On December 19th, 2008, Robert Brokam of the Motley Fool, asked John Bogle (born 1929), founder of The Vanguard Group, if we are heading for a depression (Bogle grew up during the Depression).

“Today, we hear a lot of people invoking the possibility of another Depression. So what is your take on today’s crisis? Are we looking at another Depression?”

Bogle answered,

“…This is my tenth bear market, defined as one that goes down at least 20%. And this is in a lot of ways the most difficult one that we have had because the gross excesses — the unacceptable excesses in our financial sector — are carrying over to the economy at large…I think the excesses of Wall Street and Wall Street’s greed have carried over and done substantial harm to Main Street and the people that make America go….”

In the Berkshire Hathaway 2008 Annual Report, Warren Buffet refers to the performance table (see page 4) tracking the 44-year performance of Berkshire’s book value and the S&P 500 index.

“…2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By year-end, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game.”

There was no place to hide, and asset allocation didn’t matter.

An “Investment News” survey concluded that “70% of 329 advisers said that the economic downturn and its effect on clients have negatively affected their physical and/or emotional health.”

Jed Horowitz, author of the article, writes,

“Mental-health professionals say that stress can trigger depression, which can lead some advisers to feel unjustified guilt over unpredictable client losses.”

“As many as 80 percent of Americans are stressed about their personal finances and the economy, according to the annual survey conducted by the American Psychological Association,”

according to CNNHealth.com.

Dr. Katherine Nordal, the association’s executive director for professional practice said,

“This year…the No. 1 concern is both money and the economy. In my 30 years of experience…this was not the thing that would be high in complaint lists…what we’re seeing today is that the economy and finances are viewed as significantly more stressful, by more than 8 out of 10 Americans”

(7,000 Americans replied to the survey from April to September 2008).

During his March 24th press conference, President Obama reminded Americans that

“We will recover from this recession, but it will take time, it will take patience, and it will take an understanding that when we all work together; when each of us looks beyond our own short-term interests to the wider set of obligations we have to each other — that’s when we succeed.”

.

Recent news suggests, but may not be conclusive, that this recession has found its bottom and finds it attractive.

This cat sleeps.

Dead cat stock market bounces are “A temporary recovery from a prolonged decline or bear market, after which the market continues to fall.” (Investopedia)

If dead cats bounce, the metaphor is useful when predicting stock market trends.

Dead cats bounce along Wall Street after short sellers cover their yet-to-be-owned stock. Their doubt about the market’s continued price-drop prompts them to buy the stock (ie. cover their short position).

Dead cats bounce along Wall Street when investors cover their option positions. Their action may encourage false hopes of a bounce in the markets.

Dead cats bounce along Wall Street when speculating investors throw a dart at Wall Street “blue light specials” (for you KMart shoppers). When checking their purchase in the Sunday papers, they find their shares for sale at a deeper discount.

The dead cat bounce is a silly idiom; no experiment I know of proves a dead cat bounces. No economist or analyst predicts dead cat bounces in the stock market consistently.

“8 Who Saw the Crisis Coming…” (Fortune Magazine, August 2008)
• Sean Egan
• Nouriel Roubini
• Michael Mayo
• Robert Rodriguez
• William Poole
• Richard Baker
• David Einhorn
• Bill Eickman

  “…And 8 Who Didn’t”

• Angelo Mozilo
• Jeff Larson
• Moody’s, Fitch, Standard & Poor’s
• Greenspan, Bernanke, Paulson
• James Cayne
• Chuck Prince, Former Citigroup CEO
• Stan O’Neal, Former CEO, Merrill Lynch
• Zoe Cruz, Former CEO, Morgan Stanley

An ancient test for a prophet requires exact and fulfilled predictions every time, not some of the time.

Stock market moves are not dead or alive, bullish or bearish unless investors make them so. Momentum comes when the greater number of investors take action that opposes other investors. This makes momentum possible.

Most importantly, you don’t know until you presume the cat bounced. Predicting market direction expresses chutzpah blended with keen observations.
You may be right, but the likelihood of accurate and successive predictions confirms the unparalleled dimensions of uncertainty.

Market optimism or pessimism occurs when a mass of people make the result theoretically probable. The determination or prediction of probable outcome never eliminates uncertainty unless there are glaring market anomalies (**see Robert Schiller).

Italian economist Vilfredo Pareto’s principle asserts that 80% of value comes from 20% of those who have the potential to create value. The calculations do not support the 80/20 rule every time, but at minimum the concept retains its assertion.

Therefore, 80% of market analysts are right 20% of the time or 80% of stock market predictions are right 20% of the time. As with all predictions, there’s no certainty of which prediction is right.

For me, further proof that asset allocation, with static weighting and dynamic investment methods works when market anomalies lack affect.

When Vilfredo’s cat died, he did not drop her stiff body out of his bedroom window to see if she’d bounce.

“It is a maxim of empirical economics that if you torture the data sufficiently, they will confess.”
(Stephen A. Marglin, The Dismal Science “How Thinking Like An Economist Undermines Community” (Cambridge: Harvard University Press, 2008) 122.

