September - Worst Month for Market Performance

Many investors believe October is the worst month for equity market returns. This can be partly attributable to the fact some large one day declines have occurred in October. The one market decline many investors think of is Black Monday that occurred on October 19, 1987 when the Dow Jones Industrial Average fell 508 points or 22.6%.

In actuality though, the worst month for market returns is September. Although the average return in September is negative, the magnitude of the decline was no worse the -1-1.5%.

The below chart from Chart of the Day details the average monthly returns for the Dow Jones Industrial Average for two time periods: 1980 - present and 1950 - present.


Source: www.seekingalpha.com August 29, 2008 ; Chart from Chart of the Day

Adjusted for Household Size, Real Income Reached an All-Time High in 2007

The Census Bureau just released its annual report that includes real, median household income for 2007 ($50,233). From the report:

Between 2006 and 2007, real median household income rose 1.3%, from $49,568 to $50,233 (see top chart above)—a level not statistically different from the 1999 pre-recession income peak ($50,641 in 1999 and $50,557 in 2000). This was the third annual increase in real median household income. Compared with 1967, the first year for which household income statistics are available, real median household income has increased 29.6%.

Comments: A comparison of real median income in 1967 of $38,771 per household to income of $50,233 per household in 2007 (29.6% higher) doesn't take into account the significant 22% decline in average household size over this period, from 3.28 persons per household in 1967 to an all-time low of 2.56 persons per household in 2007 (Census data here for income, here for average household size), see top chart above.

When adjusted for household size, real median income per household member reached an all-time high of $19,546 in 2007 (see bottom chart above), 65.6% higher than the $11,820 income per household member in 1967, and more than 2 times the unadjusted increase per household of 29.6% reported above.

Lost in all of the discussions and media reports about stagnating wages, income inequality, and the decline of the middle-class, we have this amazing statistical reality: In just a little more than one generation, real median income per household member has increased by a factor of almost 2/3!

It's been said that "the media constantly dwell on minor problems without celebrating the broader, more upbeat context in which they exist." A 2/3 increase in real income per person in just 40 years is definitely part of the broader, more upbeat context.

Source: Seeking Alpha, August 28, 2008

Bond Bulls

Wall Street strategists have generally become more bullish on bonds as interest rates have declined. The chart below shows the normalized trend in 10-Year Treasury yields along with the average recommended bond allocation by strategists at a group of Wall Street firms. For most of this decade, strategists have recommended that investors keep about 25% of a balanced portfolio in bonds. At the end of August, the recommendation was that almost one-third of a portfolio should be in bonds. These strategists are pretty smart and we suspect that some are focusing on safety, amid worries about housing and some financial firms. But as contrarians, we think it is simply worth considering whether bonds deserve a bigger portion of your portfolio when the 10-year Treasury is yielding 3.8% and the inflation rate has surged from 1.3% at the end of 2006 to 5.6% in July, the fastest pace in 17 years.

Source: Argus Research, Market Watch, August 28, 2008

Financial News Headlines

Dollar intervention planned, abandoned. Nikkei business newspaper reports that the U.S., Europe, and Japan created a dollar rescue plan in March when the currency was plummeting. The officials did not choose which exchange rate would trigger the plan, but were prepared to aggressively buy dollars and sell yen in the event of continued dollar weakness. The intervention was never put into action, but makes some investors wonder whether a future fall in the dollar could spark a new multi-governmental rescue plan.

U.S. companies might start using international accounting rules. The SEC proposed a tentative timeline on Wednesday that could require U.S. companies to switch to international accounting standards by 2014. Until now, the U.S. has used Generally Accepted Accounting Principles [GAAP], which are considered less flexible and more clearly defined than the international financial reporting standards [IFRS] used in Europe and in dozens of other countries. The timeline fits with a global plan to converge GAAP and IFRS, a move that would be welcome to many in the accounting industry.

MBIA to reinsure FGIC municipals. MBIA (MBI) has agreed to backstop $184B in FGIC municipal bonds. FGIC's future remains uncertain and the reinsurance agreement allows it to focus on other problems connected to mortgage securities. MBIA will receive a $741M premium.

