Quickly, I will be on Larry Kudlow's show tonight (Tuesday, June 28), which is at 7 pm Eastern. Larry has promised that we will spend some quality time on some of the current issues facing us. See you there! And now, let's jump in to this week's Outside the Box.
Last January 2009, the Outside the Box featured FusionIQ's quant models that blend both fundamental and technical metrics to determine the strength of 8,000 equities as well as the overall markets (Trading With the Big Boys).
You may recall that CEO Barry Ritholtz, (and good friend and Maine fishing buddy) had been bearish throughout 2008, and was still negative on stocks back in January 2009. Relying mostly on the FusionIQ metrics, Ritholtz flipped bullish on March 2009, and stayed bullish the rest of the year. The firm began raising cash in Q1 of 2010, and by the time the first quarter was over, was only 50% long. They sold more stock in April, and in a bit of good timing that Ritholtz will tell you was "dumb lucky" went to 100% cash on May 5, 2010 – the day before the 1,000 point flash crash.
Some economists see the world from a 30,000 foot overview (that would be me); other analysts work bottoms up. The quants – mathematical analysts whose world view consists of granular data –crunch numbers to reveal what it may about markets and economies. Ritholtz is one of the few that combines all three. This has led to prescient economic and market calls that made his clients and readers money, and kept them out of harm's way when things got ugly. Indeed, Dow Jones noted that "many market observers predict tops and bottoms, but few successfully get their timing right. Jeremy Grantham and Barry Ritholtz sit in the latter category..." heady company indeed.
Regarding the market calls, Ritholtz said "We cheat. We use everything that we know works. Macro economics, technicals, fundamentals, valuation, quantitative – it all goes into the mix. That's our secret sauce." Ritholtz added "I don't know why other people limit themselves to just one discipline – the value guys never look at technicals, the fundamental analysts ignore macro cycles. It creates blind spots in their analyses. When we go over other research reports, they are obvious to see."
I have been intrigued by the Fusion system's ability to warn investors to get out of the way of dangerous stocks sectors, even the entire market – before trouble hit.
Dumb lucky or not, I have found over the last year and a half, looking over Barry's shoulder, that this system does seem to (in general) give some very interesting signals about the market. I wanted to catch up with Barry to see what the FusionIQ system was saying these days – about Energy Stocks, about Housing and anything else that he thought noteworthy. As you can imagine if you know Barry, I got an opinionated earful. (Barry is like me, often wrong, but seldom in doubt.) I asked him to put it in a letter for this week's Outside the Box.
What follows is his explanation as to why Housing fall still has further to fall. He included some charts that explain what stocks and sectors to look at and avoid.
His application of both the macro and micro views, combined with using FusionIQ "to cheat," as he puts it, is why institutions and high net worth individuals seek out the firm's investment advice.
As is my custom, I will give you a link to where you can find out more about their services. Visit their site to learn more about FusionIQ. Watch their demo. Outside the Box subscribers are eligible for a discounted rate (less 20%) on the monthly subscription. http://www.fusioniqrank.com/signup.php?a=1
One caveat. This system is for serious traders. Most of you shouldn't be trading. It takes discipline and time. That is not a knock on anyone. I don't trade or have any business trading, either. A man's got to know his limitations. So I find what Barry writes about below interesting and informative. But some few of you who trade should explore his system as another arrow in your quiver.
Your writing away on his book analyst,
This week we have a really counter-intuitive Outside the Box. I was talking with the editor of Breakthrough Technology Alert, Patrick Cox about health care costs and he made some very interesting observations from new research about health care. It seems healthy people pay more for health care than sick people. I asked him to do a write-up for us. Despite the new health care bill that passed, health care costs are going to go up, not down. And that's a good thing, as Pat explains. You really want to read this.
Some of you may not be aware that a few months ago I wrote that I was buying stocks for the first time in 12 years, and specifically smaller, transformational biotech stocks. As I wrote at the time, I think that we could see a real bubble in biotech in the latter part of this decade, and just once, please God, I want to be at the beginning of a bubble.
