MarketVVizard's Market Thoughts

» Kirk - Re: Re: Re: Gold for the Small Investor

In response to message posted by Normxxx:

You know, there IS a strong resemblence between the HHH graph and a graph of Gold since 1980, including the recent upturn!

Amazing, eh?

<img src=http://stockcharts.com/def/servlet/Sharp... width=520 height=301>

There are many I respect who like Gold...
but gold is something you dig out of the ground and your costs to get it are known. Other than speculation, there is more than enough to last a long, long time for real uses. Also, with recycling being a big thing now, more will be recovered from electronics equipment. labor in China and India is nearly free for this...

-- posted by Kirk

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» Normxxx - Re: Re: Re: Re: Gold for the Small Investor

In response to message posted by Kirk:

Physical Gold (owning) is an idea and, like owning stocks that pay no dividend, is worth only what the next buyer is willing to pay. As for the notion that stocks with growing earnings might in the goodness of their heart, like Microsoft, eventually pay a miniscule dividend-- to paraphrase Keynes-- eventually we are all dead.

Personally, I find the notion of a "future" payoff especially disconcerting in the case of tech companies, which have a half-life of about 10 years (much less, if you include the "fly-by nights" that can only IPO when investors are asking to be had, such as now). Why pay 50, or even 20, times one year's (pro forma) earnings for a company that's not likely to be around in 10? It wasn't long ago (in the early '90s) that the consensus among investors was that tech stocks deserved to sell at "rust-belt" multiples or below. I am convinced that before this secular bear is over, they will do so again.

Gold may not have conventional "growth" potential, but it has been the major medium of exchange for thousands of years and, I expect, will be around still for a like time. (Even e-Gold is backed by the real stuff.) It has the value that it is an extra-national medium of exchange. Unlike fiat money, it is NOT inherently worthless. (Although, of course, if peace breaks out, if we figure out how to hold the inflation rate exactly at zero, if the world economies boom and we enter into a "permanent plateau of prosperity," to quote a long dead economist, then the value of Gold may drop rapidly. But unlike paper dollars, it will NEVER go to zero; it alway can be used for jewelry and in electronics. (The cost of recycling the Gold in electronics, however, is many times the cost of the commercial stuff. The Gold used in electronics is almost never recovered. Gold, being a "noble" metal, poses no biohazard.)

Note: I don't like to have to "invest" in Gold, since it does not in the least trade like equities, and so I must learn about a whole new world of investing. But I also didn't like to buy long-term care insurance, not least because you have to do much research and comparison. Still, I figured it was a necessity, if I didn't want to end up on a soup bowl line or charity ward in some distant future.

P.S. In my modest encomium on Gold above, I misspoke about the recent devaluation of the dollar versus the EURO. Since it has gone from $0.83 to the EURO to $1.18 to the EURO, that is over a de facto 40% devaluation of the dollar. So the rise in the price of Gold has almost exactly equalled the fall in the value of the dollar (versus the EURO).

-- posted by Normxxx

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» MarketVVizard - Analysis of prior stock cycles

Quoting a friend (Tony T):

>> According to Jeremy Siegel, there have been six (1906, 1916, 1929, 1937, 1973, 2000) major stock market peaks in the last 100 years from which the market has fallen by at least 40%. AFTER such market drops, the subsequent 5 year real returns averaged +8.6% and were never negative.

Average returns in the subsequent 15, 20, 25 and 30 year periods have all been ABOVE average. <<

There is a BIG difference however with the previous five troughs that occurred after a 40% or greater drop versus the 2000 trough.

Below I've listed the valuations at the troughs of each of the periods in question. I've calculated the valuations Hussman style, meaning I'm actually using peak earnings (i.e., best earnings ever prior to the trough regardless of when they occurred) rather than TTM earnings. In other words, these are best-case valuations at the trough and not based on recession earnings troughs, which are usually noise.

Time Period________PE Ratio

Post 1906 trough:____8.2
Post 1916 trough:____4.4
Post 1929 trough:____2.9
Post 1937 trough:____4.9
Post 1973 trough:____7.4
Post 2000 trough:____15.0

In other words, in the prior 5 troughs, the average trough PE (based on peak earnings but trough prices) was 5.56. The post 2000 trough valuation is almost 3x higher than any of those. The post 2000 trough is nearly 2x higher than the highest trough of those periods.

