Apr

6

One has always hypothesized that holidays are inordinately associated with major turning points. One hypothesizes that the correlation between the extent of bailout and subsequent economic recovery between countries is not zero. One notes the story from The Book of 5 Rings where a group of wealthy samurai were traveling in Kyoto and were met by a vanguard of vassals telling them that a group of noblemen were behind them and they should bow down on floor in prostration. It turned out the noblemen were robbers and stripped them of their clothes and honor and the samurai had no recourse but to renounce their profession out of shame. What lessons does this have for markets, market people, and others? One believes that the early leads in basketball games and other games tend to be increased in subsequent parts of the game. One hypothesizes that the expected change from the time that the NBER announces that a recession is over or started are opposite in direction from the economy's current announced state — i.e., after they announce a recession the market goes up more than after they announce an expansion.

Rocky Humbert writes:

The continuous surfeit of negativity over the past year (and now hints of protectionism) makes one ponder whether one fell asleep during the housing bubble and awoke in Bizarro World (the mirror-image of Superman's world)… A successful investor doesn't need to either celebrate unemployment (Dr. Rehmke) nor declare millions are out of work forever (Dr. Dreyfus). Both statements are simply provocative– it's much less dramatic to simply observe that employment is a lagging indicator. (Yawn.) Perhaps it would be good medicine for all– if the Chair resumed his slights toward Alan Abelson (last mention July 20, 2007), and prior to that more than once/month. Most importantly, for those who are looking for a "major turning point," I share the words of Bruce Kovner, with whom I had the honor of briefly working: "Listen to the market."

Put simply: for the past year, the optimists saw a monetary/fiscal cyclical recovery with the yield curve predicting growth and inflation. During the same time, the pessimists saw a false stimulus/inventory uptick with the yield curve predicting troubling deficit/supply overhang. (No one expects the job market to recover meaningfully before 2011+.)

By any standard, the pessimists have been horribly wrong. But instead of acknowledging that things are improving, they are being Alan Abelsons, digging in their heels, and predicting that the next huge downturn is just around the corner.

Pitt T. Maner III comments:

Trying to be more in the optimistic camp it looks like the US unemployment fits a hysteresis model. Sort of like TW at Augusta and at home–it could take awhile and that's if there are no more more shocks along the way! :

1. According to Caporale and Alana , two well-known facts about the unemployment rate are

(i) the high persistence of shocks, or hysteresis (see Blanchard and Summers, 1987), which is a feature, among others, of "insider" models (see Lindbeck and Snower, 1988), or of models in which fixed and sunk costs make current unemployment a function of past labour demand (see Cross, 1994, 1995), and

(ii) its asymmetric behaviour, namely the fact that unemployment appears to rise faster in recessions than it falls during recoveries.

2. The next survey of Professional Forecasters will be May 14th, but most see an improving jobs situation. Slow at first but accelerating by end of current POTUS term.

3. Interesting chart of GDP fall vs. unemployment rise (Okun ratio). Less regulations in US (and Canada) would seem to be a long term positive, but the US and Canada sensitivities to GDP fall are higher because workers can be let go faster.

Kim Zussman adds:

Here is an update on P/E type-forecast, with a caveat about markets remaining irrational…if they feel like it.

Pitt T. Maner III comments:

What about the case where you may be moving quickly from high P/Es to lower estimated 12-month forward P/Es? (i.e. S&P 500 going from 31 one year ago to 23 now to possible 15 in 12 months time). So if you have a high rate of change in the P/E downward (if numerators continue to grow) that might make the positive portion of the bars more likely?

It seems with the P/E in the 15-17 range you have more variability in range of returns but the forward dividend yield would still indicate lower returns given yield of 3.4 (one year ago) to about 1.8 today.

Jordan Low replies:

I think that the 10 year data mines the worst case as it includes both the dotcom and subprime busts. The peak of the dotcom was almost exactly 10 years ago, and investors in 2000 weren't looking for E. (They preferred g.)

I understand that the long window is supposed to average the business cycle. Well then, the window should be variable. As of right now, we are getting bad earnings from two crashes and many of those companies don't exist anymore. Perhaps it says something about the unfortunate timing of two bad periods and growth of the Internet being captured by late comers (e.g. Google and Facebook) rather than early adopters (AOL and Yahoo). Being an investor in today's market, not yesterday's, may still be attractive.


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