Pat is one (and maybe the best) of my "go-to" sources for investment ideas in the biotech space. I have been very pleased with the results of his favorite plays in the last few months. And I am glad that some of my favorite companies have seen their prices come back somewhat in the last month or so, as I plan to be buying them for a long time.
Which brings up a problem and an opportunity. Pat's letter is just getting too big circulation wise for the typically smaller companies he finds and writes about. His publishers (Agora) decided last week to basically double the price (and it is not cheap to begin with!) to reduce the number of subscribers. They did a "final promotion" at the old price with a deadline of last week. I just saw that. I asked them to extend that offer for one week to my readers and they agreed.
So for the next week, you can subscribe at a discounted $699 before it goes to double that. Below is a link to the promotional site for the letter. And yes, I know it is very "hypey." I don't like that type of copy, but that is what sells and Agora is in the business of selling letters. My business is to find you good sources and to write about them. In terms of return on investment, this subscription has been a very good one for me. Find out more here.
If you did not get to read his first Outside the Box on the biotech space (and you really should!), and my rationale on why I think there will be a bubble in biotech, you can read that at this link. http://www.johnmauldin.com/outsidethebox/the-coming-biotech-bubble-4391
And without further ado, let's find out why health care costs are going up and why it's a good thing.
Your admittedly a biotech junkie analyst,
Was it only last week I was expressing outrage that US taxpayers would have to pick up the check for Greek profligacy in the form of IMF guarantees? This morning we wake to up the sound of $250 BILLION in IMF guarantees for a European rescue fund, most of which will go to countries that are eventually (in my opinion) going to default. That is $50 billion in US taxpayer guarantees. Not sure what that translates into for Britain or Canada or Australia.
I can swallow the Fed dollar swaps to the ECB. Don't really like it, but I can deal with it, as I don't think it will ultimately put US tax-payers at risk, as long as the swaps are in dollar terms. But the IMF bailout is just wrong.
Interestingly, the euro shot up on the announcement in what was now clearly short covering. As I write this, it is almost back down to where it started. That seems to me to be a vote of "I don't believe you." We will see. But if the ECB actually goes ahead and floods the market with liquidity, that will be very good for all types of risk assets.
Note that in last Friday's letter I quoted Trichet where he said we would not do what he agreed to do over the weekend. What a turn-about. So much for ECB independence. The European leadership must have realized the wheels were coming off and brought out the nuclear option in order to stave off a very serious crisis. In my opinion, this buys time but does not solve the problem.
The eurozone leaders assume that this is a liquidity problem. It is not. It is a solvency and balance sheet problem. You do not solve a debt problem with more debt. This only shoves the football a few yards (or maybe I should say meters) down the field. And it is going to cause a MASSIVE misallocation of capital once again which will create more imbalances that will have to be dealt with. Ugh.
Now, with that off my chest, let's turn to this week's Outside the Box, which is an essay by a name that is familiar to readers, Michael Lewitt. He has written a brilliant book, the Death of Capital, which should be on your short reading list. I asked him to give us a note for Outside the Box and he graciously complied. It is a thoughtful and fun read with wonderful lines you will want to read again peppered all the way through this all-too-short piece. The book is a ringing indictment of both the regulatory and money management worlds. Get it at Amazon.com.
Your how can I get even more outraged analyst,
I have been writing for a very long time about the coming debacle that the commercial real estate problem is going to be. This week's Outside the Box is an interview that my good friend David Galland did with Andy Miller, a man on the inside of the coming commercial real estate crisis. I thought it was very revealing, as there are so many nuances to the problem. For instance, in some cases, if you default and walk away from the loan you may trigger huge taxes as the loan loss to the bank is now considered income to you. Ouch! So many strings to unravel as you figure this one out.
I asked David if I could use this as an Outside the Box, and he agreed. This was from Casey Research, a very good source for non-mainstream investment ideas. You can learn more or subscribe at a discount at here.