So clearly, this time is different. The question is "What is different?" Is it going to be different this time in that valuations don't matter? Or, is it going to be different this time in that we set a new high (by a long shot) on trough PEs?

Other questions to ponder … Would one expect to achieve similar excellent returns from a trough (assuming we've hit one) that has a starting valuation of 15x peak earnings as it would from the typical 5.6x peak earnings?

I know that Siegel believes that PEs should be permanently higher today than at any time in the past. Seems like a dangerous leap to assume that investors will lower their return expectations by the degree that Siegel suggests. And he is saying that by definition, since we've never jumped out of the 6% earnings growth channel, even during the bubble growth years … unless he also believes we break out of that channel too, while PEs stay historically beyond high.

Something else to ponder – at least while we're discussing long-term returns … The current valuation of the S&P 500 is 19.54x peak earnings (earnings hit $53.70 at the peak). Prior to 1997 we have only exceeded 20x peak earnings once. That's when we slightly exceeded 20x in 1929.

We came very close to that mark (high teens) several times during the 1960s. And the other time it was reached was 1987. I'll post some cool charts I've created of all this stuff (trough and peak PEs), including the earnings channel, subsequent 3-, 5- and 10-year returns, and annotations on a stock chart on what occurred at each of those inflection points (i.e., troughs and peaks in valuation).

The point being, bad things have consistently occurred EVERY time we've approached or exceeded a valuation of 20x prior peak earnings. There was always huge volatility, huge losses, drastic drops in valuations, etc. Obviously only one case was as bad as 1929. There are two ways to cure overvaluation – time and points. Points cured the lofty valuations in 1929. Time cured the lofty valuations in the 1960s (along with some pretty dramatic point drops, and rises, along the way).

The question is … Is it still a good time to invest because we're still fresh off of a near 50% drop in the S&P 500, or is it a bad time to invest because valuations are back to 20x?

Tony

PS: My data comes from Robert Shiller's website. You can download it in Excel format and run all kinds of studies and analysis on it. That's how I plotted my charts.

-- posted by MarketVVizard

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» MarketVVizard - Just shorted NLVS @39

probably asking for pain
but market isn't doing much (which is what I was looking for) and advance/decline is negative.

Their earnings report was pretty bad, AND they got and upgrade today with nice after earnings pop. They just told us a couple weeks ago to expect 0 cents in earnings (not counting huge write off) and they "beat" by 4 cents (not counting huge writeoff). Top line declined 7%. Intel is going with AMAT for copper and 300mm wafer. I think the ceiling at $40 will hold, but that is where my stop is ($40.15).

-- posted by MarketVVizard

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» MarketVVizard - "Our Currency, But Your Problem"

"Our Currency, But Your Problem"
Paul McCulley | October 2003

President Bush is not an intimate friend of the English language. He's a plainspoken man, who also plainly, and frequently painfully, tortures the mother tongue. And, regrettably, he's not a clone of Yogi Berra, providing comic relief as he gnaws on his rhetorical shoe leather. Thus, I was stunned a couple weeks ago when Mr. Bush cogently declared that China should pursue a "fair monetary policy." Had the President's tongue misfired, with his cue cards reading "fair currency policy," as Treasury Secretary Snow has been barking and bellowing, or did Mr. Bush really mean to say "fair monetary policy?"

I don't know. But I want to declare, for the record, that if President Bush actually meant to say monetary policy, not currency policy, I owe him an apology for belittling his linguistic mojo. A nation's currency policy is actually a subset of its monetary policy. Accordingly, President Bush was entirely correct to carp about China's monetary policy, if he has problems with China's currency policy.

Both the United States and China have fiat currencies, unbacked by anything except the sovereign's legal declaration that they are legal tender for all debts, public and private. In such fiat currency regimes, the sovereign has the ability to choose one of two goals for its monetary authority: stabilizing either the domestic purchasing power of the currency or the foreign exchange value of the currency. More technically, the sovereign can instruct its central bank to target either (1) the domestic price or quantity of its currency - a domestic interest rate or growth in the domestic money stock; or (2) the international price or quantity of its currency - its foreign exchange value, or growth in international reserves.

