Tuesday, September 29, 2009

Why I'm not tracking market technicals right now

I mentioned a while back that I was taking a break from making market forecasts. After the March low, I began to suspect that prices weren't playing by the normal "rules" - either fundamentally (PE or yield) or technically (price formations, volume, etc.) This chart of the S&P 500 index confirms my suspicions.

Normally I'd be inclined to say that the S&P is in an ascending wedge formation, which forecasts an eventual drop through the lower trend line. However, as the chart shows, prices have instead risen through upper trend lines twice already, so I'm doubtful that the new upper trend line is any more meaningful. My favorite sentiment indicators have been showing optimism about stock prices rather than pessimism, which is usually not a favorable condition for a rally like this.

Meanwhile, the dividend yield of the S&P 500 has fallen to near 2%, which is phenomenally overpriced by historical standards. My hat is off to those who have profited from this six-month rally, but everything about it seems far too speculative for me to comfortably participate in.

Saturday, September 19, 2009

Trough between waves, or pre-tsunami lull?

According to Federal Reserve Chairman Ben Bernanke, the recession is probably over, but I'm following several blog commentators who are making reasonable arguments that the worst is yet to come. The question is, "Who's right?"

It seems to me that debt is the one broad issue that distinguishes the two opposing viewpoints. A diverse group of pessimistic online pundits like Mike Shedlock, Karl Denninger, Max Keiser and bloggers on Fool.com argue that we are near - or have already exceeded - a total debt threshold that can no longer be sustained. When all forms of debt are considered together, including the Federal debt, mortgage debt, consumer debt, etc., the picture looks pretty grim. Total debt as a percentage of the nation's gross domestic product (GDP) was remarkably constant for decades, but started to increase in the mid 1980's and has been growing steadily ever since.

Karl Denninger has made a graph that breaks down the debt into categories, and it clearly shows that a recent retreat in mortgage debt and consumer debt has coincided with an accelerated increase in public debt.

It doesn't take a genius to realize that private debt (much of it owed to a few large banks) has simply been transformed into Federal debt over the last year or two by way of the trillion-dollar bailouts/stimuli. Notice too that when the Federal debt momentarily stopped growing in the late 1990's, mortgage debt growth kicked into high gear.

On the other side of the debate, the people in high offices who were proponents of the bailouts and stimulus packages, and who are suggesting that the worst is now over economically, are noticeably silent on the subject of the ballooning Federal debt. I'm neither an economist nor an accountant, but I'm pretty sure that debt can't increase forever without major negative consequences. It also makes sense to presume that the greater the debt is when the bubble finally pops, the greater the pain will be.

I'm afraid the economic pessimists have made stronger cases than the optimists up to this point. To some extent the current reprieve in corporate earnings and stock markets has to be the aftereffect of the astronomical Federal spending programs, but I fear that this only delays the inevitable day of reckoning, and ensures that the eventual fall will be deeper. The most reasonable solution - letting banks fail when they take too many risks and slashing the Federal budget - is still painful in the short term, but would ultimately lead to a sustainable recovery more quickly. However, elected officials in Washington are too worried about their own jobs to suggest such "heartless" measures. They would rather bail out the irresponsible banks, increase the national debt, and print money like mad to keep voters placated at least until the next election.

Much of the current economic data supports the pessimistic outlook. Unemployment continues to rise, a new round of mortgage defaults looms, the dollar is losing its value internationally, and state governments who can't print money like the Feds are running out of it.

I've been doing my best to plan for the worst, but I wonder if there is even any "high ground" to run to in this case. (The folks in this video saw the tsunami coming and got out of the way just in time.)

Friday, September 18, 2009

(Swine) Flu Update

Influenza in the U.S. is now at the highest level since the winter of 2007-2008, with 21 states reporting "widespread" activity.

Every state in the Southeast has been hit hard. (wunderground.com)

Given official reports and anecdotal evidence that I'm hearing, it's pretty clear that this is the second wave of H1N1 Swine Flu, which is acting independently of the normal seasonal influenza that peaks in the winter. I'm sticking with my prediction that the Swine Flu will reach a high peak in a few weeks, and that any widely available vaccine will be too late to make much of a difference.

Thursday, September 17, 2009

September 17, 1939-2009

This is a joke, right?

Exactly seventy years ago today, the Soviet Union began its invasion of eastern Poland, in accordance with the Molotov-Ribbentrop Pact that it signed with Nazi Germany. Thousands of Poles would die defending their country from Russian forces, and tens of thousands died later at the hands of the Soviets in group executions, torture, and mass deportations.

Today on the seventieth anniversary of this horrific event, the United States has announced that it will scrap plans for a missile defense shield in Poland and the Czech Republic, mostly in response to protests from Russia. Even for those in the West who oppose the missile shield, there's no denying that the timing couldn't be worse. Poland already has plenty of historical reasons to resent the choices made by the U.S. and Britain regarding Russia:
  1. Britain declared war on Nazi Germany for invading Poland, but looked the other way when the Soviets did it two weeks later. The U.S. wasn't moved to help at all.
  2. The U.S. and Britain allied with - and supplied - the Soviets from 1941-1945.
  3. The Soviet Union was allowed to occupy Poland again after the war.
Thus my gut reaction to today's news is "Oh no, not again." I hope that this move to appease Russia at Poland's expense doesn't prove to be prophetic, but I know that history has a tragic way of repeating itself.

Friday, September 11, 2009

If you're not already feeling blue...

Here comes the big bad Swine Flu.

Late summer is normally the low point for influenza activity in the United States, but that's not going to be the case this year. The following graph from the CDC shows influenza activity for the the past 52 weeks (red) and the previous two years (green and blue).

