And there’s joy at Fenway as  Boston Puts It To the Yankees.

If….you love the Yankees, I understand.

Every morning after a Red Sox game, Lisa’s grandmother tells me about the game. I already know what she tells me, but she gets quite excited at age 95.

She says, “Big Poppie (David Ortiz) clocked his third home run, and things are looking up for him” and “the stock market”, I add.

OK; not so fast, Randall. We have a lot of ground to travel before returning to solid ground. No banners hanging over Wall Street yet.

Just the same, the news is better.

Market analysts support viewpoints with statistics. Most of us find the data dreary. We scan the dull parts faster than a furtive glance.

Baseball stats dull the sound of the bat, the “wave”, and a Fenway Frank. Just the same, statistics and probabilities matter.

This summer, I went to my second Red Sox game. We sat perpendicular to third base. What seats! To my right and to my left, two middle-aged men kept track of every hit and every pitch for every inning.

I asked, “How come you do that?” They both said, “I just enjoy the game more when I do.”

So, for those who enjoy stock statistics, the attached SEI Investments commentary gives you plenty to ponder.

Quiz:  Can you guess the stat before reading the right coloumn? They all seem esoteric to me.

Here’s the article, “Small-Cap Stocks: Too Far Too Fast or Just the Beginning?” by James Solloway, CFA, Senior Portfolio Manager, Global Portfolio Strategies, SEI Investments, Inc.

Last week’s chart illustrated the current plunge of S&P 500 earnings. Today’s chart illustrates how this plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the current plunge in earnings and the recent 2.5 month stock market rally, the PE ratio has spiked to the low 120s – a record high.

Notes:
- Where’s the market headed? The answer may surprise you. Find out right now with the exclusive & Barron’s recommended charts of Chart of the Day Plus.

Source: Chart of the Day

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

   

Whole Earth from Space

 

Good news always encourages. When reading any news about the stock market, we read circumspectively. Caution, discipline, and purpose should drive investment decisions. Asset allocation works when applied with patience and consistent commitment.

Here is a positive Bloomberg.com stock market comment after four days of positive numbers and during the G-20 Meeting.

Global Stocks Rally on Improving Economic, Banking Outlook

Stockmarket opinions rage on every page about the future upward or downward direction of the stock market. Some comments are worth hearing not because they are predictive or prescient, but because they seem informed and somewhat reasonable.

Bloomberg news and Bloomberg radio offer reasonable views from seemingly informed authorites. Bloomberg seems a bit less tenentious when asking questions (compared with Fox Business News or CNBC). Professor Roubini’s views merit attention.  His comments were made earlier this year (I can’t locate the date at the moment).

Listening requires more than hearing words and data. Listen includes facial expression, voice inflection, eye movement, and persona impressions. Watch Professor Roubini, his humor may be quick and laughter may break his composure, but his mood here appears dour. He may have reasons for this. Click on the link to see the video.

Roubini Says Stocks May Fall Another 20% Before Recovery

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.

Never have I observed such a dispirit mass of views, political dysfunction, and public confusion. Dispirit views can be expected whenever discussion ocurrs, but political dysfunction is not what a democracy needs. Public confusion erupts because there is a lack of government leadership and public knowledge. When a crisis arrives, no one can decide on what works, and no one leads. All parties appear to play the zero-sum game: give me all I want and I’ll give you nothing of what you want, or I’ll give up something as long as you know there’s hell-to-pay.

Most people get their stock market updates from the evening news. The excitement on the way up with the gloom and doom during a market correction. Very few get much of an education. Duncan Niederauer, CEO of the New York Stock Exchange recognized this by statiing that many voters fail to understand the inextricable link between “Main Street and Wall Street”.

American voters think this is a “bailout of Wall Street”. What we face is a “credit-crisis”. Small businesses faces payroll challenges, the U.S. auto industry has no wheels, and the housing industry has no foundation. As Secretary Paulson said, “…this is much too important to let this fail,” Paulson said.

House Majority Leader Steny Hoyer said, “Why should taxpayers loan out their own money to solve a crisis brought on by someone else’s greed?” He answered his own question by saying, “…in our economy, none of us is an island. A meltdown would begin…on a few square miles of Manhattan, but before it was over…no city or town in America would be untouched.”