What a fiat currency country cannot do, however, is instruct its central bank to pursue all four available monetary policy targets: (1) a domestic interest rate, (2) the size of the domestic money stock, (3) the currency's foreign exchange value, and (4) the size of country's international reserves. By the laws of central bank plumbing, a fiat currency country's central bank can peg only one of these four potential monetary policy targets; once one of the variables is pegged, the other three become market-determined, unless constrained by regulatory structures.

A De Facto Monetary Union
In the United States, the Federal Reserve pegs the domestic price of money - the overnight Fed funds rate. In turn, growth in the domestic money stock, the foreign exchange value of the dollar, and growth in Uncle Sam's non-dollar reserves all adjust, via market forces, to be consistent with the Fed's chosen peg for the Fed funds rate. Accordingly, America does not have a currency policy per se, either strong or weak; America has a Fed funds policy.

In contrast, China has chosen to give its central bank a target for the foreign exchange value of its currency, pegged to the dollar. Conceptually, this implies that China cannot have a target for its domestic short-term rate, growth in its domestic money stock or growth in its foreign exchange reserves.

As a practical matter, this is not precisely correct, because China does not have an unregulated capital account or a fully private domestic banking system. Thus, China does retain some degree of control over variables besides the Yuan's pegged exchange rate versus the dollar. But these are technical matters, which should not obscure the essential reality of the matter: China does not have an independently determined domestic monetary policy, because China has chosen to peg its currency to the dollar, thereby importing America's monetary policy.

Indeed, it is not too much of an intellectual stretch to say that China is part of the monetary union called the United States - the 51st state, if you will. Over the last ten years, the nominal value of the Chinese Yuan relative to the U.S. dollar has been as stable as the nominal value of the California dollar relative to the nominal value of the Alabama dollar. That's not to say that the real value of the Chinese Yuan, the California dollar and the Alabama dollar have been stable, because they have not. Inflation rates in the areas have been different, for both goods and services and assets, with the currency of the area with the highest "domestic" inflation appreciating in real terms versus the others. And China's inflation rate has been the highest, meaning the real value of the Yuan has appreciated versus both the California dollar and the Alabama dollar.

But not enough, apparently, President Bush has concluded: he wants a higher real value for the Yuan and he wants it now! Presumably, he and Mr. Snow have one of two potential paths in mind in their desire for "fair" Chinese monetary policy: (1) Kick China out of the de facto monetary union, requesting that it remove capital controls and pursue a domestic-driven monetary policy, in which case suppressed global demand for the Yuan would presumably be unleashed to take the Yuan higher; and/or (2) force China to execute a one-off revaluation of the Yuan within the context of a pegged exchange rate regime versus the dollar, forcing up the value of the Yuan. These two paths are not, of course, necessarily independent, as the second path could be viewed as a precursor to the first path.

It's All About Relative Labor Costs
Underneath all this monetary policy mumbo jumbo, of course, lies President Bush's real beef: He sees Chinese labor as too cheap in dollar terms versus American labor, in either California or Alabama. In this sense, the quibble that the President has with China's Wen Jiabao is as if the Governor of California demanded that the Governor of Alabama revalue up the Alabama dollar versus the California dollar, because the dollar price of labor in Alabama is too low versus the dollar price of labor in California, making Alabama an "unfair" competitor in attracting job-creating capital.

The Governor of California - congratulations, Mr. Schwarzenegger? - can't do this, of course, because California and Alabama are legally bound in monetary union, in contrast to the de facto monetary union between the United States and China. But assuming that it was legally possible, it could well make sense for the Governor of California to make such a demand of the Governor of Alabama: the political self-interest of the Governor of California lies in job creation in California, because only citizens of California, not of Alabama, vote in California.