I really think you will find this a very easy and informative read. Have a great week.
Your writing from Monaco on my way to Zurich analyst,
Today I offer you an insightful look at China's real estate market - a "burgeoning bubble" that deserves a close eye as the possibility for breaking increases. Remember the chaos in Japan after their own housing dreamscape got violently yanked back to earth? As investors, we have to recognize opportunities - and know what to avoid. With a global economic crisis - and now surging housing prices in China - investors in any global market need to keep watch on political and economic developments around the world.
Today's analysis comes courtesy my friends at STRATFOR, a global intelligence company. They provide unique and on-the-money analysis and forecasts on all things global, essential for any alternative investment strategy. They've got a free newsletter as well, for which I encourage you to sign up by clicking here - so you're not limited to my caprice.
Before we get into this week's Outside the Box, let me give you a few pieces of data that came across my desk this morning, which will help set the stage for the OTB offering.
Fitch (the ratings agency), in a downgrade of yet another 543 mortgage-backed securities of 2005-07 vintage, gives us the following side notes: "The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages. In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%... The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010. To date, national home prices have declined by 27%. Fitch Rating's revised peak-to-trough expectation is for prices to decline by 36% from the peak price achieved in mid-2006. The additional 9% decline represents a 12.5% decline from today's levels."
So, what does an aging population do that has seen its retirement nest egg in the form of housing and stocks go literally nowhere for 12 years? You go back to work! David Rosenberg, now with Gluskin Sheff, offers us this insight:
"What really struck us in the employment report of a few weeks ago was the fact that the only segment of the population that is gaining jobs is the 55+ age category. This group gained 224,000 net new jobs in May while the rest of the population lost 661,000. In fact, over the last year, those folks 55 and up garnered 630,000 jobs whereas the other age categories collectively lost over six million positions. This is epic." [See chart below.]
"Moreover, the number of 55 year olds and up who have two jobs or more has risen 1.1% in the last year, the only age cohort to have managed to gain any multiple jobs at all. Remarkable. These folks have seen their wealth get destroyed by two bubble-busts less than seven years apart — the Nasdaq nest egg back in 2001 and the 5,000 square foot McMansion in 2007. Both bubbles ended in tears ... and so close together."
With that as backdrop, what are we to make of the prospects for recovery over the next decade? Not much, if we listen to Professor Paul Krugman of Princeton. He suggests that the developed world could be entering a lost decade, just like Japan after their crash. Let me quickly point out that I routinely disagree with Krugman on a large number of issues. And I usually know why I disagree and believe his policy suggestions are wrong.
That being said, one purpose of Outside the Box is to look at ideas and thinkers that we may not always agree with. Krugman certainly qualifies on that front for me. However, it must be admitted that he is a very smart man. Further, his thinking is important, because it somewhat reflects the thinking of that part of the establishment that is in charge of the Fed and the Treasury. And while we are not getting gloomy long-term forecasts from either the Fed or the Treasury, I find it remarkable that Krugman is less sanguine than his peers. And there is much (certainly not all!) within this interview that I find myself in surprising agreement with. This one made me think as I read and reread it.
If he is correct, the rosy recovery assumptions built into the already bloated budget projections are going to be far too optimistic, not just for the US, but throughout Europe as well. Krugman is interviewed very capably by Will Hutton, a veteran writer and economist for the UK Guardian (a bastion of liberal politics). The direct link is http://www.guardian.co.uk/business/2009/jun/14/economics-globalrecession.
Green shoots? Really? I invite you to read and think about what this interview means for the road to recovery. I will take this up more in next Friday's missive. (Note, I did not write a letter last week. There was a new Mauldin grandchild on Friday, and I decided that some things just take precedence.) Have a great week.
Late last week a letter from Jim Welsh crossed my desk. I started reading and found myself being pulled through his very thoughtful letter. I have not met Jim, but think this letter is worthy of an Outside the Box.