Mutual fund, 401(k), endowment fund, and pension investors can blame Wall Street “fat cats”, but we all chased the mice. We all gloated and took pride in the numbers on our statements. “No city or town in America” ran from the market upside, but everyone wants to blame someone on the downside.

The greater the excess or hubris, the greater the humiliation. The greater the cynicism, the greater the deliberative dysfunction when seeking a resolution. The greater the market avarice on both sides of a trade (long by owning stock and selling or shorting a stock)the worse the results for everyday, steady-hearted investors.

We can only hope that time and sensibility return our sanity. We can only hope that the stock market becomes a thermometer of economic growth, research and development, entrepreneural innovation, and a cooperative effort to keep this planet revolving for our kids.

A damaged market needs a “capitulation” phase followed by a “base-building” phase. Each phase defined by trading volume because trading volume confirms a trend. During “capitulation”, investors “cave-in” with dramatic selling, and significant way-above-average trading volume.

I wrote this a few weeks ago, and forgot to enter the thought. Maybe/maybe not, we have seen capitulation. Today’s U.S. market activity suggests that probability. Today’s (September 29, 2009) foreign market activity may validate this presumption.

Just turned-off Bloomberg Television (the only reason for a TV in my office). When watching the stock market, I go from Bloomberg Television to the Fox Business Channel (some former Bloomberg talking heads must have received attractive offers from the Fox Business Channel) when watching the stock market. Turning-off the TV brings a wave of quiet and rest to my head. Too many opinions along with a depressed stock market paralyzes my work (months ago, the TV was turned-off because of too much stock market euphoria).

Sometimes I open Firefox to Google “stock market news”. I look for positive information. Something encouraging and hopeful to counterpoint my disappointment in recent Fed action (or inaction), the price of oil per-barrel, Michigan Consumer Sentiment Index – MCSI, and today’s Dow Jones Industrial Average slippage to a 20% bear stock market drop.

Have I found positive, happy, sanguine news? Not really. I have found hints of optimism based on specific indicators. Investor’s Business Daily (IBD) is a favorite stock market source of information. IBD tracks the EKG (stock trading patterns), relative strength, earnings-per-share, industry rank with a lot of other data.

At Investors.com, IBD offers a stock market video reviewing the previous day’s stock market close. Anyone may listen, but the video changes daily. Ken Shreve’s stock market commentary provides helpful insights that may soothe you while watching stock market trades.

You will find Mr. Shreve’s stock market perceptions helpful. I do. Look for the “Daily Stock Analysis” at Investors.com. Remember, this is Mr. Shreve’s comment for one day. To understand stock market trends, you’ll have to listen daily. Also, my mentioning this resource is not a recommendation. You may not find IBD’s comments helpful or suitable to your investment goals. At worst, you may find his commentary and charts entertaining.

Some older friends told me about phone service in our community. You’d crank-up Mary, the phone operator. You’d say, “Mary, connect me to my Mom and Dad.” While waiting, Mary would bring you up-to-date on what’s happening in Town. Nothing like, “Jay’s horse got loose yesterday.” No, this would be juicy stuff about so-and-so leaving someone’s house in the morning shadows.
Mary’s gossip created a buzz in Town, but she may have missed the facts. Presumably, financial news comes close to plain and clear reporting with a hint of speculative prognostication. We don’t want Mary’s journalistic methods informing us about the stock or bond markets.

Investor’s Business Daily, in my opinion, offers clear data supported by distinct technical data. William O’Neill learned by watching institutional investors (mutual funds, pension plans, and institutional private money managers). IBD applies that growing body of knowledge to current market events.

Trading volume may be one of the most important, but not the only important, market actions. Others worth considering:

• Trading patterns,
• Changing market leadership,
• Support and resistance lines
• Relative strength
• Earnings and sales momentum

One of my favorite resources is the “Daily Stock Analysis” video (about 1/3 of the way down the page). Watch it, and you’ll develop insights about how markets and individual stock market pricing changes.