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.

Housing Improvement

Data out today from the Commerce Department show the first year over year increase in housing sales since this period of 2005. Perhaps of even greater importance is the number of unsold new homes in inventory which has literally been halved since January. While there is still a lot of ground to make up these are some signs of improvement. The South is faring much better than most other parts of the country and essentially all of the gains in recent monthly data have come from our region.

There are of course big dark clouds hovering over residential housing in many areas. A sizeable number of homeowners owe more on their homes than they may be worth in the current market. Most of these owners won't be selling in the near term however and for the main will continue paying their mortgages. As an aside, I recently saw a television ad for a mortgage company touting "no appraisal " mortgages. I really could not believe what I heard but indeed that was in the ad. These type mortgages were the crux of the problem to start with and it troubles me that these are being made again. Some of the data from FHA (which makes 3.5% down payment mortgages) suggests big troubles brewing within that market segment.

Sticky Intuition

Making financial decisions is rarely simple. Both spheres of the brain are involved thereby using both intuition and analysis- feeling and thinking. One of the problems , however, is that intuition can be "sticky" . That is- intuition can be stuck on a wholly incorrect notion and this "anchoring" tends to survive for long periods of time. This plays out in a number of different ways including being stuck on imaginary asset values (for real estate, individual stocks , etc) as well as rates of return, withdrawal rates and so on.

The most important aspect to remember is that very often financial decisions are aimed at either avoiding regret or achieving pride.

Stock Market Rallies- Historical Perspective

Since 1900 there have been roughly 27 major market rallies in the U.S. stock market .So about once every 4 years. Most of these fall into the range of 30-150%. Our current market rally measures 62% from the March 9 bottom (for the S&P 500).The length of these rallies run from 200-800 trading days or about 9 months to 3 years. So, the current rally as it now stands is under the average in both length and magnitude. Just some food for thought.