The long-run stock perspective

It's always good to maintain perspective (click on graph to enlarge):
HT: Doug Short of dshort.com (financial planner)

Consumers reducing debt

U.S. consumers reduced their debt in May for the fourth consecutive month, the Federal Reserve reported Wednesday. Total seasonally adjusted consumer debt fell $3.22 billion, or a 1.5% annual rate, in May to $2.52 trillion. Consumer credit fell in eight of the past ten months. The drop in May is the smallest of the group. This is the longest string of declines in credit since 1991. Credit-card debt had the biggest drop in May, falling $2.86 billion, or 3.7% to $928 billion. Non-revolving credit, such as auto loans, personal loans and student loans. fell $367.1 million or 0.3% to $1.59 trillion.

The graph above shows the year-over-year (YoY) change in consumer credit. Consumer credit is off 1.8% over the last 12 months. The record YoY decline was 1.9% in 1991 - and that record will be broken over the next couple of months.

Note: Consumer credit does not include real estate debt.

Banking Math

Interesting banking figures from Mark Perry:

Number of bank failures this year so far: 45
Total Assets of the 45 failed banks: $36.965 billion
Total Bank Assets of All 8,246 FDIC-insured banks: $13.542 trillion
Failed Bank Assets as a Percent of Total Bank Assets: .27% (or about 1/4 of 1%)

Bottom Line: The worst of the banking crisis seems to be behind us, the percent last year was 2.69%.

Outraged over AIG bonuses?

If so, click here.

A better week for stocks and, hopefully, confidence.

A week of gains, and not small ones either. The question on people's mind now is what's behind the rise and will it last.

Much of the rally appears to have been driven by activity in the drugs sector. A flurry of mergers this week sparked gains that overcame downward momentum in energy. Also, a few of the big banks came out and said they actually made money in the first two months of the year.

Now, making a few million bucks at the very start of the year after being rescued by government billions isn't exactly a signal that all is well with the financials, but after the battering suffered by the likes of Citigroup Inc. (C), Bank of America Corp. (BAC) and Morgan Stanley (MS), it is apparently enough to spur some buying. As to whether the rally will last or merely sets the stage for a new leg lower, stay tuned.

The Dow Jones Industrial Average (DJIA) rose 53.92 points or 0.8% on Friday to close at 7,223.98. For the week the index was up 9%. The Nasdaq Composite Index (COMP) added 5.4 points or 0.4% to close at 1,431.50 on Friday, a 10.6% gain for the week. The broader S&P 500 Index (SPX) rose 5.81 points or 0.8% to close at 756.55 on Friday. The index's gain for the week came to 10.7%.

Maybe the market trend will continue into next week. Hopefully, the combo of rain this week in the South and temps in the 70's next week will kick start the season into high gear.

The Crisis of Credit

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Jonathan Jarvis' animation of the credit crisis is one of the best explanations I've seen yet. It's not perfect, but provides an excellent overview. Be patient though -- while it's only about 11 minutes long, it takes a few seconds to load, but is worth the wait.

Where will it all go?

Click to enlarge this chart that breaks down the proposed stimulus package.


Source: Senate Releases Second Portion of Bailout Fund
DAVID M. HERSZENHORN, NYT, January 15, 2009
http://www.nytimes.com/2009/01/16/us/politics/16stimulus.html

Graphically speaking...

The latest from Bill Conerly (click on each graph below to enlarge):

Sorry, couldn't resist

What are we teaching the next generation?

Valuation of the stock market

This chart, courtesy of Jim Hamilton, shows the stock market relative to the average of the past ten years of earnings. The red line is the historical average. (Click on the graph to enlarge.) According to this metric, stocks are now cheap, but not exceptionally so.

10 Market Rules to Remember

Bob Farrell’s (Merrill Lynch chief market strategist from 1967-1992) 10 Market Rules to Remember (link):

1) Markets tend to return to the mean over time.

2) Excesses in one direction will lead to an opposite excess in the other direction.

3) There are no new eras — excesses are never permanent.

4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

5) The public buys the most at the top and the least at the bottom.

6) Fear and greed are stronger than long-term resolve.

7) Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.

8) Bear markets have three stages — sharp down — reflexive rebound —a drawn-out fundamental downtrend.

9) When all the experts and forecasts agree – something else is going to happen.

10) Bull markets are more fun than bear markets

Source: Dennis Gartman of "The Gartman Letter"

Free Fallin'

Interestingly, the Dow was off nearly 500 as of yesterday.

No clue as to why . . . maybe the 18% gain since October 10th is as good an explanation as anything else ?

Perhaps John Mayer has some insight.

Also, a re-post of the following: A Look Back at the past 18 Elections - See What Elections Have Meant to the Economy Over the Past 72 Years (click here)

In "Presidential Cycle," Ned Davis Research notes the S&P 500 posted its weakest returns in the first year of the four-year election cycle. Since 1900, stocks have gained just 3.4% on average in the post-election year, compared with gains of 4.0% in the midterm year, 11.3% in the pre-election year and 9.5% in an election year.

U.S. stocks tumbled for a second day today after Cisco Systems Inc. forecast the first revenue decline in five years and News Corp. cut its profit outlook, deepening concern the economic slowdown is hurting earnings. Exxon Mobil Corp. slumped 4.9 percent, leading energy companies to the biggest declines in the Standard & Poor's 500 Index, as oil slid to a 19-month low near $60 a barrel.

Sound financial practices are needed right now!

