Monthly Archives: June 2009

Is The Stock Market Rally a ‘Validation’?

As seen in the Fortune story of June 15 titled “Economy in ‘early stages of repair'”:

“The stock market’s rally serves as “broad validation” of the Obama administration’s financial rescue efforts, Treasury Secretary Tim Geithner said Monday.”

While ostensibly this is correct, and commonly-held theory states that a stock market rally would precede an economic recovery, is this stock market rally a “validation” as stated?  Or is a guarantee of any type?

In my opinion, one has to be careful about “reading too much” into stock market rallies, as they can prove to be ephemeral.  One should also take into account a broad range of economic and financial “fundamentals” as well.

If this stock market rally proves to be a “bear market rally” (as I have previously stated on the June 8 post), it will fall below the previous S&P500 low of ~666.  Would such price action “validate” the “financial rescue” efforts?

SPX at 916.31 as this post is written

The Madoff Fraud – Are There More?

Here is the latest update on the Madoff sentencing from CNBC:

http://www.cnbc.com/id/31610169

A few months ago, I wrote an article titled “Crime During Economic Stress,” that is listed under the “Individuals” section (about halfway down the page) here:

https://www.economicgreenfield.com/prosperitybypencom-directory/

One of the questions that I have is whether there are more frauds in existence that haven’t yet been uncovered?  As I discussed in the article, the Madoff fraud really didn’t appear to be overly sophisticated, and there have been various other frauds uncovered over the last few months.  Have all of the frauds been uncovered?

This question is especially important for a variety of reasons.  Perhaps chief among these reasons are the following:  unraveling frauds are the among the quickest way to lose money;  and uncovered frauds are devastating in that they destroy confidence and raise many doubts. 

SPX at 926.72 as this post is written

Is Ben Bernanke a “Hero”?

Recently various people have given high marks and effusive praise for Ben Bernanke’s performance during the Financial Crisis.  Here is a sampling:

“Bernanke’s Handling of US Crisis Gets Strong Mark” :

 

From Jack Welch:

“I think he saved the system, I think he’s a national hero,” Welch said. “I think Bernanke seems to be a guy operating on a clear intellectual framework. This guy’s done a hell of a good job.”

 

Attributed to Abby Joseph Cohen:

“She also said that history is likely to show that Fed Chairman Ben Bernanke has been an “extraordinarily effective” leader during the current crisis, the worst U.S. recession since World War Two.”

http://tinyurl.com/ml68ja

 

From Warren Buffett:

“The urgency has moved away from a total meltdown of the financial sector which we faced last fall.  I’ve never seen anything like that.  But I would give enormous credit to the people there.  (Federal Reserve Chairman) Bernanke did a fabulous job.”

http://www.cnbc.com/id/31526815/

 

There are other examples as well.  I could comment extensively regarding this praise and “high marks” for Bernanke, and might do so in the future.

However, for now perhaps the main question that comes to mind is whether by commenting in this fashion these people are presupposing that The Financial Crisis is over and that we are indelibly on the road to recovery?

SPX at 918.90 as this post is written

A Conflict of Interest?

I found this story in The Washington Post, from June 11, to be rather interesting:

“Lawmakers Invested in Bailed-Out Firms” :

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/10/AR2009061002565.html?wpisrc=newsletter

I would have assumed there are rules that expressly prohibit such a conflict of interest.  If not, perhaps a recusal would be appropriate?

SPX at 918.90 as this post is written

More Questions Regarding Green Shoots

In the last post, Warren Buffett commented what he was seeing with regard to signs of an upturn.  This link contains what John Rice, Vice Chairman of GE recently (6/19) said:

“I am not particularly of the green shoots group yet,” Rice said today to the Atlanta Press Club, referring to a phrase used by Federal Reserve Chairman Ben S. Bernanke that described signs of a nascent recovery. “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.”

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayc5BDPO_GGs

Between Warren Buffett and John Rice, there is a tremendous size and breadth of businesses overseen.  Their comments seem to support the question as to whether “green shoots” exist, i.e. is the economy showing signs of recovery?

