The Big Picture | December 2005

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Death of Volatility

Saturday, December 31, 2005 | 08:58 AM

in Markets | Psychology/Sentiment | Technical Analysis | Trading

Light posting this weekend, but I came across two fascinating VIX graphs that demanded discussion.

The VIX, for those of you who may not be aware, is a function of option trading that deduces the "implied volatility" in the markets.

The first graph is from BCA Research, and it shows the VIX over the past 15 years:

Courtesy of BCA Research

I read this as the VIX -- eventually -- becoming an attractive buy; I envision this scenario: the VIX spikes up to 13-14, before it runs into technical resistance; then as the market makes one last move upwards, it slides under 10. To me, the ideal entry point would be towards 8-9.

Those interested in seeing how the VIX trades should look at either the options (VRO) or futures (VBI).

Floyd Norris wonders if its due to "an excess of capital that feels it has nowhere to go but stocks. Individual stocks can still soar or collapse based on good news or bad, but money taken from one stock seems to flow to another, cushioning the daily movement of market indexes."

In today's NYT, he writes:

"Back around the turn of the century, it seemed as if nearly every other day was an exciting one in the stock market, and not just in the United States.

At the peak of volatility in the United States, from 2000 to 2002, the Standard & Poor's 500 showed a daily gain or loss of at least 1 percent for two days a week or more. And it was far from the most volatile market. In Germany in 2002, the average week had three big days.

But volatility began to dip in 2003, fell sharply in 2004 and absolutely tumbled in 2005. In the United States, there were 52 days in 2002 when the index showed a move of 2 percent or more - an average of one a week. That fell to 15, little better than one a month, in 2003. And there has not been one such day in the last two years.

The accompanying charts show that in Britain, Germany, France, Japan, Hong Kong and the United States, the amount of stock market volatility in 2005 was at the lowest level since at least 1996."

The chart included covers many of the major indices in the world:

>

click for larger graphic

Courtesy of NYT

Sources:
The Year Of Living Complacently
BCA Research, 09:54:00, December 20, 2005
http://www.bcaresearch.com/public/story.asp?pre=PRE-20051220.GIF

Don't Hold Your Breath for an Exciting Day in the Stock Market
FLOYD NORRIS, Off the Charts
NYT, December 31, 2005
http://www.nytimes.com/2005/12/31/business/31charts.html

Major World Index VIX graphic
http://www.nytimes.com/imagepages/2005/12/31/business/20051231_CHARTS_GRAPHIC.html

For 2006: Feedback, Please!

Friday, December 30, 2005 | 03:00 PM

in Weblogs

This year's traffic, via sitemeter:

Okay, dear readers, I have some questions for you:

What improvements might you suggest for the Big Picture? Use the comments below to let loose a barrage of suggestions (except for the colors . . . they stay).

To get the ball rolling, what do you think about:

• More frequent, shorter posts vs. longer, less frequent discussions?

• More strictly business vs. more personal anecdotes?

• Broader subject matter versus more focused attention span?

• More or less of: digital issues, politics, science, religon, economics, philosophy, psychology, enterainment, research, other web sites, education, and markets?

Don't limit yourself to these ideas, but please use them as a leaping off point.

Okay, now its time for you to chime in. Between 6-11,000 of you come here each day (less on weekends, plus a significant (but uncountable) number of RSS readers. You collectively view between 9,000 - 16,000 pages on a typical week day.

I know you people have a lot to contribute, and are none to shy about expressing your are opinions in the comments; besides, I'm asking you for it. Don't be shy!

What say ye?

Window Dressing

Friday, December 30, 2005 | 12:01 PM

in Investing | Trading

Jason Goepfert of sentimentrader.com noted the following statistics regarding Window Dressing, i.e., mark ups for the quarter-end (as reported by Rev Shark).