Jim Welsh of Welsh Money Management has been publishing his monthly investment letter, "The Financial Commentator", since 1985. His analysis focuses on Federal Reserve monetary policy, and how policy affects the economy and the financial markets.
Yesterday I sent you an Outside the Box from Paul McCulley who supports the government and Fed activity (in general) in the current economic crisis. Today we look at an opposing view from Bennet Sedacca of Atlantic Advisors. He asks some very interesting questions like:
- Shouldn't the consumer, after decades of over-consumption, be allowed to digest the over-indebtedness and save, rather than be encouraged to take risk?
- Shouldn't companies, no matter what of view, if run poorly, be allowed to fail or forced to restructure?
- Should taxpayer money be used to make up for the mishaps at financial institutions or should we allow them to wallow in their own mistakes?
I think you will find this a very thought-provoking Outside the Box.
Have you done your Christmas shopping yet? Research shows that more of us are putting it off in expectations of better prices. In other words deflationary expectations! The prices I have seen while out shopping the past few weeks are simply amazing. I have to admit to have made a few purchases for some items that I was not planning to buy just yet because prices were off by 60% or more. A few days ago a friend came in sporting a new black cashmere sweater top with jeweled embroidery and quite fancy. She said she got it at Saks. But the real story is that when she walked into Saks looking for a present for her kids they handed her a coupon with a 30% off any one item from whatever price it was already marked down. That top? At one point it was almost $500. She bought it for $75. I have to confess that made me worry about retail sales and future unemployment. I like low prices, but I like profitable companies and employment. I went and talked to a Saks salesperson a few weeks ago who had been there 25 years and asked if they had ever discounted like that before Christmas and he said never. It was Saturday in New York and the place looked busy. I asked why? And he said, "The store is empty during the week." And I bought a few sweaters at 60% off. Tiffani just got some presents from J Crew at over 60% off. Before Christmas! How many readers have seen the same sales? And yet shopping is down?
As a side note, this year most of the kids and in-laws are all going to get a Visa gift cards so they can take advantage of what I think are going to be even better sales after Christmas. It is not that Dad put off his shopping to the last minute (which I did) but the kids are really looking forward to finding their special items on sale. I wonder how many more are doing that?
This week we look at David Rosenberg's latest missive. While listing a number of negative data points, the thing to watch for is all the deflationary news. I have been pounding the table for YEARS that deflation is going to be the problem, and there would be massive stimulus from the Fed to fight it. We are now coming to that inflection point. Rosenberg is one of my favorite main stream economists and the North American Economist for Merrill Lynch. I would say enjoy this week's Outside the Box, but it is not enjoyable reading, but you should read it anyway.
Have a Merry Christmas. And enjoy the after Christmas sales! All the best,
This week we look at a short but excellent summary of the state of the current economic crisis. I always enjoy reading David Rosenberg, the North American economist of Merrill Lynch. He has a no-nonsense style that is refreshing from most mainstream economists. The reality is that things continue to deteriorate. Today's stock market action shows that we are not of the bear market woods just yet. Rosenberg gives us a few reasons why.
It is indeed a very interesting time in which to live, especially watching the financial markets. The disconnect among authorities, regulators, companies and investors is almost too much to comprehend. There are no precedents for the turmoil we are in. This week we read an essay by a name familiar to readers of Outside Box, Michael Lewitt of Hegemony Capital Management (www.hegcap.com). As usual he offers us some very cogent comments on the continuing efforts by those in authority to bail out the system, along with insights on the deal by Merrill and the woes at GM. It is a very interesting letter, so I will stand aside and let Michael jump in.
We are in a world far different than the one I learned about in economic text books. As I have written, the shadow banking system of hedge funds and CDOs, CLOs, PIPES, etc. have created a new financing economic reality far different than the traditional banking system was just 20 years ago. Does the Fed have the tools in its toolkit to deal with the new reality?
