Argument over the Future

In this week's Barron's, Michael Santoli comes up with this gem of a sentence (emphasis mine):

The stock market is essentially an argument over the future, staged over six-and-a-half hours each weekday, among people who can't even agree what's most important to be arguing about at any given moment

thereby showing his total grasp on the behavioral aspect of the market. But then he overreaches himself with this paragraph:

The more interesting question isn't whether things in this post-crisis, heavily medicated financial system are different - plenty of things are, from government action to debt levels to consumer psychology - but whether this "differentness" is already built into the markets.

As long as I am quoting nicely-turned sentences I would be remiss if I didn't mention this one by Alan Abelson:

He was a meticulous reporter of the highest integrity, a prolific writer, an unflappable, low-key interviewer, no matter how grouchy and intimidating the subject, an astute judge of markets and possessed of an extraordinary ability to separate fact from hyperbole, truth from spin.

And no, he's not talking about himself, this is part of a eulogy to Harlan Byrne, a former colleague of his who passed away recently.

Reality Check

If you need a reality check, this is a must-read article on long-term unemployment and the ways in which this recession has been unlike any recent and not-so-recent U.S. recessions:

“The system was ill prepared for the reality of long-term unemployment,” said Maurice Emsellem, a policy director for the National Employment Law Project. “Now, you add a severe recession, and you have created a crisis of historic proportions.”

Some poverty experts say the broader social safety net is not up to cushioning the impact of the worst downturn since the Great Depression. Social services are less extensive than during the last period of double-digit unemployment, in the early 1980s

Deficit Hawks

The Big Picture blog tells you everything you need to know about deficit hawks and why there suddenly seems to be a ton of them. Obviously, what's going on in Greece is scaring the living daylights out of everybody. Could the same thing happen in the U.S.? Not very likely anytime soon but it's possible. However, a double-dip recession is a lot more likely and a whole lot scarier. Insisting on cutting the deficit now is the surest way to get just that.

My answer to Barry Ritholtz's rhetorical question:

I can’t tell what motivates these new deficit hawks — are they merely ignorant, unaware of the historical analogs? Or are they hoping for another recession as part of a debased power grab?

would be: yes.

A Bullish Fundamental Take on the Market

In the latest Barron's, James Paulsen, chief strategist at Wells Capital Management, is contrarian bullish and has been since last March. He also has an interesting take on deficits.

His scenario for the economy?

If inflation remains in check or rises only slightly, then we have a real shot at a prolonged secular bull market. The key will be keeping inflation under control a couple of years out, when the recovery is in full swing.

Is he concerned about the deficits? (emphasis mine)

I don't think we're in an Armageddon situation. [...] If you look back in U.S. economic history, the five years after the deficit peaks invariably have torrid growth. Same for the peak in unemployment, which we recently hit. Remember: President Clinton left us in the late 1990s with budget surpluses and low employment, yet the succeeding decade was nothing to write home about in terms of either growth or stock-market performance.

Going Berserk Over the Interview

Paul Krugman is going berserk (here and here) over the president's Business Week interview. The part where Obama equates bankers' bonuses with baseball stars' salaries seems to particularly piss him off. And when the president says this about J. P. Morgan's Jamie Dimon and Goldman Sachs' Llyod Blankfein:

Well, look, first of all, I know both those guys. They’re very savvy businessmen. And I, like most of the American people, don’t begrudge people success or wealth. That’s part of the free market system.

Krugman is ready to throw himself under the bus:

I mean, how hard is it for the White House to understand that it’s a really, really bad idea to be saying nice things about bailed-out bankers, Goldman Sachs in particular? Even if you think it’s a bad idea to come across too populist — and why, exactly? — be evasive and judicious, say something neutral. Do NOT praise Lloyd Blankfein’s savvy, OK?

Maybe it was a bit strong for me to say that we're doomed, but this really is shocking and dispiriting.

I don't know. I find Paul Krugman's reaction a little over the top and a little too reminiscent of the kind of reactions he used to have to some truly dispiriting things coming out of the Bush White House or that he has on a regular basis to the equally dispiriting things coming out of the Republican leadership.

He should keep in mind the context, the audience and the medium. The interview is basically framed as a response to the many people, a lot of whom voted for Obama but who tend to be independents, who think the president is anti-business. It very well may be that nothing Obama says will sway this particular group of people but to take his answers as proof that he is business's (and particularly the banks') lapdog as Paul Krugman seems to be doing pushes the boundaries of good faith.

Not only that but if one were to read the whole interview, one would come across this long, very long (sorry about that) statement, a statement that basically puts the lie to P.K.'s and other's assertion that O. just doesn't get it:

After what we have gone through, surely nobody in the business community thinks that the status quo, in terms of how we regulate the financial system, is adequate. I can't believe that there is anybody who is running a business out there who thinks that 60-to-1 leverage and folks making $100 million bonuses based on gambles on derivatives, takes comfort in that kind of system.