Markups tend to take place in the stocks that have been the best performers during the quarter (all data refer to Q3):

Number of of S&P stocks up more than 20% during the quarter: 35
Number that showed a gain in last three days of quarter: 28
Percentage of stocks that showed a "markup": 80%
Number of S&P stocks down more than 15% in the quarter: 30
Number that showed gains in last three days of quarter: 14
Percentage of stocks that showed a "markup": 47%

So, there is some statistical evidence that strong stocks saw quarter-end markups Q3, while the weaker ones did not.

Source:
Where the Markups Are
Rev Shark
RealMon ey.com, 10/5/05 3:21 PM EDT
http://www.thestreet.com/p/dps/td/tradingdiary1.html#entryId10245885

P/E vs S&P 500 (50 Years)

Friday, December 30, 2005 | 10:16 AM

in Earnings | Markets | Psychology/Sentiment | Technical Analysis

As promised, today brings us to the 4th in our series of charts:

P/E vs S&P500
click for larger chart

courtesy of Mike Panzner, Rabo Securities

I'll get into the significance of what this means to the markets later, but for now, note where the P/E is over the median, and its impact on market performance.

Stocks, while not terribly expensive, can not be called cheap by historical measures. An even more discouraging mesure on this comes from Clifford Asness of AQR Capital Management (via Mark Hulbert). He calculated the P/E ratios for the entire market for the 1871-2003 period at ~11. That implies stocks are even less cheap (or more expensive) than the past 50 years implies.

Regardless of whether you take the 50 year or the 132 year perspective, the theory of Reversion to the Mean implies that stocks are likely to become cheaper so as P/Es revert. And one shouldn not expect the market to stop at fair value, as we have seen, the tendency is to overshoot on both sides.

Our 3 prior Charts:

Annual CD Sales Slide Resumes; Down 8% for '05

Friday, December 30, 2005 | 07:50 AM

in Music

We've broadly discussed the recording industry this year. How'd they do in terms of numbers?

Wsj_music_20051215 After a slight blip up in 2004, CD sales resumed their prior slide. Sales were off 7% (CD albums only) or 8% (CDs and singles). The decrease is comparable to the decline in Movie theater attendance, which fell about 7%.

Reported Album sales (January through the week ending December 25) were 602.2 million in 2005; weaker than last year's 650.8 million. Digital singles sales more than doubled to 332 million -- a 148% increase.

Some blamed the Album CD sales slump on the cherry-picking of singles by a fickle public. But the broader analysis reveals that CDs are a format in decline. While 95% of music sales are still in the CD format, there are plenty of signs this is changing. In addition to the different fortunes of the two formats -- CDs are slumping while digitial downloads skyrocket -- the industry itself is changing. A new breed of music label is distributing their product strictly in digital format, thereby bypassing CDs entirely. See Cordless Recordings as an example of this.

This year's biggest sellers, according to Nielsen SoundScan, were Mariah Carey's Emancipation of Mimi at 4.866 million; In second place was 50 Cent's The Massacre, which sold 4.834 million. "American Idol" winner Kelly Clarkson's Breakaway finished 3rd, selling 3.4 million copies. The top sales position has not been occupied by a female solo artist since Alanis Morissette's Jagged Little Pill in 1996. In 2005, female solo artists captured the gold and the bronze.

Although the major labels lament the internet, P2P, and file sharing, it turns out that the Net has been a boon for Indie Labels. Much of the industry's complaints are actually about disintermediation -- the web forces them out of the relationship between the artists and their fans. The indies understand this, and have been using the net to promote their unknown artists.

While sales here, in the UK sales continue to do better than in the U.S. -- despite Great Britain's widespread adoption of broadband. Credit likely goes to the wider playlists in UK radio, and a payola-free radio industry. Britain does not have the same concentrated private ownership of Radio Stations which have become so prevalent in the U.S. since the 1996 Telecommunications Reform Act, which enabled firms like Clearchannel and Infinity to scoop up 1,000s of stations.

Its no coincidence that music sales problems can be traced to what occurred following that legislation's enactment.