To be sure, a hypothetical devaluation of the California dollar versus the Alabama dollar would be a small negative "terms of trade" shock for California consumers, raising the price of everything they buy from Alabama. But the negative impact would be very small and very diffused (I'm not sure what I buy personally from Alabama, except for pecans, for my second favorite pie after coconut cream!). Consumers would be unlikely to evoke their wrath at the ballot box, while the positive impact on those directly benefiting from the "protectionism" of a weaker California dollar versus the Alabama dollar would likely show their gratitude behind the curtain.

Thus, protectionism does make short-term political sense, even though economists universally agree that it is deleterious to the whole of society in the long run. In matters of democracy, the economist's long-run bad dream is frequently the politician's real-time nightmare. Accordingly, President Bush's demand that China pursue a "fair monetary policy" is nothing more than rational political expediency: macro protectionism for U.S. labor, whose higher productivity does not justify its higher dollar wage rate versus the dollar wage of China's labor.

It really is that simple. And, understandable. If I were politically advising President Bush - quite the stretch, of course, given that I'm a Democrat! - I would advise that he "pander" to American manufacturing, just as he is doing. The political calculus of protectionism - even if in the drag of currency devaluation - is asymmetrically positive. Workers that benefit know that they are among the chosen few and show their gratitude at the ballot box, while consumers that are hurt rarely know that they are being nicked, and even when they do, are unlikely to get wrapped 'round the voting booth curtain rod about it. Thus, President Bush's call for China to pursue a "fair monetary policy" may be politically craven, but is also politically smart.

But What About Interest Rates?!?!
But what if China gets wrapped 'round the axle of annoyance and quits buying so many dollar-denominated bonds, driving up U.S. interest rates, I hear some dear readers retorting. You have a point, I will concede up front, as it applies to market-determined interest rates. I submit, however, that the "threat" of a nearby calamitous increase in U.S. interest rates in the wake of more muted foreign buying is much more muted than many of you fear. And the key reason is U.S. monetary policy itself: American monetary and fiscal policies are openly geared to fostering a cyclical increase of inflation, or at a minimum, avoiding an "unwelcome" cyclical disinflation.

Thus, there is virtually zero risk that a revaluation of the Yuan - via a shift to a floating exchange rate regime, or a one-off revaluation in the context of a fixed pegged exchange rate regime - would invoke the Federal Reserve to hike its 1% peg for the Fed funds rate. Accordingly, any market-induced - foreign or domestic-driven - upward pressure on U.S. intermediate and long-term interest rates would/will be limited by the leash of the Fed's reflationary anchoring of the Fed funds rate at 1%.

Put differently, there is a limit to how steep the yield curve can get, if the Fed just says no - again and again! - to the implied tightening path implicit in a steep yield curve. Put differently still, if there is ever a good time for America to have a devaluationist currency objective, it is when the Fed is in a reflationist "accommodative" state of mind: willing to accommodate however large a deficit the fiscal authority wants to run, and willing to accommodate any upward pressure on domestic inflation that might arise from a weaker dollar and associated upward pressure on import prices.

In such a context, which could also be dubbed a magical Keynesian moment, the cost of "irresponsible" policies is very low. Indeed, in the famous words of Paul Krugman, a man with a sensuous relationship with the English language, the responsible course for policy makers, when facing unwelcome disinflation/deflation risks, is to "credibly commit to be irresponsible." Or paraphrasing another great man of words, Forrest Gump, reflation is as reflation does.

Snow's Real Job: Secretary of Monetary State
Reflation is indeed America's present objective, with America's putative "currency policy" aligned accordingly. But make no mistake: a fiat currency country cannot have a currency policy independent of its monetary policy. America only pretends that it does, with the Secretary of the Treasury acting as the chief spokesman for a policy that is, in the end, subservient to the power of the Fed's printing press, and how the Fed decides to use it. Right now, the Fed wants a reflationary decline in the foreign exchange value of the dollar, as a prophylactic against "unwelcome" disinflation.

The Secretary of the Treasury is not, however, impotent in currency matters; he just doesn't set America's currency policy, because there can be no such policy independent of the Fed's monetary policy. What the Secretary of the Treasury, and indeed, the President of the United States can do, and should do when appropriate, is play hardball with America's trading partners about their monetary policy. In some cases, this may involve direct criticism of another country's currency regime, as in the case of China, when the other country's monetary policy is pegging the foreign exchange value at a level that America doesn't like. In other cases, when other countries have floating exchange rate regimes, as the case with Japan, global jawboning from Secretary of the Treasury and the President can involve gripes about interventionist "smoothing operations" - to wit, about the amount of interventionist dirt in "dirty floats."