Empirical economics is distinct from theoretical economic theory or the fundamental distinction between deductive and inductive economic ideas.

We’ll all know in six months.

“If you want to have a better performance than the crowd, you must do things differently from the crowd.” – John Templeton

Templeton is right, but most of us act according to John Emerson’s views posted on Scienceblogs.com.

Economists have always had trouble with bubbles, like the one we just experience (sic), and this is partly because not only are people not totally rational and not only do they not have perfect knowledge, but besides that, they communicate with one another, so the irrationality is not randomly distributed so that the irrational individuals are weeded out, but can pervade a whole population.

What will the maddening crowds do? Uncertainty prevails for the moment. We may presume, I think, that Americans possess an unwavering commitment toward work and prosperity, and these ethics should become evident in the value of stocks.

Getting The Facts

“Just the facts, ma’am”

Sergeant Joe Friday never said, “Just the facts, ma’am.”

He said, “All we want are the facts, ma’am…All we know are the facts.”

“The story you are about to hear is true; only the names have been changed to protect the innocent.”

The narrator introduced the story.

On April 26, 1951, on a black and white Zenith television, viewers heard, “You’re Detective Sergeant, you’re assigned to auto theft detail. A well organized ring of car thieves begins operations in your city. It’s one of the most puzzling cases you’ve ever encountered. Your job: break it.”

The past two years of stockmarket activity is “the most puzzling” I’ve “ever encountered.” My job is to explain it with just the facts.

Finding facts stripped of emotion and sales pitch takes some searching.

Finding reliable sources for facts takes some investigation.

The facts you are about to read are accurate, to the best of my knowledge; the names have not been changed, and there’s plenty of guilt for everyone.

My best resource:

Asset Allocation: Balancing Financial Risk by Roger Gibson

So, what am I learning now from Mr. Gibson.

David Drucker, an independent registered investment advisor, interviewed Mr. Gibson on March 26, 2009. “Roger Gibson on the Market Crash” is available on Morningstar Advisor (a service provided by Morningstar).

“All we want are the facts…All we know are the facts.”

Drucker’s first question, “Do we need to somehow recognize and incorporate a new level of volatility in the asset classes we use?”

Gibson’s answer, “It depends on whether we’re looking at short- or long-term volatility. Certainly 2008 was without much precedent in terms of how big the losses were and how far they stretched across all asset classes….”

Facts:
• All of Morningstar tracks 3,734 funds invested primarily in U.S. stocks lost money
• All of the 978 non-USA funds lost money.
• All of the 144 U.S. and non-U.S. realestate funds lost money.
• All of the 128 natural resource funds lost money.
• More than 4,000 funds tracked by Morningstar lost value.

Before going back to Drucker’s interview, an overview of corporate earnings might add prespective to mutual fund returns.

Mutual funds gain or lose value because of corporate earnings. If corporations do well, thier stocks perform well (not always, but usually).

Stocks go up or down, most times, because corporate earnings go up or down. Standard and Poors reports that corporate earnings for the past 20 months decreased more than 90%. Corporate earnings have been recorded since 1936. Current corporate earnings, or lack of earnings, are the worst on record.

“In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.” (Chart of the Day)

Drucker proceeded to ask about bond/fixed income funds since asset allocation models include both. Gibson’s firms studied bond fund performance too.

Facts:
• The Morningstar database tracks 1,730 bond funds (taxable and municipal)
• 1176 (68%) fixed income funds lost money.

“In 2008, panic fed on itself. I had more than a couple of sleepless nights in the last quarter as foreign markets were in a freefall because the U.S. markets were in a freefall, and the next morning U.S. markets were again in a freefall because foreign markets were in a freefall, and so on.”

Roger Gibson, David J. Drucker interview, March 26, 2009

Risk premium may inprove in future years.

Risk premium is the difference between the return received for a risk-free investment and the return on a risk-investment (stocks, commodities, etc.)

For example:

If stocks returns are 9%

and if Treasury returns are 4%

The risk-premuim is 5%

“During times of excessive optimism, people overshoot markets on the high side, and during times of extreme fear and panic, markets overshoot on the downside. In 2008, people panicked and dumped securities, which sets the stage for higher-than-normal rewards for people holding on.”

Roger Gibson, David J. Drucker interview, March 26, 2009

Drucker: So there will just be some years–like 2008–where asset allocation, with all its benefits, won’t keep us safe.

Gibson: Let me answer that with my favorite quote, by Paul Volcker, who, 15-20 years ago, was at CFA conference and said, “You cannot hedge the world.” I love that quote, if you’re living on this planet, you can manage risk, but you can’t eliminate it. We got that lesson in 2008.”

“All we want are the facts…All we know are the facts.”

  

 

American Insurance Group

American Insurance Group: Economic historians and Ph.D. candidates will dig deeply into the annals of this economic crisis. The American Insurance Group (AIG) will be the protagonist of the historical-story line. AIG’s risk tolerance, risk analysis, and policy to insure risk could be the root of this economic turmoil.

