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  • Sell in May and Go Away

    The old adage that one should 'sell in May and walk away' has been around for years. I mentioned that bromide about this time last year, urging readers to head for the sidelines if they had not already done so. I was also suggesting a strategic retreat in August of 2006 (after which the markets went up 20% before plummeting). In this week's letter we look at the actual data and offer up a fresh viewpoint. Then we turn our eyes to the recent GDP numbers, which were awful, though many took comfort in the apparent rise in consumer spending. Are Americans back to their old ways? It will make for an interesting letter....
  • Back to the Future Recession

    This week we look at the second half of my speech from a few weeks ago at my annual Strategic Investment Conference in La Jolla. If you have not read the first part, you can review it in the website. The first few paragraphs are a repeat from last week, to give us some context. Please note that this is somewhat edited from the original, and I have added a few ideas. You can also go there to sign up to get this letter sent to you free each week.

    MV=PQ

    Okay, when you become a central banker, you are taken into a back room and they do a DNA change on you. You are henceforth and forever genetically incapable of allowing deflation on your watch. It becomes the first and foremost thought on your mind: deflation, we can't have it....
  • Is That Recovery We See?

    The market, we keep hearing and reading, is telling us that there is recovery around the corner. And pundits point to data that seems to suggest the worst is behind us. The leading economic indicators, while still down significantly, seem to be in the process of bottoming. There is a large amount of stimulus in the pipeline. Mark-to-market has been modified. Housing seems to be finding a bottom, if you look at the rise in sales from January. And so on.
    In this week's letter, we look at what past recoveries have looked like in terms of corporate earnings; and we look at the continued slide in earnings on the S&P 500, which has a negative price-to-earnings ratio looming in future months (yes, that is not a typo, we have an unprecedented earnings multiple). We take a peek at housing and foreclosures. There is just so much bad news out there (like continued unemployment) that it just has to get better, doesn't it? This should make for an interesting letter....
  • Further Thoughts on the Continuing Crisis

    When confronted about an apparent change of his opinions, John Maynard Keynes is reported to have said, 'When the facts change, I change my mind. What do you do, sir?' The earnings season for the 4th quarter is almost 80% complete, and the facts are dismal. It is worse than the current data shows, and could get uglier. Unemployment is increasing, and consumers are both saving more and spending less as incomes are not keeping pace with what little inflation there is. All in all, a very different set of facts than a few quarters ago. This week we examine some of the new facts, and start out by analyzing how Thoughts from the Frontline has done over the past two years with some of the more important predictions. It should make for an interesting letter....
  • Some Things That Just Should Not Be

    There are things in today's markets that are simply astounding. They should not exist, yet they do. Why should US bills trade at negative interest? How can oil be trading at all-time highs in terms of spreads over the next year? Bank debt and bonds are trading at discounts not to be believed. Want some free money? I show you a trade that gives you (almost) just that. Fed funds at zero? Are we starting to push on a string? We'll cover all this and more in this week's letter. But first a quick commercial. Not all money managers and funds have had losses this year, even though it may seem like it. My partners around the world can introduce you to some alternative funds, commodity funds, and managers which you might find of interest as you rebalance your portfolio at the end of this year. You owe it to yourself to check them out....
  • The Financial Fire Trucks Are Gathering Again

    The economic news just continues to be bad. New unemployment claims were over 529,000 on a seasonally adjusted basis. The "real" number was 606,877 lost jobs. New home sales were off by another 5% and down 40% from a year ago, as builders slash inventories. The Chicago Purchasing Manager index came in at 33.8, the weakest number since the serious recession of 1982. The national number due next Monday will be just as ugly, as durable goods were down far more than expected, by a negative 6.2%. But it is Thanksgiving weekend, and not a time for gloom. In this week's letter I am going to talk about why we should be optimistic about the future. Things will turn around. I will also make a few comments about the latest stimulus package....
  • The Problem With Deleveraging

    In general, we consider it a good thing to save money and to 'owe no man anything save love.' But what happens when a debt-happy society wakes up and decides that saving is a good thing for everybody? What happens when banks and hedge funds decide (or are forced) to reduce their debt? What happens when businesses of all sizes find it harder to get loans to operate? In this week's letter we discuss 'The Great Unwind,' that process of deleveraging that we are now in the midst of. We also explore some recent economic data on the economy. It's a lot of ground to cover, so let's jump right in....
  • Electing the Janitor-in-Chief

    This week we survey the economic landscape that the new president will inherit. It is a polite understatement to say that he will be getting a serious mess. In reality, the US goes to the polls this next Tuesday to elect a Janitor-in-Chief. He will face a task that rivals that of Hercules in cleaning out the Stygian stables (legendary huge stables that had not been mucked out for ten years). However, there are no convenient rivers at hand for a probable President Obama to redirect that will quickly be able to clean out the mess left in the stables of our economy. This will indeed be an Herculean task and one that will take most of the first term of the next administration. So, let's look at what will face the next president. It should make for an interesting, even if not optimistic, letter....
  • Who's Afraid of a Big, Bad Bailout?