While legal Music downloads more than doubled this year, so too has the recording industry's misconduct. After settling Price fixing charges in 2002, it appears that the recording industry brain trust is at it again: An industrywide probe into how much record companies charge for digital music was started by NYAG Eliot Spitzer; subpoenas have gone out to several labels.

One last astonishing piece of music trivia: Mariah Carey's CD spawned her 17th #1 single, "Don't Forget About Us." This places her in second place on the all time #1 hit list -- behind the Beatles' total 20 #1 hits. If Carey manages to pass the Fab Four, I will interpret this as incontrovertible proof that life is meaningless or God is dead . . . I haven't decided which.

Finally, you can see my Anti-"Best of 2005" here.

UPDATE January 3, 2006 6:09am

It turns out that the British are the 'world's biggest music buyers.' According to figures released by the British Phonographic Industry (BPI) early 2005, the UK music industry recorded an overall 3% increase in volume sales, mostly due to its robust albums market.

The British buy the most compact discs in the world - an average of 3.2 per year, compared to 2.8 in the US and 2.1 in France.

Sources:
Silent Night for Music Sales
Holiday Buyers Spurn Tunes As Industry Picture Worsens; 'Cesspool of Really Bad Bands'
ETHAN SMITH
THE WALL STREET JOURNAL, December 16, 2005; Page B1
http://online.wsj.com/article/SB113469750280524159.html

UK 'world's biggest music buyer'
BBC, Tuesday, 22 March, 2005, 12:25 GMT
http://news.bbc.co.uk/1/hi/entertainment/music/4371673.stm

The extensive list of sources used in this posting can be found below

Continue reading "Annual CD Sales Slide Resumes; Down 8% for '05"

A Different Kind of Music List: The Anti-"Best of 2005"

Thursday, December 29, 2005 | 02:30 PM

in Music

Its that time of year!

Following our successful outing last year, I'm at it again. Here's my Different Kind of Top 10 Music List for 2005.

If you missed last year's version, here's the deal: This isn't a list of the BEST OF 2005 CDs; Instead, its a list of what a relatively informed music fan has been playing the hell out of. Consider it an "anti-Best of 05" list.

Let's be honest: neither you nor I listen to 1000s (or even 100s) of new releases each year. That makes us unqualified to put out a true "Best of 2005" list (not that this minor disqualification stops all that many other pundits). Instead, this is a list of CDs that actually got listened to a whole lot this past year. Some are brand new, some recent, some fairly old. But they were my soundtrack for 2005.

Two new notes this year: I've avoided a handful of obvious hits: Bigger Bang and How to Dismantle an Atomic Bomb are great discs -- but you don't need me to tell you that.

After last year's list, a friend mentioned that he was surprised to see so little Jazz on my list, given what a big fan I am. So this year, I am splitting the Top 10 into two groupings: Rock/Pop, and Jazz.

Here is my different Top 10 list (plus Jazz) for 2005:

Rock/Pop

Garden State: Soundtrack from the Motion Picture
: Garden State

Simply a wonderful collection of songs. I played the hell out of this all year -- and it stood up well to the repeated listenings.

Sometimes, a soundtrack works so well with a movie, it fails to stand on its own. Not so with this disc -- its a pleasant surprise that it works so well as a CD. Excepting the opener by Coldpay, and an odd choice of a Paul Simon song (which works better in the movie than on the soundtrack), I knew very little of the bands or tunes on this fabulous collection. I doubt you will either.

The disc also had my very favorite cover this year: a version of Postal Service's Such Great Heights -- last year's winner -- by Iron & Wine

This forces you to listen a little harder, to explore, pay attention. Its well worth it -- the bands on the disc are terrific -- and just about each track can lead you to a potentially new CD.

This was my favorite disc of the year.
~ ~ ~

Josh Rouse: Nashville

I would never have heard of Josh Rouse if a friend didn't give me a mixed disc that had some of his work on it. Nashville is his 7th disc, which kinda surprised me. Its odd that you are more likely to hear music you like these days on TV than Radio (This song was on Grey's Anatomy).

