Parting Thoughts From Rosenberg - Ver 1.0

Since this link might break, I've posted this in full. This market has me about as confused. In early march we were definitely oversold, now I think we have gone past what would be considered a fair value. Rosenberg outlines a lot of issues that we are facing fairly.

Monday, May 4, 2009

Parting Thoughts From Rosenberg - Ver 1.0

Posted by Tyler Durden at 6:56 PM

Some of David Rosenberg's last thoughts as he is putting the bubble wrap in his boxes. It is not surprising that his parting gift to his bank is a moderate shift to a slightly bullish outlook, likely designed to make life for his "Economic Strategist" replacement a little easier. However, reading between the lines allows for the real Rosie to shine through. And is, as always, a breath of fresh air in an environment where the MSM has become utterly useless.

We are in year 9 of an 18-year secular bear market

The S&P 500 peaked in real terms back in August 2000. Adjusted for the CPI, it is down 58% since that time. So, we would say that we are in year 9 of what is likely to be an 18-year secular bear market, because if you look at long waves in the past, they tend to last about 18 years with near perfection.

What happened during the last secular bear market

As an example, go back to the last secular bear market, and you will see that the S&P 500 peaked, again in real terms, in January 1966 and bottomed in July 1982, 18 years later. But there were plenty of mini-cycles in between. In fact, there were four recessions and three expansions during that entire 18-year period and unless you were a completely passive investor, you definitely wanted to be in the game during the three expansions because the S&P 500 rallied an average of 50% during those phases. Again, it is important to note that these were rallies you
could rent, not own, but they did last an average of 20 months. So, it’s not exactly as if they have an extremely short shelf life.

Playing a game of devil’s advocate

With all this in mind, we went through an exercise over the weekend and played a game of devil’s advocate. If Rosie had to face off against Rosie, what would we say if we were forced to take the other side of the debate, keeping in mind that in fact, we may be overly bearish at the present time. And believe it or not, we did manage to come up with some pretty compelling material.

Past the half-way point in the recession

First, our in-house model of predicting where we are in the cycle, for the first time, gave us a signal late last week that we are past the half-way point in the recession. Considering that the stock market bottoms 60% of the way through, this is an encouraging signpost.

We’ve worked through the effects of the Lehman collapse

Second, our propriety proxy for private sector interest rates has come down from 8.11% at the nearby peak to 7.18% now despite the backup in Treasury yields, to stand at their lowest since last September. The TED spread is back to where it was last September, as are most credit spreads. The VIX has finally broken to 35, back to where it was last September. 10-year TIPS breakeven levels, which were predicting deflation at the end of last year, are now forecasting 1.5% average inflation rates for the next decade. Again, we last saw this in September of last year. This is interesting because even though the economy and the markets were clearly in the doldrums back in September, the fact that so many market barometers are back to where they were then means that at the very least, we have worked through the ill-effects of the post-Lehman collapse.

Stock market has lagged relative to other asset classes

All an equity bull really has to do is point to the fact that the S&P 500 last September was trading around 1200. The only difference is back then we were looking at it from the perspective of being 20% off the highs whereas a move back to September levels, which, after all, would only mimic what many other market indicators have accomplished, would be viewed as an 80% surge off the lows not to mention another 35% potential upside from where we are today. Even the CRB raw industrials are now back to where they last October when the S&P 500 was hovering around the 950 level. So again, if we were equity bulls, and maybe we should be, we would simply point out that of all the asset classes that have bounced back to life, the stock market has actually been a laggard.

Three indictors that suggest cyclical bear market is over

Third, we found three indicators that have stood the test of time and strongly suggest that the cyclical bear market in equities and the economy have drawn to a close: the ISM, the Conference Board’s coincident-to-lagging indicator and the University of Michigan consumer sentiment survey. The ISM bottomed in December 2008 at 32.9 and is now 40.1. Going back to 1950, we found that recessions end within three months of the ISM hitting bottom, and never by more than six months. The coincident-to-lagging ratio just turned in successive lows of 89.6. The data go back to 1960 and we found that recessions ended within two months of this indicator, 100% of the time. And, the U of M consumer sentiment index bottomed at 55.3 last November. As we saw on Friday it had rebounded to 65.1 as of the end of April. The data show recessions end typically within six months of the bottom in this key leading indicator, and not once was the lag longer than eight months.

We could be on the precipice of a cyclical upturn

This is not to say that our secular views have changed. However, we could well be on the precipice of a cyclical upturn, and whether it is sustainable or not may have to be a story for another day. We don’t see as many green shoots as others do, but then again, we endured more than a year of jobless recoveries following the market lows of 1990 and 2002.