Bankruptcies soar. Bankruptcy filings shot upwards in the year ending June 30, to nearly 1M total. Business filings were up 41% and personal filings rose 28% on the previous year. Filings are expected to reach 1.2M this year.

Job market confidence same as 2001. A new survey shows worker confidence at a low last seen during the 2001 recession. With unemployment at a four-year high, 65% of respondents said this is a bad time to find a quality job, and 33% of workers said they don't always have enough money to make ends meet.

Durable goods show surprise growth. July durable goods orders rose an unexpected 1.3% on strong transportation equipment demand vs. a consensus 0.2%. Excluding transportation, orders rose 0.2%. U.S. Treasury debt prices fell as the report suggested resilience despite the deep housing correction and credit crunch.

Lockhart: Fed prepared to raise rates when needed. Federal Reserve Bank of Atlanta President Dennis Lockhart said Wednesday that the Fed's interest rate is consistent with slowing inflation, and signalled readiness to raise borrowing costs if such a move is needed.

Source: SeekingAlpha

Headline Financial News - 8/27/2008

Fed Minutes show weak outlook, split on inflation. Minutes released yesterday from the August 5 FOMC meeting show the Fed expects weak economic growth and moderating inflation through to the end of the year, and committee members marked down their forecast for growth in the second half of this year and 2009. The central bank's interest-rate target remained unchanged at 2%, and though committee members expect to raise interest rates at some point, the timing of such a move is unclear since most committee members believe the interest rate is not too low given the current economic situation. Fed officials appeared divided on exactly how great a threat inflation poses and to what extent financial stress is weighing down the economy.

FDIC may replenish funds with Treasury loan. Increased bank failures have pushed the FDIC's reserve ratio to 1.01% ($45.2B), low by historical standards, forcing the FDIC to develop a restoration plan to replenish the fund. Risks remain high, with 117 banks on the FDIC's "problem" list compared to 90 in Q1. Chairman Sheila Bair said Treasury borrowing could be needed to cover short-term cash-flow pressures created from reimbursing depositors immediately after a bank failure. The loan would be repaid once the failed bank's assets had been sold. Washington regulators are concerned that the FDIC is turning to the Treasury after only nine bank failures, a move that underscores the weakness of the U.S. banking system in the wake of the credit crisis.

U.S. consumer confidence hits near-record low. ABC's weekly Consumer Comfort Index shows American consumer confidence fell to a near-record low as gasoline prices remained high, and inflation and unemployment continued to weigh down the economy. The index was down to -50 in the week to Aug. 24, one point lower than the previous week, and dangerously close to the all-time low of -51, reached in May.

S&P/Case-Shiller see housing decline moderating. S&P/Case-Shiller says broad-based declines in U.S. home prices continue. Q2 prices fell a record 15.4% vs. a year ago. It does see the decline moderating, and a possible bottom in some regions.

Source: SeekingAlpha.com

That’s a Bubble?

We’ve charted the growth in three of the most recent bubbles in the financial markets and economy: the Nasdaq/dot.com Bubble of 2000, the increase in home prices as measured by the OFHEO Home Price Index, and the current run-up in oil prices. Our simple chart attempts to capture the formation of the bubble by scaling the monthly values of each index 70 months prior to a peak. We know the Nasdaq and OFHEO peaks, and for this exercise we assume the peak in oil to be July 2008. There are several interesting trends in this chart, such as the parallel ascents in the Nasdaq/dot.com run-up and crude oil (West Texas Intermediate). What may be more interesting is that the run up in home prices pales in comparison to the other “bubbles.” Of course, consumers weren’t as leveraged to oil or stocks as they are/were to their homes.

Source: Argus Research Market Watch, August 26, 2008

S&P 500 Performance

The S&P 500 recorded five consecutive down months beginning in Nov ’07 and carrying through March ’08; this included awful monthly declines of 4.4% (Nov ’07), 6.1% (Jan ’08), and 3.5% (Feb ’08). After recovering 4.8% in April and 1.1% in May, the S&P gave it all back with a blistering 8.6% decline in June. July was mildly positive. All told, the S&P has been down in five of the seven full months recorded in 2008. The index declined eight months in 2000; six months in 2001; and eight months in 2002. If that unholy period proves a template for the current bear market, we’re only halfway through. Let’s hope this painful period develops more like 1990-91; the S&P fell seven months in 1990, but only three months in 1991.