While accessible at first listen, the music really grew on me with repeated hearings. Its beautifully written and arranged, more sophisticated than typical pop songs. I wouldn't have thought that violins and pedal steel guiter work well together -- but they do. And its mellow enough that Mrs. Big Picture doesn't object to it played loud in the car (as opposed to the aforementioned Bigger Bang or Atomic Bomb). Winter in the Hamptons was one of my favorite tunes of the year.

His other CDs are worth hearing -- in particular, Under Cold Blue Stars and 1972. But Nashville was the one that really grabbed me, and never let go.
~ ~ ~

Fiona Apple Extraordinary Machine

I was never a big Fiona fan -- until this CD came out. You may recall that I was captivated by the pre-release of this disc. This is her most compelling music since Tidal. Its intriguing, ambitious, oddly haunting -- and beautiful.

When I heard that the disc was finally going to be let loose by Sony, I feared they would neuter it. Truth be told, the actual official release is pretty good. I still prefer the moodier, odder instrumentation on the original, but this is a very fine effort.
~ ~ ~

Morecheeba Charango

A cool melange of trip hop, electronica, pop and world music, this is one of those discs that I found a year or two after it came out. The "evocative nuevo-lounge and dreamy ambience" just slayed me.

There's not a bad cut on the disc, and it works on different levels -- background atmosphere or upfront toonage. Tom Lanham summed it up perfectly: "This whole Bristol sound thing, with sleepy techno beats overshadowed by the chirrupy vocals of some slumberland chanteuse." All of their prior CDs -- Big Calm or Who Can You Trust -- have the same airy, etheral vibe.

You may heard the tongue-in-cheek radio single Women Lose Weight (featuring Slick Rick) -- that's very atypical of the band, so don't expect more of that on any of these CDs
~ ~ ~

Bettye Levette I've Got My Own Hell to Raise

Gritty yet sophisticated, Levette rasps out bluesy gospel interpretations of an eclectic assortment of songs. She covers Dolly Parton, Aimee Mann, Fiona Apple, Lucinda Williams, Joan Armatrading, Rosanne Cash, and Sinead O'Connor, and in many cases, improves upon the originals.

Levette's vocals drip of a world weariness that was not present in the original versions, and the songs are revealed as all the better for it. You can practically hear the smoke and booze on her vocal cords. A kick ass backing band rounds out the sound.

This is my answer to last year's bluesy choice, Thickfreakness. It also is my favorite disc by an artist I should have heard of a long time ago, but never did.
~ ~ ~

Matisyahu Live At Stubbs

Download this song (Don't worry, its a legal Amazon MP3). Give it a good listening to. Really impressive Reggae, right?

Now: Try to picture what this guy looks like -- visualize the dreadlocks, the beard, the multicolor Rasta hat, a big spleef hanging out of the side of his mouth.

Except, no. Matisyahu is not a Jamaican from Kingston, churning out traditional reggae. He is actually an orthodox Jew (?!) -- his website is called hasidicreggae.com. That doesn't take away from the beatbox, reggae infused jams he kicks out -- it just makes him more interesting, in an odd sort of way.

That he has a kickass trio behind him doesn't hurt either.

Best deal? $5.99, shipping included at yourmusic.com
~ ~ ~

Jack Johnson Brushfire Fairytales

This is Jack Johnson's debut CD (its inclusion here is another follow up to one of last year's picks, Johnson's On & On).

From the first cut Inaudible Melodies, to the fan favorite Bubble Toes, to the haunting and beautiful The News, it is a terrific and compelling disc all the way through.

Johnson is potentially the musical heir to singer/songwriters such as James Taylor: He writes and performs his own songs, all of which are deceptively simple, lovely, well-crafted pop ditties. He has a warm and comfortable stage presence (I just ordered the DVD A Weekend At The Greek & Live In Japan), and obviously enjoys performing live.