Three colleagues and I recently conducted a series of risk management workshops that were held across the nation for nursery and greenhouse growers. As a part of these workshops, Dr. Alan Hodges of the University of Florida discussed strategies to mitigate financial risks in the nursery or greenhouse business. I asked Alan to provide a quick summary of his portion of the workshop in this timely podcast.

For more information regarding financial benchmarks, check out these two articles. Click here and here.
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The credit squeeze for growers

Click here for a brief conversation I had with Greenhouse Grower's Online Editor Sara Tambascio recently about what role suppliers and distributors play in the credit situation in floriculture and how growers can weather these volatile times.

How will the candidates' tax plans affect Joe the Grower, Joe the Landscaper, and Joe the Retailer?

According to a new analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, Democrat Barack Obama and Republican John McCain are both proposing tax plans that would result in cuts for most American families. Obama's plan gives the biggest cuts to those who make the least, while McCain would give the largest cuts to the very wealthy. For the approximately 147,000 families that make up the top 0.1 percent of the income scale, the difference between the two plans is stark. While McCain offers a $269,364 tax cut, Obama would raise their taxes, on average, by $701,885 - a difference of nearly $1 million.

Poor Joe the Plumber has become a political metaphor: something no one ever wants to be. As we all know by now, based on his actual (rather than aspirational) income of $40,000, Joe would get a slightly bigger tax cut under President Obama than President McCain.

But in one sense, even though the real Joe doesn’t own a business, most small business owners, like Joe, also have very modest incomes. Based on a sample of individual income tax returns, TPC finds that among tax units that receive most of their income from their own business, a partnership or a farm (reported on schedules C, E, or F), more than half have income below $30,000 and 80 percent make less than $100,000. (Table T07-0206)

The vast majority of small businesses would not be affected by Obama’s income tax increases. Among those that receive at least half of their income from a business or farm, 335,000 (2.7 percent) are in the top two tax brackets that are targeted for Obama’s tax increases. (Table T08-0164) Among tax units with any income from a business, 663,000 (1.9 percent) are in those tax brackets. Clearly, most business owners are safe from Obama’s individual income tax increases.

The individual income tax return data do not provide a precise picture of how taxes affect “true” small business owners. Some people who report business income on their tax returns are not really self-employed and some small businesses are “C” corporations that pay corporate instead of individual income tax on their business profits.

Many people report some business income from freelance activities while they are full-time employees. Members of corporate boards, for example, report their compensation for that service on schedule C of their individual tax return. Partners in many law firms, accounting firms, medical practices, and Wall Street hedge funds also report business income rather than wages, as do people who receive rents or royalties from investments in real estate and oil and gas partnerships.

All of these factors overstate counts of small business owners based on individual income tax return data. On the other hand, some small businesses are organized as taxable corporations (C corporations) and pay out all or most of their income as compensation to their owners to minimize corporate tax.

Despite these caveats, it seems likely that relatively few taxpayers who are small business owners (including Joe the Grower; Joe the Landscaper; and Joe the Retailer) will be affected by increases in the top two individual income tax rates.

Sources: Washington Post, 10/20/08; Tax Policy Center TaxVox blog, 10/14/08

Comparison of subprime devastation and S&L collapse

Interesting graphic (click to enlarge) from Bloomberg, comparing the present Subprime debacle versus the S&L crisis. Here is an excerpt:

The $700 billion bailout of Wall Street's subprime-tainted securities harkens back to the real- estate bets that sparked the savings and loan crisis in the 1980s. The geography's the same, too.

Then, as now, the government created a taxpayer-funded enterprise to absorb the fallout from bad real-estate investments. A Bloomberg map of the hardest-hit areas shows that, with the exception of Nevada, regions with the highest foreclosure rates also had the most savings-and-loan failures, according to the Federal Deposit Insurance Corp.

The overlap shows that the aggressive lending and speculation that ignited the savings-and-loan meltdown persisted, at least in those areas, according to Paul E. Johnson, who was mayor of Phoenix from 1990 to 1994.

Source:
Subprime Devastation Retraces Path of S&L Crisis in U.S. States
Jonathan Keehner and Bob Ivry, Bloomberg, Oct. 8 2008

More market commentary...

Putting "Panic" into Perspective -- click here

We're Laying the Groundwork for Recovery (Bernanke in today's WSJ) -- click here

See the Forest, not Just the Trees

"We are not going to have a depression, and we have survived financial crises before. A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like these are almost always making the wrong decision.

Look at history: The market eventually bounded back from the damaging stagflation of the 1970s and the savings-and-loan crisis of the early 1990s, when a whole industry had to be rescued. Stocks also recovered from the Asian crisis of the late 1990s. Similarly, investors who held on after the more than 20% one-day stock-market decline in 1987 were eventually well rewarded.

Don't forget that the U.S. economy is still the most flexible in the world and our "innovation machine" is alive and well.

No one has consistently made money by selling America short, and I am confident the same lesson is true today."

~Burton Malkiel in today's WSJ (click here)

Financial wisdom???

If you had purchased $1,000 of Delta Air Lines stock one year ago, you would have $49 left.

With Fannie Mae, you would have $2.50 left of the original $1,000.

With AIG, you would have less than $15 left.

But, if you had purchased $1,000 worth of beer one year ago, drunk all of the beer, then turned in the cans for the aluminum recycling REFUND, you would have $214 cash.

Based on the above, the best current investment advice would be...