More broadly, both the Secretary of the Treasury and the President can rhetorically pound on other countries to pursue monetary policies that are as reflationary as America's, or to suffer the consequences: (1) disorderly rises for their currencies at the hands of more rhetorically-charged declarations of America's reflationary intent, and/or (2) sector-specific regulatory trade barriers. In either case, the unveiled, unvarnished objective is to protect jobs of American workers toiling in fields when foreign workers are willing to work more cheaply, at the cost of a negative terms-of-trade "tax" on American consumers. These are the bald facts of global monetary diplomacy.

And sometimes, it is indeed economically justified for America to use its clout to "force" the global reflationary results that it wants. Such is the case when there is (1) global excess capacity to produce goods and services that global consumers desire and want, while (2) other nations cleave to mercantilist monetary policies, resisting American diplomatic pleas to stimulate domestic demand. Such is the case at present. America's clout rests in its ability to credibly threaten to act "irresponsibly" in currency matters, courting a disorderly decline in the foreign exchange value of the dollar, exploiting the inherent proclivities of the currency markets to (1) overshoot purchasing-power-parity "fundamentals" and to (2) react excessively to the words of the Secretary of the Treasury (even though he has no access to the Fed's printing press).

Bottom Line
Global monetary policy chicken is a dangerous game, and America should play it only when other countries fear a disorderly rise in their currencies even more than America fears a disorderly decline in the dollar. Put more bluntly, this game should be played only when the threat of a disorderly increase in non-dollar currencies is likely to induce monetary policy easing in non-dollar countries, removing any pressure for America to tighten its monetary policy to "defend" the dollar. Such is the case now; actually, such has been the case for several years. Indeed, almost a year ago, I publicly advocated that America play precisely such a monetary policy game with its major trading partners, declaring that:

"The time has come for the Fed and the U.S. Treasury to join forces, with Alan Greenspan cutting short rates and Paul O'Neill explicitly declaring that a strong dollar is not in America's interest. It is also time for America to announce to its G-3 partners that a weaker dollar is not a problem to be solved, but an opportunity to be seized by Euroland and Japan to aggressively ease monetary policy, using all available means, including non-sterilized currency intervention to temper the dollar's fall, and monetization of private sector assets. Yes, my friends, it is time for G-3 Keynesianism, in an all-out preemptive war against deflation."
I dubbed the "plan" the Morgan le Fay Plan1, in honor of my Dutch Netherlands rabbit, who helped me conceive it. Shortly after we proposed it, President Bush (co-incidentally!) fired Treasury Secretary O'Neill, replacing him with Treasury Secretary Snow. Morgan and I are happy that Fed Chairman Greenspan and Mr. Snow have seen fit to implement the plan. We are even happier that President Bush has bought into the plan, now commenting publicly as to the need for other countries to pursue "fair" monetary policies. In this case, "fair" is reflationary. And while the President was targeting his barb at China, it applies even more to Japan and Euroland.
All of which is, of course, ultimately quite bearish for global bonds. Yes, I do know that! In the fullness of time, higher U.S. inflation will ineluctably be transmitted to higher U.S. nominal interest rates. But a nasty bear market in bonds awaits not the promise of G-3 reflation, but the results of G-3 reflation. Only then will the Fed seriously contemplate hiking the 1% Fed funds rate. Time is not yet full, and will not be so for some time, quite possibly years.

In the meantime, Treasury Secretary Snow's job is to maintain a pool of foreign central banks to buy the dollar all the way down, not as an act of kindness to America, but as an act of anti-deflation, money-printing necessity for themselves. And as necessary, it won't hurt to have President Bush contribute to the reflationary cause by reminding his head of state peers of the famous words of a Texas thoroughbred, the late, great Texan, Secretary John Connally, who said, when his global peers were carping at him about a falling dollar:

"The dollar is our currency, but your problem."