Headline Financial News - Tuesday August 26, 2008

Regulators Put More Banks on Probation: Federal regulators have put more struggling banks on "probation," forcing them to fix their problems and try to avoid costly failures. More so-called memorandums of understanding have been issued this year to date than in all of 2007. The memorandums can force banks into agreements that include taking steps to raise capital, cutting back on risky loans and suspending dividend payments. The FDIC had 90 "problem" banks on its list at the end of March, but there have been five bank failures since then and many more considered at risk. A revised list will be released Tuesday.

Troubled economy weighs on Obama's ambitious agenda. With the Democratic National Convention underway, Obama is finding his ambitious economic agenda threatened by economic reality, WSJ says. Obama is calling for a government healthcare plan to cover millions without insurance; a system of tradeable pollution permits to reduce emissions; and higher income-tax rates and capital-gains tax rates. His top priorities would cost hundreds of billions of dollars a year, not counting a stimulus plan he is considering with a price tag of $115B.

U.S. home sales rise 3.1% in July. Home sales rose 3.1% in July, their highest level since February, as falling home prices attracted buyers. The number of homes and apartments for sale rose 3.9% in July, adding to the supply glut and further depressing home values. Home prices were down 7.1% in July over the previous year, and at least a third of July's property sales involved foreclosed homes sold at discounted prices or by owners with no alternative.

Source SeekingAlpha.com

Gross, Fuss discuss capital raising by Fannie, Freddie: Bill Gross, chief investment officer at Pacific Investment Management, and Dan Fuss, vice chairman of Loomis Sayles, said they would participate in fundraising efforts by Fannie Mae and Freddie Mac if the Treasury is also involved. The two disagreed on how the deals should be structured: Gross is interested in a straight preferred-stock offering, while Fuss suggested a convertible-debenture offering. Reuters

Don't go around saying the world owes you a living. The world owes you nothing. It was here first.-- Mark Twain

U.S. Market Value Vs. GDP

Among the tools we use to value U.S. equities, we compare the value of the U.S. stock market to the value of real U.S. GDP. From 1945 through 1989, the U.S. stock market typically traded at about half of the level of seasonally adjusted, annualized U.S. GDP. (The average from 1945 to 1989 was only about 63%.) The early 1980’s marked the beginning of a new era of investing, as 401Ks opened investing up to a broader group. From 1980 through 2007, the average ratio of market cap to GDP was 91%. It wasn’t until 1995 that the U.S. market began to trade at a premium to U.S. GDP; it reached a peak of 189% in 1999. Despite the near-bear market that exists today, the U.S. market still trades at 114% of GDP. But an estimated 45% of S&P 500 earnings now come from outside the U.S., nearly twice the percentage as recently as 2001. The S&P 500 accounts for about 80% of the market value of U.S. stocks. Still, bulls have speculated that U.S. stocks are already priced for a U.S. recession. We are not sure of that based on this analysis.

Source: Argus Research Market Watch, August 25, 2008

Best Industries for Growth in 2Q08

Just about all S&P 500 companies have now reported second-quarter earnings. Overall, results were weak (down nearly 25% from the second quarter of last year). However, as is often the case in earnings recessions, the weakest sectors (banks, autos, etc.) are having a disproportionate impact on overall results. Back in the 2001/2002 earnings recession, it was the technology sector that dragged down earnings for the S&P 500. This time around, the clouds surround banks and consumer discretionary companies. But there were several non-energy industries that posted double-digit earnings growth in the second quarter and against strong year-ago results. Most of the sectors listed below are focused in less cyclical areas like consumer staples and healthcare. But technology earnings have held up better than we expected thus far in the cycle as well. The technology sector has sold off a bit of late, we believe on the expectation that earnings in that sector will start to come under more pressure as well.