He's been quite the busy boy: touring, and his 3rd disc -- In Between Dreams -- is also worth a listen. If JJ's career trajectory follows that of JT's, we could be listening to Jack Johnson for the next 30 years . . .
~ ~ ~

Chuck Prophet No Other Love
: No Other Love

Here's a tough to categorize artist -- I hear Elvis Costello and Beck, with some Tom Petty and Dylan thrown for good measure. If you are looking for something acccessible yet off the beaten path, No Other Love is a good place to start.

His most recent disc Age of Miracles, was very well recieved, but I haven't gotten around to hearing it yet.
~ ~ ~

The Who BBC Sessions

Here's a glimpse into one of the greatest pure rock and roll bands ever to come out of Great Britain. They were so tight, whether playing songs from their own awesome catalogue, or covers of other people's work. Check out their covers of "Good Lovin" and "Dancing in the Street" -- long before the Dead ever got a hold of them.

Is it just me, or has The Who always been an under rated "Super Group?" The don't seem to get the credit they deserve relative to the Beatles, The Stones or Led Zeppelin.

Peter Townsend and Roger Daltrey will be touring next year; If you are a Who fan, than grab this disc (it's under $4 used at Amazon). I will definitely be going.
~ ~ ~

thepartyparty by RX

I listened to less mash ups this year than last, but the one that got major Podplay was the insanely creative, brilliant, eclectic -- and definitely not politically correct -- thepartyparty from RX.

Its a subversive remix of political speeches from Bush, Kerry, Clinton, Cheney, et. al. The language may offend the weaker kneed amongst you, but I found it utterly fascinating -- and strangely addictive.

Favorite cuts: my name is rx, imagine (walk on the wild side), who's the nigga?, Dick is a Killer, birthday (partypartymix), and Happy RxMas & a Whole Lotta Love. Note: this may take a few listenings to get into -- don't just play a snippet, and dismiss it out of hand -- give at least those few songs mentioned a solid hearing . . .

If you have any intertest in remixes, hip hop or mash ups, you'll grow to really like this one.
~ ~ ~

Jazz

You either are a Jazz fan or not. So rather than lecture you on the merits of Jazz, I'll just post a brief synopsis of my favorite jazz acquisitions this year (including several box sets and rarities).

~ ~ ~
Joe Williams Havin' a Good Time

Joe Williams gets less attention than many of the other Jazz greats -- and that's a shame. His voice is a honey-covered mellifluous instrument, and he uses it to great effect on Jazz standards. Joe also swings with the best of them.

The story of this disc is that Joe and the Trio were in Providence, RI for a week's worth of shows at a club, when the town got hit with a blizzard. Surprisingly, enough locals showed up for the gig that they decided "the show must go on." Jazz saxophonist Ben Webster (a jazz great in his own right) was in the audience, Sax in hand, and asked to sit in. Fortunately, someone (the club?) had a tape running.

While Count Basie Swings, Joe Williams Sings is a bettere known disc, Havin' a Good Time is a great way to discover a terrific, lesser known Jazz vocalist.
~ ~ ~

Chet Baker My Funny Valentine

I "discovered" Chet Baker's vocals this year -- he was primarily known as a Jazz trumpeter, the "epitome of cool jazz."

His lyrical approach to ballads, with its odd phrasing and melancholy soul, to be fresh -- even today. His voice is distinctive, alternately fragile or charming, depending upon the song.

Perhaps you will agree with the reviewer who noted his "singing is a double of his trumpet playing here, spare and barely present but achieving much through nuance and suggestion."

This is a charming album you will find yourself coming back to during long winter nights.
~ ~ ~

John Pizzarelli Trio Live at Birdland

In addition to the terrific musicianship this album displays, Live at Birdland reveals John Pizzarelli to be quite the raconteur, regaling the audience with amusing tales between songs.

On a long ride out to the Greenport (near Orion Point), I found myself not only enjoying the music, but chuckling repeatedly to this.