Rather than elaborate and interpret, I will  list a series of relevant stories. Click on the titles below to read the report on a separate browser page. 

Corporate malfeasance convolutes and distorts the best qualities of a firm and its people.  Many AIG employee stomachs turned sour when learning of AIG’s failing compleasance. In the Leviathan, Thomas Hobbes’s “fifth Law of Nature, is compleasance; that is to say, “That every man strive to accommodate himselfe (sic) to the rest.”

Hobbes contrasts the man who will adjust himself, his passions, to the larger group with the “man that by asperity of Nature, will strive to retain those things which to himselfe (sic) are superfluous, and to others necessary; and for the stubbornness of his Passions, cannot be corrected, is to be left, or cast out of Society, as combersome (sic) thereunto.” AIG Corporation may “be left, or cast out of Society, as combersome thereunto.”

Here are your stories; this is not an exhaustive list. 

• Falling Giant:  A Case Study Of AIG by Gregory Gethard
• Jim Crammer Apologizes to AIG Employees
• AIG Employees on Edge as Once-Safe Company in Turmoil
• AIG On The Brink
• Crisis on Wall Street: Questions and Answers On AIG
• Charlie Rose: A Conversation About AIG with Hank Greenberg

October 29th, 2008

Nothing about the stock market is too predictable…what you expect usually does not happen.

Some will disagree. For them, the direction of the market is clear. At least clear when claiming prescience. They’ll never admit when wrong; they will boldy exclaim and humiliate when right.

Stock trading intra-day has relevance, but what seems to matter most is what the market indexes say at 4PM (or after the final trades settle around 4:10 or later).

Here are three observations:
• Volatility prevails
• The better hedge funds seem to be standing on the sideline
• Nobody is really certain about what happens next; Those who are certain see “gloom and doom”
• Many wait for the next economic “shoe-to-drop”

Finally, whatever happened to dollar-cost-averaging?

Two intriguing observations from this data (Compiled by Dustin Woodard)

Stock market crashes can last more more than a year.

September or November are the critical months (remember October 1987).

10th Worst Stock Market Crash:
Date Started: 1/15/2000
Date Ended: 10/9/2002

Total Days: 999
Starting DJIA: 11,792.98
Ending DJIA: 7,286.27
Total Loss: -37.8%

9th Worst Stock Market Crash:
Date Started: 11/21/1916
Date Ended: 12/19/1917

Total Days: 393
Starting DJIA: 110.15
Ending DJIA: 65.95
Total Loss: -40.1%

8th Worst Stock Market Crash:
Date Started: 9/12/1939
Date Ended: 4/28/1942

Total Days: 959
Starting DJIA: 155.92
Ending DJIA: 92.92
Total Loss: -40.4%

7th Worst Stock Market Crash:
Date Started: 1/11/1973
Date Ended: 12/06/1974

Total Days: 694
Starting DJIA: 1051.70
Ending DJIA: 577.60
Total Loss: -45.1%

6th Worst Stock Market Crash:
Date Started: 6/17/1901
Date Ended: 11/9/1903

Total Days: 875
Starting DJIA: 57.33
Ending DJIA: 30.88
Total Loss: -46.1%

The 5th worst stock market crash:
Date Started: 11/3/1919
Date Ended: 8/24/1921

Total Days: 660
Starting DJIA: 119.62
Ending DJIA: 63.9
Total Loss: -46.6%

4th Worst Stock Market Crash:
Date Started: 9/3/1929
Date Ended: 11/13/1929

Total Days: 71
Starting DJIA: 381.17
Ending DJIA: 198.69
Total Loss: -47.9%

3rd Worst Stock Market Crash:
Date Started: 1/19/1906
Date Ended: 11/15/1907

Total Days: 665
Starting DJIA: 75.45
Ending DJIA: 38.83
Total Loss: -48.5%

2nd Worst Stock Market Crash:
Date Started: 3/10/1937
Date Ended: 3/31/1938

Total Days: 386
Starting DJIA: 194.40
Ending DJIA: 98.95
Total Loss: -49.1%

Worst Stock Market Crash Ever:
Date Started: 4/17/1930
Date Ended: 7/8/1932

Total Days: 813
Starting DJIA: 294.07
Ending DJIA: 41.22
Total Loss: -86.0%

NOTE: This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts. For more information, including a prospectus with charges and expenses, call the number of any brokerage firm, mutual fund company, investment advisor, or insurance company.. Please read the prospectus carefully before investing. . Mutual fund investing involves risk, including the possible loss of principal. In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments typically exhibit higher volatility. Products of companies in which technology funds invest may be subject to severe competition and rapid obsolescence. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Past performance does not guarantee future results. Ethos provides this news page for information purposes only and it should not be construed as legal, accounting, tax, or professional advice. Ethos Advisory Services disclaims any loss or liability which is incurred as a consequence, directly or indirectly, of the use or application of this news page or any page on ethosadvisory.com or echievements.com.

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