessis of Plexus Asset Managment looks at what long term return expectations might be from today’s stock market valuations. He offers us a range of expectations which I think should help you in your investment decision making process.
Dr Prieur du Plessis is chairman of Cape Town-based Plexus Asset Management and author of the Investment Postcards from Cape Town blog: http://www.investmentpostcards.com (Subscribe to e-mail updates of new articles by clicking on “Subscribe to Updates” in the top right-hand corner of the blog site and providing an e-mail address.)
I am on my way back to Dallas from a quick trip to Washington DC. The cherry blossoms are beautiful, even if the weather is gray.
John Mauldin, Editor
Outside the Box
By Dr. Prieur du Plessis
Surging stock markets since the lows of March 2009 have caught most investors by surprise, especially as new pieces of the economics puzzle are not always rosy and do not quite seem to support an overly bullish case. In short, investors are increasingly struggling to make sense of the most likely direction of stock prices.
Are we perhaps nearing the end of a cyclical bull phase in a structural bull market? Or will strong earnings growth ensure the longevity of the bull? Or is a “muddle-through” trading range in store? It seems to be a case of so many pundits, so many views.
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According to the Bureau of Economic Analysis personal income and outlay report for January (pdf) that would appear to be the case. The savings rate, close to zero in 2007, rose to 3.3% in January. Bank lending, long considered a benchmark of economic activity as a whole, declined by 19% since 2008 according to FDIC.
A little care is required in interpreting these statistics. First of all, these are short term numbers and not entirely unexpected as an initial reaction to a severe economic contraction. But set against that, conventional wisdom holds that a pullback in credit retards an economic recovery. This “conventional wisdom” further asserts that small businesses require the ability to roll over old debt and/or open new lines of credit in order to accommodate expansion plans. The economy however, isn’t fueled by debt alone. Yes, I know that might come as somewhat of a revelation to some people, but there’s data to back up this assertion.
Last year, the economy experienced a significant reversal, from shrinking at an average rate of 6.4% in 1Q to 5.9% net growth in 4Q, this while private sector credit dried up, and all but fell over and died! Looking at this in the broader sense however, a reasonable person (a recently arrived tourist from Mars, for example) might conclude that the embrace of cash, (and the renunciation of debt) is beneficial.
We assume that our Martian tourist is a trained economist who has studied in the school of agnostic economics. This is to say that he has managed to avoid the slobbering hordes in Chicago, and has absorbed sound Mises/Hayek/Rothbard principles during his studies. Oooh dear, I’d better get back on track with the narrative, my prejudices are showing.
During the “mad years” it was commonplace to hear various (Chicago) theorists to discourse at length on “the discipline of debt”. Yeah, OK…but… On paper, high debt loads force managers (oh yes, and also homeowners) to make tough, nasty, swift decisions in order to remain solvent. Default means losing the company/farm/house/shop. In reality however, we’ve seen just this behavior. Rather than force real solutions into the mix (read “genuine hardship to save the joint”) overextended borrowers have chosen to walk away. Whether abandoning underwater mortgages, or pushing companies into Chapter 11 bankruptcy protection, giving up seemed the best way out.
Americans may now – admittedly in small measure – be gradually discovering the “discipline of cash”. The foremost result of this is that it causes executives and consumers to think twice – and consider the long term consequences – before spending. I don’t want to say that instant gratification has disappeared, instead I’d prefer to assert that its allure may have taken a sideline seat for the moment. The rise of the cash economy makes businesses and consumers more hesitant to make the kind of capital expenditures they used to typically fund with abundantly available debt. That’s not as easy any more. The availability of credit isn’t quite so abundant these days, and if it is, the price makes it considerably less attractive than in former times.
There is a difference between conservation and outright hoarding. We saw numerous examples of the latter in the immediate aftermath of the credit market crash, but there are signs that is abating somewhat. Just as extreme carelessness in funding expansion purely with credit is a trap, hoarding can have opposite – but equally dire consequences. Growth slows to a marginal pace, or even goes into reverse which is bad news for any economy that must continue to grow in order to survive as a healthy global entity.
While consumers are going to take longer to bounce back, there are some signs that corporate America, at least, is beginning to loosen the purse strings. Investment in capital equipment and software rebounded at an 18.4% annual rate in 4Q 2009. In 2009, PepsiCo’s (NYSE:PEP) cash holdings almost doubled, but on March 15th the company stated that it would raise its dividend 7% and buy back $15 billion in stock by the spring of 2013.
Moves such as that, done from a net cash position, are healthy and point towards a more conservative management style in these changing times. Corporate America needs to be convinced that the recovery is real, but once that time of acknowledgment arrives, we could see some sparkle and fizz return to the economy.
Our Martian tourist would approve.
It’s Tuesday, spring is definitely in the air, so let’s get right to it:
Stocks are cheap – relative to high yield bonds (Bloomberg)
The challenge of trying to tell a story with yield curves (Felix Salmon)
Well d’uh – big banks pay less, on average, on their deposits (Atlantic Business)
A simple cash flow tutorial (A VC)
Fedspeak: A clue graphic for fed policy watchers (WSJ)
Take responsibility for your own investments (Ultimi Barborum)
OK folks, that’s six – have a profitable day!
This is enough to make anyone go “hmmmmmm”.
Oh and no, there is one thing I can absolutely assure you all of – it is NOT Photoshopped