February 10, 2009
Grieving Over Lost Dreams
There is much speculation over exactly what kind of projects will be built into the economic stimulus package that will come out of Washington and when they will actually reverse the recession and get us back into an economy we don’t have to worry about so much.
I have stated several times recently in this newsletter that earlier stimulus moneys are slowly gaining traction in the economy. Government money normally takes 6-9 months to show up in the stock markets, perhaps longer in economic statistics. But the real question is when does that time period begin. In December 2007 when the Feds began injecting $20-30 billion per month into struggling banks? Or on October 2nd when the $700 billion TARP bill passed? Somewhere in between?
No one knows for sure, but either way the clock towards economic lift-off is ticking. And with an estimated $9 trillion of investment money sitting on the sidelines, when the stock market begins to rally and that much money begins moving back into the markets it could be a spectacular stock market run. Here is another indicator showing that we are very close to that point.
Sedge Coppock, who died in 1989, was known for analyzing patterns of human emotions in the stock market. In 1962 he was hired to manage money for the Episcopal Church, and had the opportunity to interact with a number of church officials. Coppock asked about how much time a person spent grieving after the loss of a loved one. The answers generally ranged from 11-14 months before acceptance and normalcy begin to return.
Coppock theorized that investors actually grieve over significant financial losses much like when a loved one dies and it also takes time for the painful memory to recede enough so that normal investing can resume once again. This makes a lot of sense if you think about it. The lifestyles of many investors have changed due to losses in 2000-02 and again in 2007-2008, just like lifestyles often change after a love one dies. Anything that forces a lifestyle change is a big deal.
As a result of this insight, Coppock devised the VLT (Very Long Term) Momentum indicator built upon this insight. This indicator, now called the Coppock Curve, measures market declines and the time that has passed since the decline ended and generates signals that mark very low risk entry points into the market.
The Coppock Curve is currently at a point from which significant signals often come. It would take a huge market rally to turn this indicator up in February, but smaller and smaller increases are required as time goes on and the grieving process over last year’s losses runs its course.
I maintain a list of about 140 market indicators looking for consensus shifts among them to help me identify turning points in the market. The improvement among these indicators during the week of February 6th was dramatic. Having the Coppock Curve provide a buying signal would be an indicator not only that the market was returning to health but also we are entering a very low risk environment to buy stocks.
How Can Unemployment Numbers be Positive?
The big news last week was that almost 600,000 jobs were lost in January, the highest monthly job loss since December, 1974. According to the US Bureau of Labor Statistics, the unemployment rate is now up to 7.6%, the highest rate since May of 1992 in the wake of the 1990-91 recession.
How can these numbers be good? I’ll tell you.
One thing to keep in mind is that unemployment is a lagging indicator. Unemployment normally peaks after a recession is over. It is part of the creative destruction of capitalism, where inefficient or low-demand businesses are forced to trim back or shut down completely as demand shifts to new industries which will rise and lead the economy in the next cycle.
Capitalism is the purest form of democracy. Whenever we spend money, we each vote with our dollars, showing where the demand is without the need for much filtering or interpretation. Demand shifted out of industries with rising unemployment months ago. It takes businesses a while to recognize that the change is more than a blip and then adjust.
The key here is that unemployment tells us that business was bad months ago but does nothing to tell us about what to expect. Successful investors make money by preparing for what is ahead, not reacting to last year’s news.
The good news is that regardless of whether you are comparing numbers of jobs as the comparison to December 1974 does, or percentage of the workforce that is unemployed as the comparison to May of 1992 does, these peaks in unemployment almost always occur after the bulk of a recession is over and the economy is on the mend. High numbers right now tell us we are closer to the end of the economy’s problems than the beginning, which is very good, really.
Remember the cause of the 1973-74 recession? It was the Arab oil embargoes and the damage they did to our economy. Many factories shut down for lack of energy. Oil prices quadrupled – if you could get any at all. Remember the gas lines? The December, ’74 peak in unemployment was at the end of that business downturn. Therefore current numbers can be interpreted to mean we are toward the end of this one, too. In addition, I don’t think conditions are as bad right now as they were in 1973-74, so don’t let the media scare you.
During the great depression, unemployment reached 25%. We are currently at 7.6%. That is higher than we are used to, but a long way from 25%. Unlike the 1930’s we are not beset by global trade wars, nor a Midwestern draught and dustbowl that displaced millions. So although the stock markets have shown great losses, in general, our economy is not as bad off as many other periods. We recovered nicely from those times. We will recover from this one, too.
