Another bad idea from Paulson
Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?

   This Week’s Data

    Third quarter productivity improved 1.3% versus expectations of an increase of 1.0% while unit labor costs rose 2.8% versus estimates of being up 3.1%.  These numbers reflect that hours worked are declining faster than the fall in output.  The good news is that management is watching costs closely; the bad news is that fewer goods are being produced.

    The Institute for Supply Management reported its November nonmanufacturing index at 37.3 versus forecasts of 42.0 and 44.4 recorded in October.

    Weekly mortgage applications spiked 38.1%; lower mortgage rates helped but the seasonal impact of Thanksgiving week also accounted for this dramatic rise.

    Weekly jobless claims fell 21,000 versus expectations of a rise of 29,000; that’s good news.  But the moving average is still heading up.

    The Fed released its latest Beige Book report (a once every six weeks anecdotal look at the economy) and as might be expected it points to weakness in virtually every sector and geographic area in the country.  There were some bright spots in this report: (1) the weakness includes prices, (2) retail inventories appear under control and (3) of a more localized nature, the Dallas Fed reports that the TARP funds have led to an increase in lending.

    Finally, after the Market close, rumors circulated that the Treasury was developing plans to funnel funds via Fannie Mae and Freddie Mac into the mortgage market which would allow those agencies to offer mortgages at a 4.5% long term rate.  A couple of points:

(1)    as of this writing, this is all rumor; the Treasury is making no comments; so we have no clue as to the specifics of this program,

(2)    the current program in which the Fed is buying mortgages is already having a positive affect on the mortgage market,

(3)    so I am a bit confused as to why Paulson is considering starting a new plan.  Indeed, I am beginning to think of him as something of a pin ball--bouncing from one thing to another in a somewhat random fashion.  I know that early on I defended him in this narrative on the grounds that no one alive has ever had any experience formulating or administering  policies to counter deflationary economic forces and, therefore, he should be granted leeway as he struggled to find the appropriate measures.  But my patience and understanding are wearing thin with what I think has been consistently inconsistent attempts to deal with the credit crisis.

This latest measure would seem to be at its best price controls (determining mortgage rates by fiat) if it applied to all mortgages and at its worse a Byzantine system that would be ‘gamed’ and therefore impossible to properly administer if it tried to distinguish between those who would benefit from the lower rates and those who didn’t.

    Of course, we have no details; so I can’t be too critical.  However, the more important point here is that every time Paulson gets on TV and announces a new program which in the final analysis changes the rules of the game, the Market hates it and invariably goes down.  So I look forward to hearing the details of the new plan, if there is one, with trepidation.


    Some thoughts on current monetary policy:

    The Bank of England and the central bank of the EEC have reduced their lending rates--and that is a positive.
    The results of Cyber Monday sales:

    Housing affordability is at a six year high:

    Today the auto executives stand before congress again with tin cup in hand.  As you probably know, they are supposed to have a business plan for recovery in order to get the bail out funds that they say that they so desperately need.  Things to watch: (1) how large are labor concessions, how many models are discontinued, how many dealerships are closed, how many managers lose their jobs (ha, ha), what congress gives in return.  And don’t hold your breath for anything reasonable.



  International War Against Radical Islam

The Market

    Here is a great study on P/E’s and dividend yields and subsequent 10 year stock performance.  It is a great testament to our Price Disciplines.

    Technical strength by Market sector:


    I really like the pin action yesterday.  Both indices (DJIA 8591, S&P 870) remain within what I hope is a trading range whose bottom is somewhere in the range defined by the 10/10 and 11/19 lows.  The volatility index again declined but not by enough to be considered positive; and the volume was OK, though nothing over which to get excited.  However, there is a downtrend line off of the Averages’ September high that is coming into play near current levels (circa DJIA 8657, S&P 881); that bears watching as potential resistance.  As an aside, 36% of the stocks in the Dividend Growth Portfolio, 31% of the stocks in the High Yield Portfolio and 43% of the stocks in the Aggressive Growth Portfolio are already trading above their equivalent downtrend line.  I think that that is a reasonably positive sign regarding future price direction.

Another upbeat take away from yesterday’s trading was that there was a constant stream of lousy news (Freeport McMoran cut its dividend, Research in Motion reduced its sales and earnings outlook, the ADP employment number was bad, productivity was up for the wrong reason and the Beige Book report didn’t make great reading); yet stocks were up.  I have noted previously that when stocks rise on bad news that is a hopeful sign that a bottom has been made. 

So if those circumstances are so positives why didn’t our Portfolios buy stocks especially since I suggested in yesterday’s Morning Call that purchases would likely occur sometime during the day.  The answer, as sorry as it is, is that I kept hearing the bad news, thinking that stocks would get banged (in my defense, at one point the DJIA was down triple digits) and ignored my own advice.  And to make matters worse, I am going to continue to do so until we have some clarity on rumored the Treasury measure [discussed above] or the Averages break through the aforementioned September to present downtrend line.

Posted 12-04-2008 8:30 AM by Steve Cook