Source: Argus Research, Market Watch, August 21, 2008

Recession Measure Holding Up

The National Bureau of Economic Research (NBER) is the arbiter of business cycle changes. When the group meets to determine if and when the U.S. economy has slipped to recession, it uses several gauges — including trends in real GDP, real personal income, payroll employment, the real volume of sales of the manufacturing and wholesale-retail sectors and a privately produced monthly estimate of real GDP. Some of these measures imply recession, while others do not. Manufacturing activity is also one of the closely watched indicators, and is best represented by industrial production. During July, industrial production increased 0.2%, which followed a 0.4% gain in June. This is encouraging because the index had hit the skids from February through May. A graphical depiction of this index suggests the firsthalf slowdown paled in comparison to the pronounced downturns experienced during confirmed recessions.


Source: Argus Research, Market Watch, August 20, 2008

What a Difference a Month Can Make or a Rebound in the Dollar

In terms of investing style, small caps are back; the Russell 2000 is off just 3% year-to-date, compared with declines of 13%-14% for the Dow and the S&P 500. At the other ends of the spectrum are the NYSE (off nearly 15%) and the Nasda (now down “only” 8.8%). In the Schadenfreude department, U.S. market performance is sterling compared with that in former growth markets. The Shanghai Composite is down 55% year to date; the BSE Sensex (Bombay, India) index is off 28%. Most major European indexes are down 22%- 30% YTD in local currencies. While those declines were in the past mitigated by dollar weakness, the strong dollar means that dollar-denominated overseas declines are now aligning with local-currency declines. Investors ruing their international portfolio returns have learned that misery really does love company … after company...

Source: Argus Research "Market Movers" 8-20-08

Q2 2008 Earnings Profile

Bespoke Research separated the more than 2,300 US stocks that have reported earnings since early July into their respective sectors and calculated the percentage that beat earnings estimates. As shown below, the Industrials sector takes the title for the second-quarter reporting period with a "beat" rate of 70.1%. Industrials are trailed by Consumer Staples at 64.7% and Health Care at 63%.

Overall, just under 60% of companies beat earnings estimates, which is inline with the prior two earnings seasons. Financials and Telecom were the only two sectors that had a "beat" rate of less than 50%.



Source: Seeking Alpha, August 19, 2008

Profit Estimates Still Falling

The current mean of S&P 500 profit estimates from market strategists is $84.77 per share for 2008 and $91.21 for 2009. Still, stock analysts and market strategists have been steadily decreasing their estimates for the past several months. Our current estimate is $80 per share for 2008 and $90 for 2009. We note, however, that estimates of strategists seem to have stabilized over the past few months — with the deepest cuts happening earlier this year. We continue to believe that EPS estimates for the banks are too high and we are starting to see signs of weakness in other sectors. We are waiting to incorporate second-quarter earnings from retailers into our model and we may lower our earnings estimates once again for both 2008 and 2009. The current strategist consensus of $84.77 implies a slight decline for earnings in 2008 versus 2007. In 2007, earnings were down only slightly from the record 2006 level. We think that such a modest peak-to-trough decline is too optimistic.


Source: Argus Research Market Watch, August 18, 2008

Commodity Prices Remain Elevated

Most broad indices of commodity prices have declined by more than 10% over the past few weeks. Below, we have charted the Reuters/Jeffries CRB Index. Through August 6, this index had lost about 10% from its peak value in early July. The Dow Jones-AIG Commodity Index is also down sharply from its recent peak. (Still, it’s important to note that both indices have still increased by more than 15% in 2008.) Recently, investors have tentatively bid up equities – but we believe that the sell-off in commodities may prove shortlived. The U.S. dollar may weaken again as the U.S. economy works through the credit crunch. And demand for commodities from foreign markets still appears to be strong, with long-term supply constrained in many cases.


Source: Argus Research Market Watch, August 14, 2008

Recent Federal Reserve Presidents' Comments

Richmond President focused on inflation more than growth:
Richmond Fed president Jeffrey Lacker said that although economic growth risks persist, he's far more concerned about inflation, compounded by the surge in energy and commodity prices which may or may not be moderating. "For us to lose substantial ground on inflation would be much more costly for us to remedy than for us to have to face a more substantial slowdown in growth than we've seen so far." He said financial markets have weathered economic storms admirably, and believes the Fed's monetary policy is due some credit. "A 2% federal-funds rate with overall inflation running at 4% is an exceptionally low real interest rate -- lower than we've had in the post-war record."