This week, Bill Gross of Pimco fame looks at the problem in a manner that is truly Outside the Box. Bill Gross has been called "the nation's most prominent bond investor," by the New York times, managing Pimco's Total Return Fund, the world's largest bond fund.
Enjoy your week.
Who should we blame for the problems in the credit markets? This week in Outside the Box my good friend Barry Ritholtz takes on the task of pointing his prodigious finger at the guilty parties. As he notes, there is plenty of guilt to go around. This is a problem that is going to stay with us more than a few weeks. As I wrote last week, it is not a problem of liquidity. It is a problem of credibility. Until investors of all types feel safe getting back into the structured finance market water, US mortgages and all sorts of consumer finance are going to be severely hobbled. There is plenty of money on the sidelines, but it is going to take some work to make investors feel comfortable.
Part of that process is to figure out what went wrong and how do we avoid getting into this mess yet again? How do we restore credibility? I offer a few quick thoughts on this at the end of Barry's work. And if you have the time, you should click on some of the links Barry has to various research, especially the first link which shows that housing prices could easily drop 15% (or more in some of the bubble areas!).
Finally, I should note that I am going to be speaking yet again at the New Orleans Investment Conference (October 21-25, 2007). This is always one of the great investment conferences of the year. You can click here to learn more.
This week in Outside the Box, we take a closer look at the bond market and its underlying drivers. HMIC's Van Hoisington and Dr. Lacy Hunt anticipate lower inflationary pressures on account of faltering consumer spending and further deterioration in the housing market.
Hoisington Investment Management Company focuses on long-term investment strategies based on Economic Analysis. The firm is a registered investment advisor specializing in fixed income portfolios with over $3.5 billion under management for large institutional clients. Van R. Hoisington is the President and Chief Investment Officer and has produced an outstanding fifteen-year performance record. Dr. Lacy Hunt, an internationally known economist, joined the firm in 1996 adding depth and expertise with his in-depth research and analysis.
Today's article is from their Second Quarter Review and Outlook which I am delighted to present to you with their consent. While constructing their assessment for bonds, Van and Lacy walk through each building block, providing analysis on the predominant driving factors in the bond market and their respective implications.
This week in a very special Outside the Box we have an investment outlook tour de force. My friend and South African business partner Dr. Prieur du Plessis gathered a group of some of the more interesting investment managers in the industry, along with your humble analyst, and let us have the opportunity to opine on what is driving various markets and their respective implications.
We begin with the U.S. economy, addressing the underlying implications of the real estate market, interest rates, liquidity, and the ever precipitously depreciating dollar, procuring an assessment of these collective market drivers and their respective effects on the U.S. economy, the stock market, bond market, and commodities market.
Thereafter, we incorporate macroeconomic drivers that will impact our respective outlooks be they the influence of the Asian Tiger economies, Yen Carry Trade, and the ample liquidity derived from vast foreign currency reserves on account of currency manipulation, and the respective consumption patterns of the developing countries on the global economy.
We conclude with an assessment of the risks to domestic and global economies from the market drivers and offer advice we have humbly been forcefully taught throughout the years by the always hard task-master, the market.
As I glanced over at the TV in my office this morning, the latest news on the ticker wire was that American Home Mortgage Investment Corp. (AHM) is trading down over 16%. While the company is not of any particular importance to me, it spurred my thinking regarding how the housing market will affect the economy throughout the remainder of the year. And as I have written it is not really a matter of the housing market affecting the economy so much as it is a matter of tightening credit spreads that will do the damage.
This week's Outside the Box is written by PIMCO Managing Director Bill Gross where he discusses his views regarding the correlation between housing, credit spreads, the bond market and FED policy. In his article "Grim Reality," he goes on to point out that losses on loans, in and of themselves, are not the real monster lurking in the night for this economy, but rather it's the tightening of credit standards the could have a materially adverse effect. Bill does an excellent job explaining this as he so often does with his usual great style and wit.
