2009- A Year to Remember

As 2009 ends and 2010 begins let's take a brief look back to see what we need to remember and what we should have learned from this past year. The herd mentality that drove many investors out of the stock market early in 2009 helped us define the difference between investing and speculating. Looking at money fund balances, it is clear many investors have missed the 65% upswing since early March as they wait for "the right time" to invest. Depending on these last 2 trading days the S&P 500 should finish with its best year since 1995.

We also learned that all asset classes including real estate can decline in value. For many folks this reality has been almost unthinkable. The good news is that much of the data suggest a bottoming process may be underway in some regions and at some price points. The bad news is mortgage rates are likely heading up and higher priced homes are still soft . We are roughly at 2003 price levels in most areas of the country.

Looking ahead to 2010 we of course make no predictions but a couple observations might be useful. Looking at Price to Earnings ratios it seems that the now 9 month long rally in equities has somewhat outstripped the underlying earnings. That is, growth in 2010 will likely come from higher earnings not expanding P/E's. One final tidbit. I heard yesterday that a recent study of stock "analysts" predictions provided some helpful information. The study looked back a number of years and covered over 6 million "Buy and Sell" recommendations from these brokerage firm analysts. The conclusion was , in the aggregate, the recommendations followed the market trends in both the up and down directions. In other words...they had no particular predictive value. No surprise here! Happy New Year!

Ideas for Improving the Economy

I fairly recently became aware of the Center for Economic Forecasting at California Lutheran University (with full disclosure my son is an economics major/basketball player there). CERF is headed by Dr. Bill Watkins and just today they released their current 2010 forecast for California and the U.S. This is an excerpt from that report from the VC Star.

The very straightforward prescriptive measures include: 1. Fixing the banks (as I have said here they are not yet sound-the toxic assets largely still remain) ; 2. Lowering the cost of hiring- this seems simple enough but of course politically difficult. High employment costs= lower # of employees...always has/always will; 3. Changing Monetary Policy- they are 100% correct. The so called "carry trade" where banks are making billions for not lending has to be reversed ; 4. Increase Immigration- this is a sensible manner of correcting the huge imbalance that we have in terms of retirees to those actively employed.

Quite good stuff.

Market Efficiency Revisited

When you unravel all of the puffery, investors either believe that the market is efficient or they do not. Of course in the short term it is very messy and very noisy. Perhaps this is really the wrong question. Even if you believe that the market is not efficient what is the cost of seeking to exploit the perceived inefficiency? In reality , very, very few will manage to outpace the market on a cost and risk adjusted basis.

FHA follow up/ TD Ameritrade ad slogan

You may have read that Bank of America will soon be repaying the government in order to be free from the government pay standards etc. My most recent post mentioned brewing problems with FHA mortgages. Bank of America is the largest originator of these loans and recent estimates of near term losses by FHA range from $75-150 billion. FHA is essentially out of reserves so...these losses could end up being losses for banks that hold these mortgages. Time will tell if Bank of America and all the others are really out of the woods just yet.

I have seen a new ad by our primary custodian TD Ameritrade that is pretty good. It has a tag line/slogan of "It's time for fresh thinking". Indeed it is. It also mentions objective advice which of course we like as well. A lot of ways to interpret "fresh thinking" but a start might be to ignore the typical Wall Street marketing din of "we have a system, manager,black box, fund, etc. that can solve all that ails you". Interesting times indeed.