Paul A. McCulley
Managing Director
October 8, 2003
mcculley@pimco.com

1 "Morgan le Fay Plan," Fed Focus, November 2002

-- posted by MarketVVizard

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» MarketVVizard - vs. Hussman

Analysis versus superstition

One of the key elements of our investment approach is the recognition that market action conveys information. As I've frequently noted, the best indicators of oncoming economic conditions are not statistics such as employment, GDP or industrial production, but market action reflected through risk spreads (the difference in yields between risky corporate bonds and default-free Treasuries), stock prices, currency markets, yield curves, and other forward-looking indicators.

That said, investors put themselves in jeopardy when they rely on any indicator or model without a firm understanding of why it should be useful, and the mechanism behind it. Investment decisions made without this understanding are not based on analysis, but on superstition.

For example, in recent decades, investors had come to expect extremely positive stock market returns following two consecutive cuts in the Federal Funds rate ("two tumbles and a jump"). Unfortunately, this experience was based on a world where a significant portion of bank assets were actually subject to reserve requirements, and where the primary feature of economic recessions was temporary weakness in demand. In the early 1990's, however, the Federal Reserve abolished reserve requirements on all bank assets except for checking deposits, which represent a minor source of bank funding. In doing so, the Fed assured its own irrelevance. Meanwhile, the capital spending bubble, fueled by a wild surfeit of speculative investment, left the U.S. economy with a great deal of overcapacity - which remains in place today.

Fed easing works when it eases some constraint that is actually binding. In most prior economic recessions, banks were willing to lend and businesses were willing to borrow. In that environment, policy changes that increased bank liquidity and lowered borrowing costs were followed by increases in bank lending. As a result, the stage-one engines of economic recoveries - housing, autos, and capital spending - enjoyed strong and fairly timely improvement following a series of Fed easings.

Unfortunately, investors who relied on two tumbles and a jump in recent years learned that Fed policy in the current economic environment is largely ineffective. At least, that's what they should have learned, and the lesson should not be missed.

If you look carefully at the current evidence for economic strength, it is evident that investors have placed an almost superstitious faith in leading indicators. The most frequently cited indicators of coming economic strength generally have very heavy monetary and stock market components. This is certainly true of the so-called "leading economic indicators" published by the Conference Board, but it is equally true of leading indices produced by private research firms. The difficulty in these indices is that they do not distinguish the current downturn (characterized by overcapacity and predictably ineffective monetary policy) from typical cyclical recessions. Our reading of market action suggests that the strength in the stock market since October is mainly due to increased willingness of investors to take market risk. There is no strong reason to believe that investors are acting on useful information about improved prospects for income, employment, or the economy in general.

Make no mistake - I strongly believe that market action is far more informative than government statistics when it comes to gauging economic prospects. But a blind adherence to rules-of-thumb can never take the place of careful analysis and understanding.

A great second half does not make an economic boom

Third and fourth quarter GDP growth will clearly be strong. As the analysts at Bridgewater have noted, the jump in third quarter spending was driven by growth in after-tax income during that period. Yet pre-tax income was stagnant. In other words, the spending burst during the third quarter (which undoubtedly resulted in GDP growth well in excess of 4% at an annual rate) was the temporary effect of consumers spending their tax windfalls. Meanwhile, inventories dipped somewhat, indicating that businesses did not increase production in anticipation of sustained demand. Most likely, that inventory will be replaced during the fourth quarter, so there will probably be some amount of follow-through to strong third-quarter growth. After that, the picture becomes much less clear.

In my view, analysts have been far too apologetic about employment being a lagging indicator. To hear them explain it, the strength in the stock market and Fed easings "in the pipeline" make the continuing weakness of the job market irrelevant. That's simply not true. If you look at the data, the year-over-year growth rate of total non-farm employment begins to improve sharply and immediately at the end of typical recessions. Employment growth doesn't necessarily turn positive right away, but the momentum always reverses from accelerating job losses (more and more negative rates of growth) to moderating job losses (less and less negative rates of growth). In contrast, there has been no perceptible reversal in the momentum of job losses in current recovery. At the end of the recession in November 2001, job losses were running at about -0.8% of total employment at an annual rate. Job losses remain at that rate today.