    Flying last Tuesday, overnight from Cape Town in South Africa to London, I read in the Financial Times that Republican Congressman Joe Barton of Texas was quoted as saying (this is from memory so it is not exact) that he had difficulty in voting for a bailout plan when none of his constituents could understand the need to bail out Wall Street, didn't understand the problem, and were against spending $750 billion of taxpayer money to solve a crisis for a bunch of (rich) people who took a lot of risk and created the crisis. That is a sentiment that many of the Republican members of the House share. As it happens, I know Joe. My office is in his congressional district. I sat on the Executive Committee for the Texas Republican party representing much of the same district for eight years. This week, Thoughts from the Frontline will be an open letter to Joe, and through him to Congress telling him what the real financial problem is, how it affects his district and help explains to his constituents the nature of the problem, and why he has to hold his nose with one hand and vote for it with the other. I think this is as good a way to explain the crisis we are facing this weekend. This letter will print out a little longer because there are a lot of charts, but the word length is about the same. Let's jump right in....
  • Additional Thoughts on the Continuing Crisis

    We are entering the next stage of the credit crisis, and one which is potentially more troubling than what we have seen over the past year, absent some policy reactions by the central banks and governments world wide. The crisis was started by an intense run-up in leverage by financial institutions and investors world wide, investing in increasingly risky assets such as subprime mortgages and then the realization that leverage could hurt. The deleveraging process started to intensify last year about this time. The easy part of that process has been just about done. Now is the time for the really hard work. It will not be pretty. In this week's letter, we look at the process and think about its implications for the markets and the economy, and visit some data on the housing market and unemployment....
  • Whatever Happened to Decoupling?

    The old mantra was that if the United States sneezed, the rest of the world would catch a cold, as the US was seen as the main driver of world growth. That was then. Economists and analysts began to argue that China and the developing markets were starting to provide a consumer base for the world. And Europe's new and growing markets would be able to stave off problems from abroad and stay on their own growth path. The world, we were assured last year, would not suffer from problems in the US economy. Today, we look at evidence that this might not quite be the case. And if it is not, those who look for diversification in global markets may be disappointed. Also, I quickly look back at my January forecasts and feel it may be time for a mid-course correction. It seems I may have been a little too optimistic. It should make for an interesting letter....
  • The Rise of A New Asset Class

    This week I am in Maine on vacation with my son, and next week is my daughter Tiffani's wedding, so for the next two weeks I am going to send an updated version of a speech I have been giving the past few months on what I think is the likely potential for the rise of a brand new asset class. It is too long to be sent as one letter, so we will start with the first part today and finish with the second part next week. This first part can be read as a standalone letter. I think we're at a watershed moment, what Peter Bernstein defines as an "epochal event," with the very order of the investment world changing as it did in 1929, in '50, in 1981, where a number of things came together - it wasn't just one thing but a number of events happening that conspired to change the nature of what worked in the investment world for the next period of time. It took most people a decade after 1981-2 to recognize that we were in a different period, because we make our future expectations out of past experience. It's very hard for us to recognize a watershed moment in the process. We're going to look back in five or ten years and go, "Wow, things changed." As we will see, it's going to be a change that's going to cost people in their portfolios and in their retirement habits....
  • Earnings and Mr. Bear

    "The stock market is a voting machine in the short run and a weighing machine in the long run." - Benjamin Graham -- The voting part of the equation is tempered by fear and greed. It is largely emotional, although investors like to think of themselves as rational players. That emotion is driven by views of the future. If you can be confident of large and growing returns, you are less likely to be swayed by the erratic movements of a stock. But as confidence wanes? Well, that is the stuff that bear markets are made of. Because at the end of the day, what the market weighs is earnings and the ability of a company to reliably produce them. This week we look at what earnings are likely to be over the next year and see if we can discern what that suggests for the markets. We also take a look at the energy markets, the possibility of a further drop in the price of oil, and muse on what a sane energy policy for the world would look like. There is a lot to cover, but it should make for an interesting letter....
  • The Slow Motion Recession Re-visited

    It was only five years ago that the central bankers of the world, and especially the Fed, was worried about deflation. Ben Bernanke was introduced to the world at large with his famous helicopter speech about how the Fed could deal with a deflationary environment. Who would have thought that what passed as humor to a group of economists would be taken so seriously by the rest of the world? Today the worry on the mind of investors and central bankers is inflation. It is causing havoc with the markets. In this week's letter, we look at whether we should be worried about inflation, take a mid-year check on the economy, muse on the malaise in the stock market and offer a very contrarian possibility for a positive shock to the world. It should make for a thought-provoking letter....
  • The Muddle Through Question

    A few weeks ago I asked for readers to send me questions and said I would try and answer them while I was in Switzerland. Some of them were quite good and have given me ideas for whole newsletters but will require a lot of research. But a lot of them fell into two basic camps. This week we look at a number of questions from readers about my thoughts on the Muddle Through Economy....