What we have said is that if you look at the holes in the system right now, we have got to have a way of monitoring the systemic risks. We have got to make sure that there is a way to wind down a firm that's in trouble that is quarantined from the rest of the system so that we don't have institutions that are too big to fail.

We think it is very important to have a consolidated and streamlined regulatory approach to things like derivatives and hedge funds, not just banks. We think it is important to have a consolidated and streamlined approach to consumer financial protection, because although it is true that the immediate cause of Lehman's [bankruptcy] may not have had to do with what was going on with credit cards, what is also true is that if you have consumers who are getting predatory loans that they don't understand, credit cards or debit-card rates that they don't understand, a lot of these financial instruments that drive huge profits, but leave consumers unprotected. That is not good for the system overall.

We think that increasing capital requirements for systemically significant firms is important. So all these things are of a piece—not designed to squelch innovation in the financial market, but designed to make sure that there is a level playing field, transparency, clarity in how this system operates.

Now, the Volcker Rule is part of this overall framework. And I think there has been some misunderstanding, at least in the popular press, about what we are proposing. What we are simply saying is that it makes sense if banks are getting cheap money through the discount window, if they've got assurances and guarantees from the government, that they don't simply take that cheap money, fully backed by the U.S. Treasury, and go out and just start rolling the dice in proprietary trading or other transactions that aren't designed to help raise money for their customers or designed to ensure investment and job growth, but basically, are just designed to boost their profits and their bonuses.

That is not something the government probably should be in the business of subsidizing. And that is the essence of the rule.

Whether we can get it through Congress is always a question because, as we have seen throughout this year, we have a political process in Washington right now that is a little dysfunctional.

Simplistic Criticism of Simplistic Technical Analysis

This post from Kim Zussman, quant extraordinaire from the Daily Speculations Blog...:

SPY's Friday close was the second consecutive below the simple 100DMA, after a long period above the moving average.

Going back to 1993, checked for instances when SPY closed <> 100DMA. Here are the mean returns for the next 5d, 10d, and 20d:

One-Sample T: 5d, 10d, 20d

Test of mu = 0 vs not = 0

Variable N Mean StDev SE Mean 95% CI T P
5d 18 0.010 0.021 0.005 (-0.00057, 0.02114) 2.00 0.062
10d 18 0.007 0.023 0.005 (-0.00447, 0.01933) 1.32 0.205
20d 18 0.004 0.040 0.009 (-0.01570, 0.02430) 0.45 0.656

All up, if not significantly. If only it were that easy…

...got this response from me:

Yes indeed, Kim, if only it were that easy.
Your observation, while true, might be just as incomplete and misleading as the blanket statement you are implicitly deriding, namely: "the market closed under its 100-day SMA, therefore it's bearish".

It is also useless to a short-term trader since you're not saying anything about 6-hour, 12-hour, 1-day…4-day returns. You will probably find that a system that gets short after 2 consecutive closes under the 100-day SMA following 20 consecutive closes above the 100-day SMA and covers after a close above the 10-day SMA (or something along those lines: it's my turn to be incomplete and potentially misleading but I believe I'm right - If I find the time to run the numbers I'll be sure to post them here and/or on my blog) has made money since 1993.

Goldman Sachs Must Love Paul Volcker

Paul Volcker makes a strong case for serious re-regulation in a New York Times piece (emphasis mine):

I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks.

In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.

I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.

The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.

Hard to argue with any of this. Unless, that is, you work for Goldman Sachs.

S&P 500 Index: The Long Technical View

In this time of relative market turmoil, I wanted to step back and take a look at the long-term technical picture. This is the weekly chart for the S&P 500 Index (click to enlarge) with the usual accoutrement: Bollinger Bands centered around the 20-week moving average, 14-week RSI and Slow Stochastics. I purposely left volume out so we can concentrate on pure price.

The 20-week moving average is pretty significant here because it has basically acted as support to the stock market rally since last April. And the fact is that the 20-week moving average was broken this past week in a pretty decisive manner. Does it mean the rally is over? Let's just say it is compromised and the market will have a lot to prove over the next few days/weeks to show otherwise. To begin with, it would have to overtake our old friend the 20-week moving average which, in a metamorphosis known to technicians and traders everywhere, is now presumably acting as resistance, sitting at 1,088 as of Friday. Even more significantly, the S&P 500 index would have to break decisively above 1,100, also looming large as resistance.

It goes without saying that the technical picture can change in a matter of days but the longer the index lingers under the two previously mentioned resistance levels, the more likely it would be that the bull market that has pissed off so many people (mostly people talking their book, but aren't we all, one way or another?) since last March has ended. Now, the end of a bull market does not necessarily mean the beginning of a bear market. We could very well enter a phase of range-bound, directionless trading which might be even more frustrating to more people than the previous phase. But isn't it what markets do?