For the moment, I grin and bear it
Steve Cook on Disciplined Investing

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Economics

   This Week’s Data

Weekly mortgage applications rose 5%.

    First quarter productivity was reported up 0.8% versus expectations of up 0.3% and a decline in the fourth quarter of 2008 of 0.4%; unit labor costs rose 3.3% versus estimates of an increase of 3.4% and a 5.7% jump in 2008’s fourth quarter.
   
    Weekly jobless claims fell 34,000 versus forecasts of a drop of 1,000; however, continuing claims continue to rise.

   Other

Politics

  Domestic

The on rushing health care ‘reform’:
http://hughhewitt.townhall.com/blog/g/32f69318-9676-43e8-83fa-69c6d0349586

The history of US interrogation policy:
http://www.powerlineblog.com/archives/2009/05/023498.php

James Madison on the sanctity of contract law:
http://www.cafehayek.com/hayek/2009/05/madison-on-regime-uncertainty.html

    More on taxing US companies’ international profits:
    http://article.nationalreview.com/?q=OTU5MGFlMGNiMDVmZjI3M2YxNDY5ZGY1ZTk4MzU5YWY=

  International War Against Radical Islam

The Market
    
    Technical

    Market continues to show strength.  The indices (DJIA 8512, S&P 919) (1) remain in a very short term up trend, the lower boundaries of which are circa DJIA 8257, S&P 889 as of the yesterday’s close and (2) longer term are in a trading range whose upper boundary stocks have yet to clearly define.  For the moment the nearest and best candidate for that upper boundary is DJIA 9078, S&P 947; however, with stocks stronger than horseradish, DJIA 9645, S&P 1004 can’t be ignored. 

    Of course since stocks really haven’t experienced any meaningful decline in the rally off the March low, we also can’t really point with any certainty at a clearly defined lower boundary--although there are several candidates: DJIA 7940, S&P 876; DJIA 7437, S&P 740; DJIA 6432, S&P 666.

    One final note: the volatility index broke through its prior low in the last couple of  days--which bodes well for a continuation of this upsurge.



    A review on sentiment indicators:
    http://www.ritholtz.com/blog/2009/05/sentiment-reading-mixed/

   Fundamental
   
    One of the biggest disadvantages of being in the investment business is that one is almost never happy: if stocks are declining, you beat yourself up for having too much equity exposure; and if they are rising, you never own enough.  We have just lived through a year in which the former was the problem for eleven months and the latter for one month.  I bring this up because it is the latter that is starting to cause me heart burn. 

The key for me in these situations is to never have positioned my Portfolio in the first place so that it makes too large a bet on a single outcome (the S&P is without a doubt going to 500), never succumb to momentary emotions (OMG, stocks are smoking and I have too much cash!!!!!!), stick with the asset allocation decisions that I made when I had more perspective, BUT always be attuned to developments (economic, psychological etc) that could invalidate my original assessment and be fearless in admitting a mistake and promptly correcting it. 

As painful as it is not to be 90% invested in this current Titan III Market (1) our Portfolios are over 70% invested and rising faster than 70% of the Market’s rate of increase, (2) 100% of the time that I have ever bought into a Market rising at the rate of change as this current Market, I have lived to regret it, (3) while I reduced our cash position in early March from 40% to 27% recognizing that the neither the economy nor the banking system was going to implode, I have a much bigger problem now.  I have no clue about the extent to which (a) the Obama agenda of higher government spending, higher taxes on capital, increased regulation and protectionism has any chance of enactment and, if it is, the magnitude of any impairment it will cause to our economy’s long term secular growth rate potential and (b) the success the Fed MUST have in soaking up the enormous quantities of money that it has injected into the system in order to avoid a 1980’s level of inflation.  And until I do, anything but a minor tweaking of our investment strategy seems out of the question [as previously noted, I would like to take our cash position from 20-30% to 15-25%], (4) I am doing my dead level best to be as objective as I can about the current economic/political decisions emanating from Washington [see below], I am just not getting much help from the powers that be, (5) nothing would make me happier than to be wrong. 

For the moment, I grin and bear it.

**********************************************

    Yesterday’s headline impacting the Market:

    Most news was the ‘leaked’ results of the ‘stress test’.  Investor reaction to the news on individual bank stocks was universally positive no matter whether the ‘stress test’ showed that the bank needed new capital or not--which tells me that the worst news had been priced into the stocks.  Given the relief rally among the financial stocks, the rest of the Market followed.

    One solid bit of news from the Treasury regarding the test was released after the close yesterday.  It stated that for those banks needing to raise capital in addition to having till mid June to submit a plan for increasing capital (we knew that from Tuesday’s news), they have until November to actually raise the capital; and then they have to maintain the proper capital ratios through out 2010.  This clearly gives the problem banks some breathing room during which they can allow earnings to provide at least a portion of the funds required.  (this is good)

    We also learned that Treasury’s preferred source of capital would be from private sources (no forced conversion of preferred, no new government infusions--also good).  In addition, each bank must also submit a plan outlining how it will repay TARP....and there was a string attached to that provision.  It was that if a bank repays TARP, it loses the FDIC guarantee to its short term debt, i.e. without the FDIC guarantee, its ability to sell short term debt could be impaired.  In other words in an uncertain economic environment, a bank might think twice about repaying the TARP funds even if it has the ability to do so (I am iffy on this one).

    All in all, the outcome as we now know it (at least as of 8pm Wednesday night) is not as bad as I worried that it could be.  So credit where credit is due--it appears that the administration has handled this portion of the financial crisis reasonably well.

    The already leaked results of the ‘stress test’:
    http://www.calculatedriskblog.com/2009/05/stress-test-table-morgan-stanley-needs.html





Posted 05-07-2009 8:33 AM by Steve Cook