Old habits die hard.  This has to be commented on.  You can’t just watch the edited interview with Jim Cramer on the show, you have to watch the whole interview on the Daily Show web site.  This is better financial reporting than anything I’ve seen in any “real” news source anywhere in a long time.  Truly amazing.

In the second half of last year I started thinking about potentially leaving my current employer and starting my own investment firm.  There were many reasons for this, not the least of which is complete disillusionment with company management.  For a number of months now I have been exploring this possibility, researching regulatory requirements, interviewing financial service providers, developing a business plan, etc.

I started this blog as part of this research.  The concept was to incorporate it into a more traditional business web site and use it as a way of effectively communicating updates to clients and prospective clients.

The blog has turned out to the the easy part.  Creating one and filling it with content has been simple compared to the other tasks.  And, after a very detailed examination of the alternatives, I have decided to shelve the idea of launching own firm for now.  The rate of change and amount of uncertainty in the financial services industry is at extreme levels, and I may end up elsewhere, but for now it will not be of my own volition.

So, this is the last entry for the Durable Investor.  I will turn my efforts back to concentrating solely on success in my current role.  Yes, management at my company remains questionable, and perhaps has even been borderline criminal in the past, but I have the ability to work independently to a very large extent and protect my clients from my own company as well as the overall markets.

To close, here’s a final thought: while the future does not look appealing right now, it does not look as bad as many think.  We may be in a “Great Recession”, but it remains highly unlikely that we are in Great Depression II.

Look at this entry from Calculated Risk.  CR was one of the very early voices warning about the bubble economy.  Behavioral investing is all about being aware of crowd dynamics and irrational actors.  We are currently in a pessimism bubble; try to keep things in perspective.

Today was a good day in the markets.  For some perspective, take a look at this chart.  The markets are still tracking the course they set during the Great Depression.  Even if we start to see a rally, here’s some perspective from today’s Barron’s.

Recent volatility doesn’t even begin to compare to what it was like during the 1930s.

In fact, there were eight calendar months during the decade of the 1930s in which the Dow rose or fell by more than 20%. The month with the biggest Dow move was April 1933, when the Dow rose by 40.2%. In August 1932, furthermore, the Dow rose by 34.8%.

The biggest monthly losses during that decade were almost as big. The largest came in September 1931, when the Dow lost 30.7%.

A quick look at a Yahoo! chart of the Nikkei over the past 20+ years also shows up upswings followed by even bigger losses.

For the foreseeable future any time we see some upside from Mr. Market, the very tough question will continue to be, is this rally the real thing or a head fake?

That’s the title of Jeremy Grantham’s last posting on the GMO website.  Like most of his writings, this one is nuanced.  While he believes that the S&P is fairly valued at 900, and he is putting money to work, he also thinks that there is a 50% chance it drops to 600.

Clearly, this does not provide the clear guidance we all wish for.  His closing comment: “be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.”

Here’s the entire one-page article:

It was psychologically painful in 1999 to give up making money on the way up and to expose yourself to the career risk that comes with looking like an old fuddy duddy. Similarly today, it is both painful and career risky to part with your increasingly beloved cash, particularly since cash has been so hard to raise in this market of unprecedented illiquidity. As this crisis climaxes, formerly reasonable people will start to predict the end of the world, armed with plenty of terrifying and accurate data that will serve to reinforce the wisdom of your caution. Every decline will enhance the beauty of cash until, as some of us experienced in 1974, ‘terminal paralysis’ sets in. Those who were over invested will be catatonic and just sit and pray. Those few who look brilliant, oozing cash, will not want to easily give up their brilliance. So almost everyone is watching and waiting with their inertia beginning to set like concrete. Typically, those with a lot of cash will miss a very large chunk of the market recovery.

There is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it. Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer. This is what we have been doing at GMO. We made one very large reinvestment move in October, taking us to about half way between neutral and minimum equities, and we have a schedule for further moves contingent on future market declines. It is particularly important to have a clear definition of what it will take for you to be fully invested. Without a similar program, be prepared for your committee’s enthusiasm to invest (and your own for that matter) to fall with the market. You must get them to agree now – quickly before rigor mortis sets in – for we are entering that zone as I write. Remember that you will never catch the low. Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the roundtrip as well as lowering the average risk exposure.

For the record, we now believe the S&P is worth 900 at fair value or 30% above today’s price. Global equities are even cheaper. (Our estimates of current value are based on the assumption of normal P/Es being applied to normal profit margins.) Our 7-year estimated returns for the various equity categories are in the +10 to +13% range after inflation based on an assumption of a 7-year move from today’s environment back to normal conditions. This compares to a year ago when they were all negative! Unfortunately it also compares to a +15% forecast at the 1974 low, and because of that our guess is that there is still a 50/50 chance of crossing 600 on the S&P 500.

Life is simple: if you invest too much too soon you will regret it; “How could you have done this with the economy so bad, the market in free fall, and the history books screaming about overruns?” On the other hand, if you invest too little after talking about handsome potential returns and the market rallies, you deserve to be shot. We have tried to model these competing costs and regrets. You should try to do the same. If you can’t, a simple clear battle plan – even if it comes directly from your stomach – will be far better in a meltdown than none at all. Perversely, seeking for optimality is a snare and delusion; it will merely serve to increase your paralysis. Investors must respond to rapidly falling prices for events can change fast. In June 1933, long before all the banks had failed or unemployment had peaked, the S&P rallied 105% in 6 months. Similarly, in 1974 it rallied 148% in 5 months in the UK! How would you have felt then with your large and beloved cash reserves? Finally, be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.