If you don't know John Pizzarelli, this is a terrific introduction.
~ ~ ~

Mose Allison Trilogy: High Jinks

I'm a huge Mose Allison fan, and so when I came across this rare boxed set used (for a reasonable price), I grabbed it. This may be a bit eclectic for those who don't know Mose; He has a huge catalogue.

You can start with Tell Me Something: The Songs Of Mose Allison. Its a fantastic tribute disc featuring Van Morrison, Georgie Fame and Ben Sidran. Its a great collection of tunes, very accessible.

From there, you can move on to Your Mind Is on Vacation or Ever Since the World Ended. Of course, you can't go wrong with the Best of as a way to start. I also really liked The Mose Chronicles: Live in London, Vol. 1 and Live in London, Vol. 2.

~ ~ ~
Julie London Cry Me a River

A friend turned me on to Julie, and I came away impressed. She was better known as a blonde bombshell who appeared in numerous films in the 40 and 50s, and eventually, played a nurse in the 70s tv series Emergency (kinda before my time).

She has a wonderful lounge singer's attittude, combined with a smoky, jazz singer's voice. Some reviewers have put her in the same category as Ella, Sarah, or Billie. I;'m not willing to go that far, but its a debate worth having. And she's more than a crooner; She's a Blues/Jazz/lounge singer whose voice is infused with a compelling sexuality.

You don't have to start with the 3 disc box set -- try Time for Love - The Best of Julie London. Its a worthy addition for any Jazz fans' collection . . .
~ ~ ~

Jazz at the Pawnshop

This is a really interesting Jazz combo from Europe; I don't know why it lists for $53 at Amazon, or why it sells used for $30.

This will be one of the few times you ever hear me say this: Find someone who has one, and make a copy of it.

But for cryin' out loud, no CD is worth $53!

~ ~ ~

Jimmy Scott: Holding Back the Years

Jimmy Scott is a male jazz ballad singer whose voice has been called "unearthly," "uniquely androgynous," and "capable of marvelous subtlety."

His unusually high voice will surprise, as will his selection of music, ranging from John Lennon to Prince. I found his version of Simply Red's "Holding Back the Years" to be a soulful, melancholy affair.

Credit for (attempting) to bring Scott to a wider audience goes to Ray Charles, who produced an album for him in 1962 -- only to see it get tied up in litigation.

My favorite reviewer quote: "Scott's high, lonesome, silky instrument that can wring tears out of the most cold-hearted cad."

If you would rather hear classic American songs rather than more modern covers, than the disc All the Way might be more to your liking...

~ ~ ~

1966-1982 Trading Range

Thursday, December 29, 2005 | 07:41 AM

in Markets

Here's the 1966-1982 trading range:

>
click for larger chart

chart courtesy of Rydex Funds

If we are in fact in a long, post-Bull trading range -- see our 100-year Dow chart -- than this is year ~5 of what could be a 10-15 year secular Bear market. As the 1966-82 trading range above shows, we may be in for violent moves down and rapid blast offs.

The March to December 2003 cyclical move higher is very consistent with this trading environment.

I am placing us somewhere around late 1972 . . .

2 Studies on the Flattening Yield Curve

Thursday, December 29, 2005 | 06:24 AM

in Federal Reserve | Fixed Income/Interest Rates | Inflation | Technical Analysis

A reader asked about prior studies on a flattening or inverting yield curve, wondering "what have they concluded?"

Quite a few other analysts have looked into the question. Here are two worth considering:

Bill Gross, who manages the world's largest Bond fund -- and therefore better know about this stuff -- featured the chart below last month.

Gross' conclusion? "By the time 10-year and 2-year Treasuries reach parity, as is almost the case now, the economy is typically slowing and the Fed is at or near the end of its tightening cycle."

Here is his relevant chart:

click for larger graphic

Courtesy of PIMco

Gross also observed that "Economists/investment managers are aware of the potency of a flattening yield curve (shown in Chart above). . . Only [former Fed Chair] Volcker, with his need to strangle inflation out of the system, persisted into negative yield curve territory for longer than a few months."