The most glaring example

The most glaring example of all is the fact that the S&P 500 bottomed in the summer of 1932 and yet by the end of the 1930s, seven years after ‘New Deal’ stimulus, the unemployment rate was still 15%, consumer prices were deflating at a 2% annual rate, and let’s face it, the Great Depression did not actually end until 1941. But for investors, the worst was over in the summer of 1932 in the immediate aftermath of the acute government intervention at the time. While
there were recurring setbacks along the way, including the severe bear market of 1937-48, the fundamental lows had already been turned in long before.

Investors have been able to price out financial tail risks

Fast forward to March 2009, and the same mantra was heard – ‘nationalization’, ‘depression’ and ‘deflation’. As was the case with FDR’s early days as President, what the last half of Obama’s first ‘100 days’ managed to accomplish was to eliminate these words from the investment lexicon. The degree of intervention from the Treasury and the Fed has been so intense that investors have been able to price out financial ‘tail risks’ that had dominated the market landscape through much of the first quarter.

The market is gravitating to a new mean

So, the way to look at the situation is that by removing the ‘tail risks’ of an outright systemic financial collapse, the market has gravitated to a new ‘mean’ (in the sense that at any given point in time, market prices reflect some expected distribution of possible outcomes – a very bad potential outcome has been taken out of the probability distribution, at least according to Mr. Market). This is why if the bulls have a solid argument, it is the prospect that the S&P 500 can indeed approach those pre-Lehman levels, which back in September, seemed rather bearish, but is only bullish today benchmarked against where we are.

Still not sold on the bull case for equities

Despite all these powerful arguments, we are still not totally sold on the bull case for equities. Valuation is not compelling, in our view. Sentiment has completely swung towards a bullish consensus (which is a contrary negative). Home prices and employment are still in freefall, the former undermining the balance sheet and the latter exerting a drag on the income statement and suggestions that a mild improvement in the negative growth rate is something to be excited about seems off base.

Difficult to ascertain who the marginal buyer will be

It seems hard to believe that after being burned by two bubbles seven years apart that the baby boomer is going to line up at the trough one more time. So, it’s difficult to ascertain who the marginal buyer is going to be. Disposal of durable goods assets to pay off a record household debt burden seems like a multi-year deflation story as far as we are concerned. Since the boomer household is income constrained and underweight fixed-income securities on its balance sheet, we believe that demand for high-quality bonds is going to strengthen in coming years. Government policy will remain highly pro-cyclical but there is no match for the contractionary effects from a shrinking US household balance sheet.

Deflation will win out over inflation

We are concerned that deflation will win out over inflation this time around. While the data cited above are indeed impressive in terms of their track record, since this is not a manufacturing inventory recession but rather a downturn deeply rooted in asset deflation and credit contraction, we may find out that the economic releases that were tried, tested and true in the other post-war cycles may not be appropriate today given the overpowering secular trends of consumer deleveraging and frugality.

Consumer Credit changes for Mar 2009

The fed released data this week on outstanding consumer credit debt. The outstanding debt has been falling since the start of the credit crises in October of last year. In years pass falling consumer credit debt levels usual happen during the onset of a recession. The more severe recessions actual consumer credit contracts on a year to year basis. I've put together a couple of graphs of Year over Year changes in consumer credit.

The fed started tracking consumer credit debt in 1943. As you can see it has had a very steady and upward trend. You can see a larger version of the graphs by clicking on the images. The small wavers in the lines are changes in the growth rate of consumer debt. Since changes in total outstanding debt can either rise or fall on a month to month basis. I've smoothed out the trend by making a year to year comparison of debt levels.

Growth of total consumer debt varies from year to year. As you can see by this graph, debt growth averages between 5% and 15%. It is on only rare occurrences that actual outstanding credit contracts on a year to comparison. These contractions usually happen during the more severe recessions.

This last graph is from 1990 to present to show in detail the changes since the last time consumer credit contracted. In 1990 the consumer credit growth rate started falling. 18 months later total credit had started to contract. Reaching a total contraction of 2%. In April 2008 the credit growth rate started falling, this was shortly after the Bear Stearns collapse. April 2009 should be the first time total debt contracts on a Year to Year basis since '91.

Looking back there have only been a few points in time where total consumer debt outstanding has contracted. In each of these cases, the recession were worse and longer felt. The fall in the growth rate has accelerated since the Lehman collapse in the the fall. To date, this is one of the quickest time frames where total consumer debt goes from peak growth rate to contraction.

Customizing Oracle Evergreen Check Printing

So, you decided that you must customize the Evergreen check printing process anyway. That's ok, I had to modify it, too.

So if you read this posting you know I said never ever change it. Well the business had to have certain changes, and most of these changes were needed. They do help speed up processing and cut down on costs.

