These are some mini-rants that have not made it up to full rant status and so have been saved up, like Green Stamps (for those old enough to remember those things) and now are being dropped on you before they go stale.
The economy still in the news
“Our great nation is on the verge of another great wave of growth. It may not come rapidly or at the exact time we may expect it, but it is coming. Why? Because we have all the ingredients we need to get lots of economic growth. Interest rates are low. There is lots of money flowing around. We have lots of unused capacity in labor and capital markets. Many cyclical industries are operating at minimal operating levels (so any increase in demand translates into marked growth). We have a consumer who has dramatically reduced consumption. Inflation is virtually non-existent, outside periodic bouts of commodity-driven price increases. And, the government has a program to pump money into the economy and create make-work jobs. There should be no question we are going to have a recovery. The only question is how powerful it is likely to be.”
We wrote that back in August and it reads just as fresh today. Nothing has changed except people’s perception of what is happening. All of the above is still true. We have evidence that it is happening. We have massive amounts of fiscal and monetary stimulus, we have loads of unused capacity in capital, labor and material. If either monetarist economics or Keynesian economics has any validity, we will get a recovery. The problem then becomes the argument about which really worked, monetary policy or fiscal policy. Oh well, that is sort of like coaching T-ball when you’d like to see two kids go after that rare hit rather than no kids go after it.
Too Big to Fail This is the concept that some financial intermediaries are just too important to the daily functioning of the financial machinery of the US or the world to allow them to go bankrupt. This is also nonsense. In retrospect, it is obvious that Lehman Brothers was too big to fail, yet it failed and we’re all here to tell the story. If Citigroup had failed it might have been a bit worse, but only in degree. The issue is really about the cavalcade of failures had we not stepped-in to save the rest of the leading financial companies after Lehman failed. As we spoke at the time, and when Bear Stearns failed several months earlier, the Fed was trying to stop the dominoes from falling once the first one fell over. Bear was the first domino. Lehman was the second, which prompted the fall of AIG. Merrill Lynch may have been the next, then Wachovia, Washington Mutual. Citigroup may have landed about here and Bank of America maybe soon thereafter. There were several smaller banks, Comerica, Fifth Third, Key Bank, and others that were in everybody’s sights as well as Morgan Stanley and maybe even Goldman Sachs. It is salvaging the latter dominoes that should really be the idea, not too big to fail.
Our financial system could probably have endured even more pain and suffering had we allowed all those dominoes to fall. Maybe there was enough capital and business acumen in J. P. Morgan Chase and Wells Fargo to cobble together a working financial system with only a couple of major pieces. We’ll never know. But we do know that the pieces that were salvaged this time are unlikely to be allowed to fail next time. Well, maybe one of two will be allowed to go under as an object lesson to those left standing.
In just about every economic recession some big financial institution fails. It is one of the hallmarks of the bottom and of the higher risk perception that encumbers investors. We think that the survivors of the great bloodletting of 2008-09 shouldn’t feel they are out of the woods, yet. The analogy is to the kids’ game of musical chairs. We seem to be willing to let a couple of firms go each cycle, so the ones who don’t have a clear shot at one of the remaining chairs might yet be in trouble.
The trouble with ETFs
Before you get the wrong idea, we like ETFs. They provide a useful service for investors by allowing people with no specific idea to buy or sell ‘stocks’ without having to monkey with one particular stock (and make its trading even more erratic than most of them already are.) But, the trouble with ETFs is that they have gotten far too popular. Because ETFs are so popular, nobody has to think about whether IBM is a better investment than INTC, they just buy some tech ETF and call it quits. ETF demand for some stocks will occasionally jerk around the stock on a slow day.
Most ETFs utilize the derivatives markets because that market can give them the easy liquidity or the leverage they need to track their index. Many ETFs will actually never own anything other than the derivatives (options and futures) because their approach demands they lever-up their returns and the stocks can’t do that all by themselves. Now a days, a big piece of every day’s volume is in ETFs. Which brings us to the real beef here: we think the exchanges should not list ETFs in the most actives. What good does it do us to know that three different version of the financial index are active on the same day? If we look at the market and see the NASDAQ is up, why do we need to know what the QQQQ is doing? We don’t. We already know. We need to know why. We can’t tell that when on a typical day half or more of the 10 most active ‘stocks’ aren’t stocks at all but ETFs. If we cleaned the ETFs out of the active stocks, we might find out once in a while why the ETFs are all up or down on a given day.
On a related topic, why do the exchanges list active stocks by their number of shares traded in the first place? Doesn’t the dollar value of the trades mean a lot more than the sheer number of shares? It is all well and good that 100,000,000 shares of SIRI trade one day, but when you find out that is less than $5,000,000 you lose interest pretty rapidly. While GOOG only trades less than 1,000,000 shares but that is $500,000,000. Which is more important? It’s the dollars! Luckily, many market websites will give you the choice of looking at shares or dollars, but they all default to shares. That is just silly.