Further, I happened to come across this commentary -- A Study on the Flattening Yield Curve -- of post-1970 inversions.

The study's generalized conclusions?

Recessions have been preceded by yield curve inversions since 1970.
lead time averages over 40 weeks.
The S&P 500 does not do well when the yield curve is inverted (performance measured over the entire span of the inversion).

The chart accompanying that commentary shows yield curve inversions relative to the S&P500.

>
click for larger chart

See the rest of the charts form various studies here.

UPDATE: December 29, 2005 1:30PM

I have made repeated references to never relying upon one lonesome single indicator, burt some of the newer reader smay have missed them. For those of you haven't done so yet, please see Single vs. Multiple Variable Analysis in Market Forecasts . . .

>
UPDATE 2: December 29, 2005 3:03PM

Dave Altig of MacroBlog fame suggests NY Fed's Arturo Estrella yield curve primer: The Yield Curve as a Leading Indicator. Its another excellent (if somewhat jargon laden) source.

>
Source:
Takin’ It To The Blog
Bill Gross
PIMCo Investment Outlook, November 2005
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2005/IO+November+2005.htm

A Study on the Flattening Yield Curve
Ron Griess
The Chart Store, December 13, 2005
http://www.financialsense.com/editorials/griess/2005/1213.html

Alaska is Melting . . .

Wednesday, December 28, 2005 | 03:30 PM

in Science | Technical Analysis | UnScience

It seems that the melting polar ice is becoming more of a concern to Alaskans than those of us in the lower 48.

click for larger graphic

courtesy of Anchorage Daily News

Thank goodness there's no Global Warming -- imagine how much more of Alaska would be melting if there was!

See also:

The truth about global warming > http://seattletimes.nwsource.com/html/nationworld/2002549346_globewarm11.html

A world of evidence says global warming is real > http://seattletimes.nwsource.com/news/nation-world/globalwarming/1.html

Source:
Permafrost-thawing concern deepens
PERMAFROST: Computer scenario shows rising temperatures could melt top 11 feet in Alaska by 2100.
DOUG O'HARRA
Anchorage Daily News, December 25, 2005
http://www.adn.com/front/story/7312139p-7223885c.html

100 Year Dow Jones Industrials Chart

Wednesday, December 28, 2005 | 09:00 AM

in Markets | Psychology/Sentiment | Technical Analysis

Have a look at this 100 year (actually, 105-Year) chart. I colored each "Market" appropriately -- Green for Bull, and Red for Bear -- to more clearly show what happens.

Bull markets get ahead of themselves. At their ends, they tend towards excesses that take a very long while to recover from.

When a long Bull runs end, it takes quite a while before the next one begins. Some of this is related to the destruction of capital crashes cause; Much of it has to do with the psychological damage suffered by investors. As we have seen more recently, that damage -- plus 46 year low interest rates -- helped push former market investors into real estate. We have yet to see their unbridled love affair with sotcks rekindled. What will be the catalyst to get them back into equities? My best guess is a sustained move upwards.

Regardless of the actual cause, in the past century, every Bull Market has been followed by a significant refractory period. From the looks of the time-lengths of red, it appears almost generational in nature. The damage is repaired when a new crop of investors -- without crash scars -- finally appears.

click for larger version

Is it possible that an 18 year Bull market (1982-2000) could be followed by a 2 1/2 year Bear (March 2000 peak to October 2002 low), and then launch into another multi-decade (2003-2018) Bull? Sure, anything is possible. But as the chart above plainly shows, it would be historically unprecedented.

One other thing worth noting: The steepness of the gains from 1924-1929 are very much parallel to the 1996-2000 moonshot. Both ended with near 80% drops (Dow for 1929, Nasdaq for 2000).

It took 25 years -- until 1954 -- for the Dow to regain its 1929 highs. I don't believe it will necessarily take that long for Nasdaq -- but I am aware of the outside possibility.

