John Stewart for Treasury Secretary

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.

Last Post

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.

One Good Day 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?

“Reinvesting When Terrified”

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: Continue reading

“Financial Equivalent of Snake Oil”

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”. Continue reading

The Future of Capitalism

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.

Ahead of Roubini?

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.