Plus the exchanges have rules about listing stocks below $1 or below certain trading volumes, but that doesn’t seem to be in anyone’s best interest to enforce. Either enforce the rules of dump them but stop the hypocrisy.
Economic News (we’ve discontinued the Good News section since most of the economic news seems to be good news these days, maybe not this week so much.)
We really had very little, which is a good thing since the previous week was so heavily packed with economic releases.
Last week saw the trade balance reported and it was worse than expected. The monthly trade deficit was $36.5 billion, versus $30.8 the month before. Much of the difference was blamed on energy prices, which have risen month over month and also volume, which has risen seasonally. So much for the weak dollar fixing our trade problem! That is unfair, give it time to make a difference. Our exports were higher, but that darned oil situation just ruined everything.
Consumer sentiment, the University of Michigan version, fell again which will really frustrate economists who thought that last month’s decline was some sort of one-off. The guesses were for a small bump up in sentiment.
Last week saw another gain in stock markets almost all around the world. The gains were anywhere from over 4% in India to modest losses in Japan and Korea. The US markets gained about 2%, give or take. Small stocks here, as represented by the Russell 2000 Index, were up only 1%. By far more stocks gained than lost last week. Some of the losers were the same stocks that had gained so much in the rally since March, risky stocks with poor immediate fundamentals that gained because they had escaped bankruptcy after the financial collapse last year. The gains were centered among high quality stocks, with good and improving fundamentals. It was fun for a change.
Foreign markets were generally higher with the EAFE and Emerging Markets both higher by over 2%. Except for Japan, the developed markets were generally higher. Gains were likewise focused on quality stocks with improving fundamentals. Emerging markets were mixed with a broad range of contributors.
Bond markets around the world were mixed. Essentially, if you were an island nation your rates fell, if not, not. The exception here was the US where Treasury rates fell along with most other sectors of bonds. Foreign government bonds were higher in the Euro-land as well in some emerging markets. Higher interest rates could be mistaken for a sign of strength.
Real estate securities had a marvelous week with massive gains virtually around the world. The US REIT index was higher by 6% while foreign real estate was generally only 3% higher. Signs of recovery in many parts of the world are largely responsible for this. The timing may seem a little haphazard, but the direction makes some sense. While property markets are still stuck in a quagmire, but the securities linked to the properties are trading at an ample discount to the property values and will forecast a recovery while the properties are still struggling.
Commodities were mixed. Precious metals are riding gold’s coattails to recurring gains. The gold bandwagon is pretty full these days, which argues for limited potential gains, but then momentum can always go farther than logic would dictate. Energy prices fluctuated up and down last week, ending somewhat lower overall.
We’ve successfully passed another Friday the 13th. This suspicion of Friday the 13th is loosely based on an actual historical event. Friday the 13th, 1307 was the date. The event was the destruction of the Knights Templar across most of Europe but especially France.
The Templars were created as the Poor Fellow Soldiers of Christ and the Temple of Solomon in 1129 to help hold the Holy Lands after the successes of the First Crusade. Europeans were willing to serve as soldiers to defend Christendom and hold Jerusalem against the Muslims. All sorts of people from peasants to nobles joined the order to protect their homes, show their piety and in many cases to have a big adventure.
In the centuries after they were formed, the Templars gained a reputation for piety, bravery and trustworthiness. Pilgrims traveling to the Holy Land would entrust their valuables to the Templars and the Templars would return them either in Jerusalem or when the pilgrim went home. Since many pilgrims didn’t manage to make it to Jerusalem or get back home again, the Templars inherited those deposits. The Templars became the first international bankers from this humble beginning.
By the 14th century, the Holy Land had been lost to the Mameluks. The order had moved their headquarters to Cyprus, where they continued on and later to Rhodes and then to Malta as Islam re-conquered all the lands the Crusades had taken.
The power of the Templars came now mainly from their wealth. It is rumored that the French King, Philip the Fair, owed the Templars substantial sums. King Philip was aware of charges that the Templars had secret rituals where they violated Christian mores and even sacrificed to Satan, that there was no basis for this didn’t matter. Philip convinced Pope Clement V to remove his support from the Templars and allow them to be prosecuted for their crimes. This lead Philip to launch a huge raid on Templar centers across France on Friday, October 13, 1307. Many reports said the Templars were killed without resistance having pledged not to raise their swords against fellow Christians. The leaders of the Templars were brought before an inquisition and most found guilty of some crime or other.
Within a couple of years, the power of the Templars was broken in all lands in Europe save Britain. There, the ongoing warfare between England and France made the Templars a valuable addition to the English side.
So, if you’re a Templar, you’ve managed to escape another Friday the 13th, congrats.
Have a really great week.
Karl Schroeder, RFC
Investment Advisor Representative
Schroeder Financial Services, Inc.