Minneapolis President focused more on growth than inflation:
Minneapolis Fed president Gary Stern said it remains a close call whether the current slowdown will ultimately be defined as a recession. He hopes the Fed will be patient in waiting to hike interest rates, but acknowledged it's not always possible to wait for the economy to heal: "If you wait until you have conclusive evidence, you run the risk of waiting too long. And so the real message is you've got to be willing at some point along the way to say, 'You know, I have enough confidence in my outlook that it is time to go.'"

Who's right? Only time will truly tell. I due believe a little more patience is needed. Housing stability needs to occur before much action by the Fed can take place. I don't believe housing prices have reached their bottom and inventories are too high. As these moderate to the norm, then the focus can shift to inflation. Don't get me wrong, inflation is an issue.

Risk Aversion and Decision Traps

Great article covering risk aversion and how the typical investor reactions and makes the wrong decision. This is a time to be buying great companies selling at a discount. The American public loves sales; well the market in on sale. PG selling at 60 is an example of a great company selling at a discount. It is surely cheaper than it was just 12 months ago, but still providing the same revenue and earnings growth. Financials are another issue; time is needed to determine who is going to survive. Mr. Greenspan left Mr. Bernanke a mess to clean up.
Review our website in the coming months as we cover ‘Eight Common Decision Traps”. We are working in concert with a local university to communicate the traps and provide tools to overcome them.

Risk Aversion
By Felix Salmon
Source: Seekingalpha.com, 8-8-08

I've been thinking a bit more about the downside of risk aversion, which is something that Steve Waldman, brought up yesterday and which I then applied to the ARS fiasco, among other things. The problem is that it's entirely natural, even when it isn't a good thing, and so I've been wondering a little a related question: given that risk aversion has always been around, how has capitalism dealt with it in the past?
Recall that it was too much risk aversion (it even had a name: "portfolio insurance") which caused the 1987 stock-market crash. And it's too much risk aversion which causes any kind of liquidity crisis, from a generalized reluctance to lend all the way to an outright bank run.
Right now, investors are really panicky, because they're coming to realize -- quite possibly for the first time -- that there's a large amount of risk built in to all of their savings. If you just kept your money in a savings account, it was historically perfectly safe. But with the dollar collapsing, that's no longer the case. If the world's reserve currency is also a weak currency, what is a risk-averse investor to do? Other stores of value -- buying commodities, or other currencies -- involve increasing your risk profile, so while they might make sense, they're not a great place to go psychologically. And as for the safety of housing, well, the less said about that the better. Suffice to say that it probably would be a safe investment, if it weren't for the fact that it was so highly leveraged.
In many ways, the financial system is actually based on risk aversion. That's why there are more bonds than stocks: with a bond, you're promised your money back, in full, with interest. Stocks have a significantly higher return than bonds, which results in the equity premium puzzle. Even after accounting for risk aversion there's a puzzle there; before accounting for risk aversion, it doesn't seem to make any sense at all to buy bonds rather than stocks.
Risk aversion is so all-pervasive that capital-structure arbitrageurs are never going to be able to make it go away. And as we've seen it extends even unto the very largest investors, entities like the Chinese central bank, with trillion-dollar balance sheets. (Maybe if they hadn't been so risk-averse, buying only US Treasuries and their ilk, they wouldn't have lost so much money when the dollar collapsed.)
Stock-market investors, too, are risk averse -- even those who you might think wouldn't be. I remember talking to a very successful investment banker once, who was being offered downside protection on her stock portfolio by her private bank. Of course, as a successful investment banker, she priced out the product: she went to a friend working in equity derivatives, and worked out how much it would cost to replicate wholesale. But once she did the math and decided that her private bank wasn't ripping her off, she was very serious about buying the product. It's called the endowment effect: Once you have money, you're more scared of losing it than you are excited about seeing it grow.
Risk aversion is a great way of explaining business cycles. When everything's going up, people spend much less time worrying about the risk of things going down. So their risk aversion dissipates, or else it's simply overwhelmed by their fear of losing out on potential upside. Nothing lasts forever, however, and so when the bull market ends, the risk aversion comes back with a vengeance. Things are going down, so worrying about things going down is entirely natural. And there's precious little opportunity cost to playing it safe, either: in fact, the safest investments tend to outperform.
For that matter, risk aversion is also a great way of explaining the success of Warren Buffett. He's an insurer at heart, and insurance companies make their money by insuring people against the risk of loss. He's happy taking big, billion-dollar risks, so long as they're priced correctly. And he loses no sleep when the securities he's invested in fall in value: if anything he likes that, because it just means they're getting cheaper and better value should he want to buy more. The vast majority of us, however, simply don't have the psychological ability to behave like Warren Buffett. (And, of course, Buffett's a multibillionaire with a relatively modest lifestyle whose children will inherit relatively little: he can easily afford his attitude to risk.)
You can't make risk aversion go away: it's hard-wired into what it means to be human. Maybe all we can do at this point is sit back, and wait, and have faith in a higher power. It's called greed.