This question is absolutely critical at this juncture, for a variety of reasons.  Perhaps chief among them is the following:  If there currently is no economic recovery, how sustainable is the stock market (as well as other markets’) rally since early March?  If there is no economic recovery, is that some type of proof of the ineffectiveness, or failure, of the intervention efforts?  Are we heading toward Sustainable Prosperity?

SPX at 918.90 as this post is written

Warren Buffett June 24 Interview

I found this Warren Buffett interview to be interesting, particularly when he says this:

 

BECKYThe last time we sat down to talk to you was on May 4, and at that point you told us that you think we’re in an economic war right now.  How much progress do you think we’ve made in that war?

BUFFETT:  Well, it’s been pretty flat.  I get figures on 70-odd businesses, a lot of them daily.  Everything that I see about the economy is that we’ve had no bounce.  The financial system was really where the crisis was last September and October, and that’s been surmounted and that’s enormously important.   But in terms of the economy coming back, it takes a while.  There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while.  In the (Berkshire Hathaway) annual report, I said the economy would be in a shambles this year and probably well beyond.  I’m afraid that’s true.

http://www.cnbc.com/id/31526815/

____

As an aside, for those interested I wrote an article a few months ago titled “Does Warren Buffett’s Market Metric Still Apply?” It discusses several issues that may be of interest to followers of Buffett, as well as investors in general.  It can be found under the “Investor” heading here:

https://www.economicgreenfield.com/prosperitybypencom-directory/

SPX at 920.26 as this post is written

Article of Note

I would like to call attention to an article written a few months ago by Scott S. Powell titled “‘The Road to Sefdom’ – Revisited.”  Although I don’t entirely agree with all of its points, it presents several themes and points that I believe to be very important and worthy of serious contemplation.

Here is the link:

http://www.washingtontimes.com/news/2009/mar/26/the-road-to-serfdom-revisited/

SPX at 906.45 as this post is written

The Untimely Death of Long-Held Assumptions

Ever since the Economic Crisis began, there has been one facet that has been very under-recognized – that many long-held assumptions have proven incorrect.

There are many of these assumptions, but I will list a few.  The “fallout” from these assumptions proving incorrect has been widespread and very damaging:

  1. Real estate (particularly residential) always goes up.
  2. Las Vegas / gambling is immune to recessions.
  3. A Fed Funds rate near zero would, in effect, “supercharge” the economy; i.e. lowering the rate would cause the economy to “boom” 
  4. Gold would “rocket”, or at least perform very strongly during a financial crisis
  5. “Gentleman’s Clubs” are recession-proof (see link)http://online.wsj.com/article/SB124467942901904435.html

There are many others.  It is important to realize that, although these assumptions may seem to have been rather faulty in hindsight, the reason they became such ingrained beliefs is that they had withstood “the test of time.”  That they have now proven inaccurate, after such lengthy “tests of time” is, in my opinion, another testament that we are currently in an economic environment that is truly different than those that have come before – with the concomitant implications…

SPX at 907.66 as this post is written

A Quote of Note from Pete Peterson

I found the following interview to be of interest.  Pete Peterson certainly has an interesting background:

http://www.chicagobooth.edu/magazine/31/2/peterson.aspx

Of particular note was a quote from the article:

“We now have political system where, unlike what the founders of the country had in mind, politicians consider the position a career and don’t want to lose their jobs.  If they peddle the hard truths, they fear they’ll lose elections and lose their jobs.”

SPX at 901.08 as this post is written

An Interesting New Index

I ran across the following – it is Fortune’s Big Picture Index.  From the original notice in Fortune Magazine, June 8, p 62, “Our new proprietary index measures seven key signs of economic health”

I find the index interesting, and worth at least a quick peek.  Unfortunately, the link provided doesn’t give a lot of detail with regard to index construction, history, backtesting, etc. – and seems to only go back to 2007.  Nonetheless, it is nice to see the overall index trend and then the seven subcomponent trends, as well as an overall “meter” of the recession vs. recovery spectrum.

Here is the link:

http://money.cnn.com/magazines/fortune/storysupplement/recovery_index/index.html

SPX at 900.94 as this post is written