Friday, April 24, 2009

Magazine Cover Stories







Magazine covers have been used as a contrary indicator. It’s not that the magazine editor’s have poor timing. Instead, the editors choose a cover that reflects public sentiment and will sell well.

One of the most well known magazine covers is from an August 1979 issue of Business Week. The headline: “The Death of Equities.” Well, not quite.

Coinciding with the 2002 stock market low, the July 29 issue of Business Week ran the headline, “The Angry Market.” That marked the beginning of a five-year bull market.

How about the March 2009 low? Business Week ran “When Will the Bull Be Back? Most signs point to more stock market pain. But opportunities are emerging for very, very long-term investors.”

It is a bit unfair to point to magazine covers at important market lows because it ignores some other covers that didn’t coincide with the low. Nevertheless, the magazine covers reveal the public mindset at important lows.
David Vomund

Wednesday, April 8, 2009

Mark to Market

No single policy or event ever destroyed as much wealth so quickly as the mark-to-market accounting rules that depleted capital and destroyed earnings.

The infamous mark-to-market rules that were activated in the fall of 2007 (coincidentally as the market topped) are being relaxed to give banks and insurance companies leeway to use common sense and cash flow estimates to value mortgages and other loans, not merely a price set months before by a distressed seller in an illiquid market. Now banks are allowed to value assets as they would in an “orderly” market.

When a House committee held hearings March 5 on the impact of mark to market, members were aghast by the needless chaos and wealth destruction the rules were creating. Finally, politicians have gotten something right. The Financial Accounting Standards Board (FASB) heard them loud and clear. On March 9 the FASB said they would soon have changes to announce. As investors knew any change could only be positive for banks, stocks began to rally, and rally.

On April 2 the FASB released their new rules for valuing some assets. Banks and insurance companies have a lot more discretion now to be realistic, not reactionary. That will help earnings and boost capital, effective April 1. Now that mark-to-market rules have been relaxed, banks can spread losses over several years as they occur, not take them immediately in anticipation of losses that may or may not appear. This is progress.

Wednesday, April 1, 2009

Equities and Recessions

During the second half of March I made many phone calls to those that had previously expressed an interest in our managed account program. After making these calls I overwhelmingly found that people did not want to get back into the stock market (a contrary indicator ???). As for reason, they cited the poor economy and bad news.

At this late stage in the bear market it is a mistake to be gloomy on stocks because of the bad economy. To see why, let’s look at equity price behavior during the past recessions dating back to 1926.

Going back to 1926 there have been fourteen recessions. Looking at duration, stocks hit their low point about mid-way through the recession (after 16 months in our current recession, surely we have hit the mid-point!). That means that most of the time new bull markets start during, not after, a recession.

On average stocks increase in value during the second half of a recession. That’s right, in the second half of a recession stocks typically increase in value despite the bad news headlines. That’s because stocks get cheap during bear markets and they are forward looking.

I am much more optimistic on equities and firmly believe that investors will look back at this time and wonder why they were sellers instead of buyers.

David Vomund

As always, past performance does not guarantee future results.