I believe that you will find this Outside the Box to be a good read on what the implications behind a decline in the housing market really are.
On Friday, I wrote my annual forecast, "The Goldilocks Recession," on what investment themes I expect in the coming year. This week's Outside the Box will follow up on the subject with an excellent piece written by Van Hoisington and Dr. Lacy Hunt. In their fourth quarter review of 2006, they address how the current status of the bond market measures up against historical interest rates and inflation. From there, each of the six major sectors of the economy, Personal Consumption Expenditures (PCE), Residential Investment, Nonresidential Fixed Investment, Government Expenditures, Inventory Investment, and Net Exports, are covered specifically and analyzed to depict the trends for 2007.
This letter is one of the more in-depth and fundamentally heavy articles I've featured as it is chock-full of data, or what I like to call the "hard facts." Van Hoisington and Dr. Lacy Hunt have done a stellar job collecting a great deal of information and dissecting it to form some well-thought investment conclusions. For those of you unfamiliar with Hoisington Investment Management, the firm is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the company has over $3.5-billion under management, composed of corporate and public funds, foundations, endowments, Taft-Hartley funds, and insurance companies.
Each year presents its own set of both opportunities and risks for us investors. I trust that you will find value in this Outside the Box and use it to form your own independent investment conclusions.
One of my favorite economists, Paul Kasriel, wrote an excellent article last Friday in his weekly commentary, "The Econtrarian." Not only is it a great "outside the box" analysis but it also follows up to and illustrates several points that I made in my latest e-Letter, "Party Like It's 1999."
At Northern Trust, Paul is the Senior Vice President and Director of Economic Research, responsible for producing the Corporation's economic and interest rate forecasts. He is also the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy.
His article "Festivus Flow-of-Funds Stocking Stuffers," offers us some insight into consumer debt and savings. He further goes on to discuss the trends in both consumer and corporate borrowing (and I should note that he provides some excellent data on both).
I believe you will enjoy Paul's analysis and find it to be both insightful and "Outside the Box."
I touched briefly on the subject of housing in my Friday letter, "Thoughts from the Frontline" (you can view it here). Data from across the country points to a number of trends including declines in both new construction and existing home sales. Market "experts" are calling for both sets of outcomes with some saying that we have been through the brunt of the contraction and with others saying that further declines await us yet.
This week's letter is from Paul Kasriel of The Northern Trust Company. Paul is the Senior Vice President and Director of Economic Research, responsible for producing the Corporation's economic and interest rate forecasts. He advises the Bank's Assets-Liabilities Committee as well as the Corporation's Investment Policy Committee.
In his commentary, "The Econtrarian," Paul addresses the housing market by taking a deep and thorough look at the data while asking the question of whether or not we are near a bottom. A further decrease in home prices would have a material effect on consumer spending and the decision making of the Fed.
Paul has a knack for taking a balanced look at the facts instead of paying attention to all of the noise generated by many media outlets. Let's take a look at this week's "Outside the Box."
Last Friday, I wrote about That Stubborn Yield Curve in my Thoughts from the Frontline letter. In it, I quoted a few paragraphs by Pimco's Paul McCulley, but upon reflection, I feel that his whole letter is worthy of taking a look at more in-depth. Paul writes a monthly commentary, the Global Central Bank Focus that, because of its well-researched and unique perspective, is always at the top of my reading list. As a Managing Director at PIMCO, Paul is an intelligent economist and a self-proclaimed "religious Keynesian."
In his article "Time-Varying Variables Vary" (quite the tongue twister), Paul looks back upon his forecast for the Fed Funds rate and evaluates the "Taylor" formula. But one of the things that I like best about Paul is that, despite his lengthy analysis, he is a bottom-line kind of guy who always boils it down to the end result, which in this case, is the future decision making of the Fed.
With Morgan Stanley and Goldman Sachs each weighing in on opposing sides of the interest rate debate, I believe that you will find Paul's piece to be a truly "outside the box" point of view.