Today’s Financial Times has a second great column to go with Martin Wolf’s, mentioned in the prior post.  This column is from Robert Shiller, again talking about Keynes, his concepts of capitalism, the need to balance it with government, and the chaos of human emotion or “animal spirits” that adds a wild card to what classically trained economists wish would be a rational and easily modeled social science.

The column is an excellent read.  The best sound bite is calling modern investment products the “financial equivalent of snake oil”.

The concluding paragraphs read:

There is a broader moral to all this – about the nature of capitalism. On the one hand, we want to take advantage of the wisdom of Adam Smith. For the most part, the products produced by capitalism are what we really want, produced at a price that we are willing and able to pay. On the other hand, when confidence is high, and since financial assets are hard to evaluate by those who are buying them, people will and do buy snake oil. And when that is discovered, as it invariably must be, the confidence disappears and the economy goes sour.

It is the role of the government at two levels to see that these events do not occur. First, it has a duty to regulate asset markets so that people are not falsely lured into buying snake-oil assets. Such standards for our financial assets make as much common sense as the standards for the food we eat, or the purchase medicine we get from the pharmacy. But we do not want to throw out the good parts of capitalism with the bad. To take advantage of the good parts of capitalism, when fluctuations occur it is the role of the government to see that those who can and want to produce what others want to buy can do so. It is the role of the government, through its counterbalancing fiscal and monetary policy, to maintain full employment.

The principles behind such an economy are not the principles behind a socialist economy. The government insofar as possible is only creating the macroeconomic conditions that will allow the economy to function well.

That is the role of government. Its role is to ensure a “wise laisser faire”. This is not the free-for-all capitalism that has been recommended by the current economic theory, and seems to have been accepted as gospel by economic planners, and also many economists, since the Thatcher and Reagan governments. But it also is a significant middle way between those who see the economic disasters and unemployment of unfettered capitalism, on the one hand, and those who believe that the government should play no role at all.

The idea that unfettered, unregulated capitalism would invariably produce the good outcomes was a wrong economic theory regarding how capitalist societies behave and what causes their crises. That wrong economic theory fails to take account of how the animal spirits affect economic behaviour. It fails to take into account the roles of confidence, stories and snake oil in economic fluctuation.

Martin Wolf is the influential chief economics commentator at the Financial Times.  His most recent column, titled Seeds of its own destruction, is a lengthy contemplation of the future of modern capitalism in the face of what appears to be systemic weakness.  It begins, “Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.”

Wolf provides a brief history of key inflection points in capitalism over the past few decades, states that we are at another one, but admits that “it is impossible at such a turning point to know where we are going”.  That being said, according to Wolf the most likely outcomes are discouraging over the short term.  Wolf also reminds us that the way out of the Great Depression was via WWII.

Echoing my earlier post about the real roots of the current problem, Wolf asks “if the financial system has proved dysfunctional, how far can we rely on the maximisation of shareholder value as the way to guide business?”  A very interesting question coming from the pages of the Financial Times.

I am just a simple financial consultant trying to do my best for my clients, but it looks like Nouriel Roubini is late to the game on this prediction.  Below is excerpt from the latest “alert” message from Dr. Roubini.  I’ve been talking about this for some time now.  (Emphasis in the original.)

Earnings per share (EPS) of S&P 500 firms will be in the $ 50 to 60 range, but they could fall to $40. The price earnings (P/E) ratio may fall in the 10 to 12 range in a U-shaped recession. If earnings are closer to 50 or the P/E ratio falls to 10 then the S&P could fall to 600 (12 x 50 or 10 x 60) or even to 500 (10 x 50). Equivalently the Dow (DJIA) would be at least as low as 7000 and possibly as low as 6000 or 5000.

This week’s Barron’s magazine is pretty much mono-thematic: stocks are cheap, time to buy.  I hope they are right this time, but I’m not drinking this Kool Aid just yet.

Here’s an interesting post on the P/E ratio method of valuing the market over the past 100 years.  Using the Schiller method, the S&P is trading at an 11.85 P/E.  That’s well below the long term average 16, so the markets are oversold, but still above the level were markets bottomed in major downturns in the past.

So, if you have a long-term perspective, you could buy and have a reasonable expectation of coming out ahead in the long run.  But there could still be some decent downside in the meantime.

Another post from the same site shows that, on an inflation-adjusted basis, the DOW is the same today as it was in 1966.  Flat for 43 years.  “Stocks for the long run, indeed.”

You’ve seen the report that the unemployment rate is now officially 8.1%, the worst since 1983.  You may not have heard that the rate of job losses is the highest since 1949 and appears to be accelerating.  CalculatedRisk has a good chart showing how the current recession compares with prior ones since WWII.

The WSJ’s Real Time Economics blog reports that the U-6, the broader measure of unemployment (it counts people who have stopped looking as well), is now at 14.8%.  Think of it as 1 out of 7 Americans out of work.  Some economists believe that this measure will get to 20%, 1 out of 5, before this recession is over.  Ouch. Peak unemployment in the Great Depression was around 25%.