Some things that you need to know about the evergreen print process. Evergreen uses the print driver file to store the escape character sequnces for formatting and placing various objects down to be printed. In the report design these are mostly found in little field boxes that make calls to the esc character code number (100,101,200,201 etc). This is a good listing of various escape seqences. HP ESC codes

The changes discussed here are the following:
1) print overflows from seperate tray
2) Addiong marks for envelope stuffers
3) sending second signature checks to a different output tray
4) modifying all overflows to go to overflow tray

First change, the ability to print your overflows from a seperate tray than your check. This way you are not printing all of the extra remittance pages on check stock. Not printing on check stock has two purposes. If you look at the code in the report there is logic when assiging the void and using the void section of the report. A seperate print driver code will need to be created that appears like the standard page except you make a call for printing to a different tray. For me all of the special print driver codes that I added were in the 400 range. You will also have to make changes to the orginal print code to print to the first tray for checks. Then the printer will need ot be configured to only use the designated tray for printing.
1) change exitisting print driver to print to specefic tray for check stock
2) add new driver that looks like 1 but prints to a different tray for overflow documents
3) change printer setup to only select paper designated tray only

Mailing large check runs is a tedious process and most companies utilize a envelope stuffer. These stuffers usually read marks on the paper to know when to start stuffing a new envelope. You will need to print driver codes for this. The first code tells where to start printing the mark. The second code returns the print curser back to where it was before printing the mark. This way you do not have to worry about all ofthe other print elements being moved or adjusted in ways that you are not expecting. In my case a double mark printing was used for a new document and a single mark notified the stuffer to continue stuffing.

Sending checks that require second signature to different output tray. Checks that required a second signature needed to be seperated, it was easier to just place it in the code to break it out for a different destination tray. This is also achieved by makeing changes to the print drivers.

We made an adjustment to include overflow checks as well. The stuffer wanted the checks to be the first document and not the last as the stndard program prints. The alternate tray leaves the checks face up instead of face down in the main output tray on top of the printer. This then placed the overflow in the correct way so that they too could be stuffed easily.

Citi buys new Private Jet

With all that is going wrong with Citi these days, you would think that they would not go out and buy a Jet.

50Million of taxpayer money being spent on , not an American made jet, but a French made Jet. Only 9 of these are in the US. What do you think maintenance is going to like. $$$$

You would think with the sword of Damocles hanging over them aka Nationalization, they would not be doing this. Then again maybe they know the sword has already dropped and it is us the public that just does'nt know it.

Credit to GDP

I've been reading a lot of stuff about the recent credit and liquidity freeze in the fall. A lot of speculation is being discussed on how this will impact the economy. It's a given that credit has been loose over the past few years and has helped fuel the real estate bubble, and has helped bring on the financial crises. What if Credit has been loose longer than we have thought, and only recently the barn door was left wide open?

I took some data from economagic to take a look at Credit to GDP as a percentage. A couple of interesting items come out. First, there are two definite growth rates. One prior to 1985 and the other post 1985. Post 1985 shows a growth rate 2-3 times the rate from 1952-1983.

With trend lines added you can see that we are currently above trend from the 1985 onward, but we are also way above the 1952-1984 trend line. The big question is, if credit is going to contract because of this crisis where will credit retract to. Something along the 1985 trendline, or the 1952-1984 trendline.

I guess we will find out in the next few quarters where Credit to GSP is heading. Then that will tell us what to expect on the impact of the loss of credit to the economy.

Lloyds is pants

Found this article. At one level it is very humorous. But from a security point of view it is very horrendous. Some items the article didn't even touch.

First. Passwords were not encrypted. This means that every bank account password can be potentially exposed.

Second Bank personnel have easy access, can view and can make changes to the password.

Third, the 6 letter word for a password is ludicrus. It will only take minutes for a brutefoce attack to succeed.

Non-compete no more

Found this Article today. I've had to sign a few non-competes over the years. They were all industry specific in nature so they have really never had an impact on my job mobility. I've always tried to make sure that the job skills I possess are applicable to most industries. There are fundamental processes needed in running a business successfully that transfer from job to job, industry to industry without any major changes.

It's just the principle of being fairly compensated for your job. If an employer really thought that the knowledge and the work you do is truly worth something, the employer should compensate you for this, right? The competitor across the street thinks you are and wants to pay you for it. At least in the state of California you can now take the job and money.

Almost every job I've ever left, the main issue was fair compensation. The job I didn't leave based on compensation, the IPO failed in 2000. I was left with the option of doing what I was doing or jump into the opportunity of doing support work on an Oracle ERP install at another company.

In the long run decisions like this one will reduce the friction of job transfer and will make the US more competitive.

Rails 2.1 and Timestamps

Haven't posted many articles lately. Been busy with several work projects and other issues.

I've spent enough time with ruby that I can now look at tackling rails again. Since my first attempt at rails back in December were slow and did not gain traction. I thought a shift to getting to know the Ruby language would be better.

Version 2.1 of Rails has been released since I first looked at Rails. Apparently one of the new features that has been incorporated is time zones. One of my new rails projects uses date and timestamps. It was cool knowing everything is getting recorded in UTC. It cuts down on confusion of when a transaction was recorded. The only issue is displaying the users local time for it. I found this article that was very helpful in getting some quick results.