Inflation Increases = Fed Rate Increases

The Bureau of Economic Analysis reported a 0.8% increase in the personal consumption expenditure deflator (PCED) during June – the largest monthly increase since September 2005 (1.0%) when hurricanes damaged infrastructure in the Gulf and sent prices skyward. Over the last 12 months, consumer inflation is up 3.9%. This surge in inflation took a notable toll on the pace of spending. During June, total consumer spending increased 0.6% — but once adjusted for inflation, that figure actually contracted by 0.2%. Meanwhile, the core PCED increased 0.3% in June, and has risen 2.25% since June 2007. This exceeds the Fed’s comfort zone of 1.0%-2.0%. This elevated pace of inflation has several members of the FOMC concerned, which may ultimately result in a Fed rate hike. However, at this point, the Fed is in no position to cut or raise its benchmark target rate.

Book Review: 'Greenspan's Bubbles' by Bill Fleckenstein

Originally posted at:http://seekingalpha.com/article/89073-book-review-greenspan-s-bubbles-by-bill-fleckenstein


Much of the public who are aware of Alan Greenspan have only heard positive things about the former governor of the Federal Reserve board. Political pundits, when commenting on Greenspan, offer nothing but effusive praise. Wall Street has deified the ex-jazz musician.

Then there are a small band of critics who charge that Greenspan has been recklessly incompetent and has imperiled the US economy.

One of those critics is short seller and hedge fund manager Bill Fleckenstein. "Fleck," as he is known, has been an unrelenting critic of Greenspan since I first stumbled across his writings over a decade ago. A witty writer, Fleck has penned a short book entitled Greenspan's Bubbles where he lays out the case against The Maestro.

According to Fleckenstein, much of the prosperity of the past 20 years has been due to Greenspan's penchant for bailing out financial markets when they have gotten into trouble. Rather than allowing markets to clear naturally, Greenspan sought to cut interest rates and increase the money supply whenever asset markets fell hard. This encouraged risk taking and the development of the "Greenspan put" whereby investors felt they could take on more risk than they otherwise would have had they not believed that Greenspan would bail them out.

Each crisis was met with more action by the central bank, which meant more stimulus and more problems down the road as problems where pushed into the future. The excess monetary creation fed its way into the real economy, artificially inflating economic growth and encouraging the misallocation of resources and excess supply - think tech stocks and homes. Eventually, Fleckenstein argues, we will have an enormous bill to pay, one that we may be paying right now.

Greenspan's claim that bubbles could only be identified in hindsight and the proper duty of the central bank was only to deal with the after-math of the popped bubble contributed to the creation of bubbles. If an asset bubble was being fed by the central bank, yet the central bank was unable to recognize the results of its actions, and then used the power of the printing press to flood the system with money to ease the asset market's descent. The seed's of the next bubble were being sown if the bank did not embark on a policy of cleaning out the excess monetary creation. This, Fleckenstein argues, occurred under Greenspan.

Fleckenstein argues that many adjustments to the economic statistics (not necessarily the fault of the Federal Reserve or Greenspan) have skewed the true health of the economy, leading to poor policy decisions. For example, hedonic adjustments to the calculation of inflation have understated inflation. Adjustments have always lowered the official rate of inflation because of quality improvements - think computers - but never once have inflation rates been adjusted upwards because of deteriorating products and services - think airline flights.