Similarly, our two old friends - capacity utilization and help wanted advertising - remain at abysmal levels. The recently released August data on help wanted actually fell a point to 37, while stagnant capacity utilization at 74.6% also remains near recession lows. Until these indicators of demand for labor and capital begin to improve strongly, the sustainability of any economic expansion will remain in question. Of course, the deep current account deficit virtually ensures - via the savings/investment identity - that growth in gross domestic investment and consumption will be fairly restrained in the coming years (see prior updates for more on the relationship between current account deficits and subsequent economic activity).

In short, there is little question that third and fourth quarter GDP growth figures will be very strong. Unfortunately, this says little about the sustainability of the recovery. While many analysts are placing great faith on monetary and market indicators, I have real doubts that investors can rely on the typical mechanisms that have linked these indicators to an improving economy.

Market Climate

The Market Climate for stocks remains characterized by unusually unfavorable valuations and modestly favorable market action. In the Strategic Growth Fund, we remain fully invested in a broadly diversified portfolio of individual stocks, with about half of that value hedged against the impact of market fluctuations. As usual, our returns are driven by the individual returns of our favored stocks as well as by overall market fluctuations, so it is simplistic to believe that our returns will simply mirror half of what the market does. More importantly, the historical data is clear that avoiding market risk in overvalued markets does not compromise long-term returns, regardless of whether valuations become more extreme over the short run. We're still positioned primarily to gain from an advancing market, but there are already enough blemishes in market conditions to hold us to something less than an aggressive position.

In bonds, the Market Climate remains characterized by modestly favorable valuations and modestly favorable market action. We took the opportunity of depressed bond prices last week to modestly increase our position in long-term Treasuries. At present, the Strategic Total Return Fund has a portfolio duration of about 5 1/2 years, meaning that a 1% (100 basis point) move in interest rates would induce a roughly 5.5% fluctuation in the value of the Fund.

Even if this was a typical economic recovery, we would expect the yield curve to begin to flatten at about this point. That pressure is even stronger given the potential for economic softness after the fourth quarter. I have little doubt that much of the flattening in the yield curve will happen through an increase in short-term yields rather than a sharp decline in long-term yields, so we want to hold some portion of our assets in very short-term Treasuries on the likely prospect of extending the maturities at higher yields. In any event, given that we do want to have some exposure to interest rate fluctuations in this Climate, our current mixture of TIPS, Treasury bonds, and very short-term Treasuries is comfortable.

-- posted by MarketVVizard

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» MarketVVizard - Roach

Due to job losses from outsourcing. wage and salary disbursements -- by far the dominant component of personal income -- are basically unchanged in real terms fully 21 months into this recovery; by contrast, at this juncture in the past six upturns, real wage income has been up, on average, by about 9%. The gap between the current cycle and the norm of earlier cycles works out to a shortfall of about $320 billion in real terms, or 4.4% of the current level of real disposable personal income. In other words, the foreign sourcing of domestic demand via imported productivity has given rise to a significant income leakage that already has had a material impact on household purchasing power. Absent other sources of support -- tax cuts, home mortgage refinancing, or a renewal of vigorous hiring -- this shortfall of internally driven income generation could end up spelling serious trouble for the overly indebted, saving-short American consumer. In short, there's good reason to doubt the sustainability of a recovery built on a foundation of imported productivity.

-- posted by MarketVVizard

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» MarketVVizard - sentiment

AAII Index:
Last week |2weeks ago |3weeks ago
Bullish 60.3% | 57.6% | 50.0%
Bearish 13.8% | 23.2% | 28.6%
Neutral 25.9% | 19.2% | 21.4%

Market Vane Consensus
Bullish 58.0% | 57.0% | 50.0%

-- posted by MarketVVizard

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» MarketVVizard - Cablevision's latest venture almost certain to fail

This company has a history of burning cash. You can check out their latest venture at most sears stores. VOOM HD satellite service. Was a neat idea, but it will almost certainly flop just like nearly all of their other investments.

You can read about hard core home theater folks opinions of its launch here.

CVC has run up tremendously, high market cap, negative earnings. Very shortworthy.

-- posted by MarketVVizard

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