Creating Financial Zombies
There is great hope in the economic recovery bill being crafted in Congress, but there is great peril, too. In trying to bail out struggling companies, Congress may unknowingly put healthy ones at risk. I’m increasingly worried that we may regret the unintended – and possibly long term – consequences of a hastily written law.
Granted, the government has an interest in propping up failing enterprises whether they are banks, automakers or whatever, so they can continue to provide jobs.
But in propping up businesses that are uncompetitive we allow them to use government money to compete with healthy companies which receive no government funding. This puts the healthy companies at a competitive disadvantage. A big one. Perhaps big enough that a few of the healthy companies may go under as a result. Times are tough all over, even for healthier companies. They don’t need Congress making their tasks any tougher.
Healthy companies are the engine of growth in this country. If, in the process of trying to soften the economic hardships of some, we hobble or even kill off healthy companies, in the long run, our economy may become worse rather than better.
A report from the Congressional Budget Office on February 4th, 2009 said although the massive stimulus bill now in Congress may help in the short run, the economy may be less productive in 10 years than if the government did nothing due to the zombie effect. And this is from a non-partisan government agency.
The prosperity that Americans have enjoyed for generations is built upon the efficiency of our free enterprise system. Rewarding inefficient businesses is the opposite of what has gotten us this far.
Sure, we have current problems in the financial system, but isn’t your standard of living still better than 30 or 40 or 50 years ago? Think cell phones, high definition TV and instant computerized communication. That kind of prosperity is created by the productivity of free markets.
Too much government intervention can make an economy less productive as we have seen in every instance where it has occurred.
We must protect the mechanism that creates this prosperity at all costs, so tell your representatives in Congress if you share my concern.
On the Lighter Side
Perhaps we should warn people from Nigeria that if they get any emails from Washington DC about money transfer schemes, it’s a scam. Don’t fall for it.
Also, something that worries me about the banking crisis is that if one of my checks is returned for ‘insufficient funds’ does that refer to the bank’s funds or mine?
Markets and Account Update
January was not a good month in the markets. After ending the year 2008 on a strong note, negative news kept buyers away and the stock market drifted lower during most of January as did the government bond market. Remember my article called “Treasuries Becoming Toxic” from a month ago? Well it happened.
Although we did better than the major market indexes, I’m sorry to say we still had losses in January. That’s the bad news.
The good news is that the market has once again turned up and is still holding above the November lows which is a very good sign.
Other positive developments are the emergence of junk bonds as market leaders. Junk bonds, despite their bad name are one of the best leading indicators -up and down – that we have in this business and they are up strongly over the past month.
I often say this is a crazy business, and the fact that in the face of all the bad news in the economy, junk bonds are rising and Treasuries are producing losses is another example of how things rarely happen the way you would expect and why I favor a flexible investment approach.
Currently our Flexible Income model* account holds an Inflation Protected Bond fund, a Junk Bond fund and a fund that goes up as Treasuries go down. Careful Growth* account holders will notice me moving to protect against inflation with investments in energy and gold mining, plus health care, internet, junk bonds and the same “inverse” treasury fund as our Flexible Income accounts*.
Our municipal bond accounts* are once again fully invested after sitting out most of the Fall, and our socially screened accounts* hold investments in clean-tech, a socially screened index and junk bond funds.
This is the time for investors to be patient. Any losses we have sustained have been very minor compared to the S&P 500 Index** which represents what the average investor experienced.
An investor who rode the S&P 500 Index** down 51.92% from October 9, 2007 to November 20, 2008 would need a 107% gain, just to get back to even. Investors in my Careful Growth* strategy need only a 25.3% gain to reach breakeven. We are that much better off. A 107% gain will put our growth accounts* up over 80% while an index investor would just be breaking even.
No method of investing is perfect, but managing risk through active management the way I do can provide a significant edge over normal buy and hold investing as these numbers show.
1099 mailings are later than normal again this year. But at least the government has recognized the problem this time.
The reason for the delay is a new law passed late last year that has permanently changed the deadline for brokerage firms to furnish Forms 1099-B to customers from Jan. 31 to Feb. 15.
Under the new law, 1099-B forms must be mailed, not received, by the new date. There’s a wrinkle this year, however, because Feb. 15 falls on Sunday, and Feb. 16 is a federal holiday. The 2009 mailing deadline for the forms is Feb. 17, as a result.
We appreciate your patience during this time.