Fleck also takes issue with the notion that productivity rapidly improved during the latter half of the 1990s, which Greenspan inferred through the increase of investments in technology, even though official growth rates in productivity had not yet shown a dramatic increase. Greenspan believed that productivity was being understated by official figures since all the investments in computers and servers and software must have lead to an acceleration in productivity, even though there was little empirical evidence that this was so.

A former protégé of Ayn Rand, Greenspan had an enduring faith in markets. By buying into the notion that markets were almost always efficient, there was no reason for the central bank to intervene when asset markets went nuts, valuing companies in the billions of dollars when a company barely had $10 million in sales. If the collective action of millions of investors valued such a Talking Sock Puppet company at that level, who was the central bank to doubt them?

Today, nearly a half a trillion dollars worth of losses have been recorded by banks as home prices have fallen nearly 20% from their peak according to the Case-Shiller home price index, all on top of the collapse of the Tech Bubble, which erased $7 trillion of shareholders' wealth.

I generally agree with the central premise of the book - Greenspan was complicit in the creation of the never-ending asset bubbles. I would also concur that Greenspan's stock, like the stocks of the Talking Sock Puppet companies of The Tech Bubble, is vastly over-rated. Whether or not he is the worst central banker of all time, I have no idea for I don't even know the name of the Fed governor in 1929 and am too lazy to Google it.

Fleckenstein acknowledges that Greenspan is not solely to blame for the asset bubbles. However, I think that though Greenspan may be the single greatest contributor to the bubbles, I tend to believe that he is not as responsible as his arch critics and the perma-bears contend. The support to keep the party going was intense, not only from the politicians in Washington, but from Wall Street and investors themselves. Remember, the emotions were so incredible; analysts who downgraded stocks would sometimes receive death threats. M guess is that it wasn't Alan Greenspan making them.

Greenspan's faith in technology investments driving an acceleration in productivity gains is almost certainly over-done. However, the lesson I take away is that so much power should not be in the hands of one man. Greenspan was the overwhelming force on the Federal Open Market Committee. It was Greenspan who determined the setting of the interest rates, and not the FOMC.

Greenspan used the committee primarily to legitimize his decisions on the rate that should be set. If Greenspan - that one man - was wrong, for example, about the productivity gains arising from technology investments, then the fall-out from the Fed's policies could be disastrous. Thus, Ben Bernanke's decision to democratize the FOMC is a very welcome decision.

Fleckenstein wrote the book with Fred Sheehan. Greenspan's Bubbles is short. It does not take long to read. In an interview with Kate Welling, the authors said that the length of the book was due to the tight deadline set by the publishers. Sheehan will publish a more extensive volume in the future.

Economy Sheds 51,000 Jobs

The U.S. economy lost 51,000 nonfarm workers during July, which followed a revised 51,000 decline in June. The economy has now eliminated workers for seven consecutive months – and the losses during that period total 463,000, which is a far cry from the roughly 1.8 million jobs lost in the 2001 recession. The current weakness was widespread — with the usual culprits of manufacturing (35,000) and construction (22,000) leading the layoff pack. Retailers furloughed 17,000 workers in July for an eighth consecutive monthly decline. The most disturbing of all components was the jump in the unemployment rate to 5.7% — the highest level in four years. It’s going to be tough for the economy recover quickly now that tax-rebates have come and gone and with a difficult jobs environment.


Source: Argus Research Market Watch, August 1, 2008

Bank Stocks Need A Catalyst

The KBW/Philadelphia Bank Stock Composite is a market-weighted index of the 24 largest U.S.-based regional bank stocks. Since hitting an all-time high in February 2007, the index has lost more than half of its value and is now trading at a level not seen since 1997. On valuation measures, the index is looking as cheap as it has been since the last major banking crisis in the late 1980’s/early 1990’s. The index now trades essentially even with reported book value versus the 30% premium that prevailed as recently as May. Even excluding goodwill and other intangible assets, some banks are trading at discounts to their book value. Still, bank stocks are not likely to stage a sustained rally until a bottom in home prices begins to come into view as well. Until then, investors will struggle to value these stocks.


Source: Argus Research Market Watch, July 31, 2008