I've added a red arrow to highlight the most recent data from last week. As you can see, in the past two weeks influenza activity has jumped from a somewhat elevated summer plateau up to levels that are usually seen during the worst part of the winter. State-by-state data confirms that an early outbreak is in progress, with the southern half of the country feeling the worst of it at the moment. (From wunderground.com using data from the CDC)

The big concern this year is the new strain of Swine Flu (H1N1) which most people have less natural immunity to, and which apparently has the potential to mutate into a more deadly pandemic strain. It would be a pretty big coincidence if H1N1 wasn't behind this unusually early outbreak. There was hope that a vaccine for H1N1 could be developed and distributed in time, but I'd say all bets are off now. (At times like this I'd be happy to pay double the normal cost for a vaccine, and shield vaccine companies from exorbitant lawsuits.)

I'm doing what I can to avoid infection and to minimize the pain if I don't. I've deployed my own bottles of hand sanitizer at work and at home. I've got cans of soup stashed away, juice in the 'fridge, and a fresh bottle of cough medicine in case I succumb.

I can think of one way to forge a win-win situation out of all this: at the peak of the H1N1 influenza outbreak, which could arrive in just a few weeks, they could declare the anticipated bank holiday and shut down the banks for a bit while we're all cooped up in our homes. It's not like we're going to need the money for shopping or travel at that point anyways.

Mirror, Mirror

Exactly two presidential terms after the 9/11 attacks, things are repeating or persisting in ways I never would have imagined.

Eight years ago, nineteen Muslim men under the direction of Osama attacked the United States, prompting a final showdown with Hussein.

Today the President of the United States is B. Hussein Obama, the son and stepson of Muslim men. Is this more than a coincidence - a subconsciously motivated choice perhaps by voters who opposed the War on Terror in general, and the invasion of Iraq in particular?

Eight years ago the collapse of the twin towers left an empty, smoldering space in lower Manhattan.

Today Ground Zero is still an empty space. Why do I suspect that, had the attacks occurred in 1931 there would have been a new skyscraper on the skyline by 1939, despite the Great Depression?

Eight years ago we were suffering the consequences of a speculative bubble in the stock market.

Today we are suffering the consequences of an even larger speculative bubble in real estate, the stock market, consumer credit, and skyrocketing national debt.

I can still remember my raw emotion and my view of the future in the days following September 11, 2001, as I watched the smoke rising from the Pentagon, replays of the towers collapsing and people jumping to their deaths. If someone had told me back then where we'd be eight years later, I would have concluded he was nuts.

Update 9/12/2009: It's come to my attention that the Dow Jones Industrial Average closed at 9605 yesterday (Sept. 11, 2009) and at 9605 eight years earlier on Sept. 10, 2001. (The market was closed on Sept. 11, 2001, so the Dow was frozen in place at the same 9605 level for a week.) That's too weird. There's more mirroring going on than I was even aware of when I named this post.

Wednesday, September 09, 2009

Problem-solving 101

Question: What do these three things have in common?

Answer: I bought each of them with my own money in order to solve a problem.

My office is in a rather old building on an even older campus, and that means we have an archaic climate control system. The centralized air conditioning is primitive, and in a good fraction of the offices and classrooms in my department it is simply incapable of keeping the air cool in the summertime. This wasn't even a particularly hot summer in my part of the country, but still it was common to see fans placed in open doorways as a last-ditch effort to stay cool. The same thing happens every year: people in the hot offices complain to the maintenance staff to fix the problem; maintenance never gets around to fixing the problem; and then the hot people switch to complaining about the poor maintenance.

I had a different response to the heat. Several years ago, when I realized I couldn't keep my new office cool enough, I bought my own air conditioner for $80 at Walmart. I now have perfect control of the temperature in my office during the summer, and even on the hottest days I can make my office as cool as I want. Now, you might think that the hot people around me would copy this simple yet phenomenally effective solution, but you would be wrong. The complaints about maintenance have continued unabated.

The heating system here is equally crude. Every office has exposed steam pipes near the outside wall with a simple valve that losely controls the amount of heat radiated by the pipes. Of course, the central system that distributes the steam operates unevenly, and sometimes we arrive at work in the morning to find our offices baking at 85 degrees. That prompts people to turn off the valves and open the windows, which eventually cools the offices too much and ... well, you get the picture. I bought a space heater with a thermostat for $30 and closed my steam valve, and now I stay an even 70 degrees throughout the day, every day. Problem solved.
Last Spring my university was part of the insane nationwide push to purge trays from cafeterias, so now eating in the faculty dining room has become decidedly less convenient. Instead of being able to put a salad, an entree, a cup of soup and a drink on one tray and then walk to our tables, we now have to make two or three trips back and forth between the table and serving area in order to assemble our meals. It's comical to watch professors in suits and ties ignominiously shuttling around with plates balanced on their arms, and the sound of a dish shattering on the floor is not uncommon.

Besides the inconvenience of not having trays, I have concerns about sanitation. Without trays, utensils end up resting directly on a table that someone else has just eaten on, and at the end of the meal we resort to carefully stacking our used plates on an unsanitary communal pile. It's all the more ludicrous to do these things given the occasional outbreaks of Norovirus and the looming threat of Swine Flu. In response I bought two cafeteria trays online for $5 apiece. I brought one of the trays to the dining room for the first time today, and although I got some bemused looks from my colleagues, it worked like a charm.
Why am I talking about these things? At the very least I can claim to have a unique perspective among academics when it comes to problem-solving. My first instinct is to rely on myself to find the simplest solution, rather than hope that someone else will solve it for me. I've done the same thing now in anticipation of another financial meltdown: opening multiple bank accounts and hoarding cash in case the worst happens. I hope nothing happens, but if it does, there are quite a few academics around me who can't say I didn't warn them.