~ ~ ~

Sources: The raw data for this comes from Stock Trader's Almanac, which Jeff Hirsch kindly provided.

The concept for this was shamelessly lifted from Rydex. But their chart (see original here) was flawed -- I found where they delineated the post 1929 crash Bull and Bear Cycles, and the post WWII Bull, was wanting. Rydex's chart had a 25 year post-1929 Bear, followed by an 11 year post WWII Bull market. That seemed wrong, especially whent he market had been going up for much of that 1940-1946. So I adjusted the start to more clearly reveal the post WWII Bull beginning around 1946.

Picking a beginning to the Bull is subjective -- you could start it from 1940, or from the 1942 low, or the 1943 high, but then it includes a major correction in 1945 -- the Dow dropped from over 211 to 163 (23% -- but not in a day, like 1987). So while I could have placed the beginning as late as 1949 or as early as 1940 or 1942/3, I somewhat arbitrarily placed the start of the Bull at 1946 . . .

Where does the Bull Market start?
(click for larger chart)

See also:
Looking at the Very Very Long Term
http://bigpicture.typepad.com/comments/2003/11/looking_at_the_.html

Dow Jones Chart (1900-2004)
http://bigpicture.typepad.com/comments/2005/08/dow_jones_chart.html

Explaining Yield Curve Inversions

Wednesday, December 28, 2005 | 06:30 AM

in Economy | Federal Reserve | Fixed Income/Interest Rates | Inflation

The Yield Curve briefly inverted -- twice -- Monday. As we noted yesterday, the deeper and longer a curve remains inverted, the more potentially significant it is.

That factoid has been overlooked by many commentators. Following yesterday's post about what an inversion means, it became apparent that there is alot of confusion about the implications. So far, all we have is a brief inversion -- which, for the moment, is merely a warning.

The best explanation I've read for what the Inverted Yield Curve may mean to the economy and markets comes from Lacy Hunt, a veteran Wall Street economist who formerly worked at the Dallas Fed:

"There has been a lot written about the flattening yield curve, though most people don't understand what causes it.

The narrowing spread between yields is a superb leading indicator but shouldn't be observed in a vacuum -- no lone silver bullet can take down the economy. A steep flattening of the yield curve is a sign that the Fed is in the later stages of tightening its monetary-policy belt. It's part of the broader process. But once it occurs, it does have its own implications for the economy and the markets.

Treasury yields should be viewed in concert with central-bank policy and changes in the availability of money and credit. The Fed influences supply and demand for money when it raises the fed-funds rate, since it pushes up money-market yields. To boost the funds rate, the Fed has to cut down on total reserves -- money that banks are required to keep around for backing up deposits.

That reduces how much money can be supplied to people and businesses for borrowing and investing and it crunches the availability of credit that Americans now rely heavily on to keep up their spending habits. Banks' profits, meanwhile, are crimped because they can't make easy money by borrowing at low, shorter-term rates and lending at high, longer-term rates -- one version of the time-honored carry trade. Higher rates can grind the borrowing and lending process to a halt -- or it can reverse, where people pay their loans with money they normally would spend elsewhere. All told, economic growth is stunted.

The yield curve is flattening because Fed policy is working -- it's not a surprise that a higher fed-funds rate is followed by slowing growth in money supply and a narrowing in the spread between short- and long-term Treasury yields. This is clearly evident as 2005 draws to a close: Total reserves fell 4.1% in the past 12 months, and the contraction has happened at a faster pace in recent months because of the cumulative impact of 13 Fed rate increases. M2 money supply -- cash, deposits and short-term assets such money-market funds -- increased a paltry 3.4% in the last 12 months, the slowest growth in 10 years.

While the flattening yield curve is part of the process, it shouldn't be taken lightly. This barometer narrowed significantly prior to all of the recessions since 1954, as well as two major business slowdowns in 1967 and 1995. In the middle of those slowdowns, the economy grew at annual rates of 1.6% and 0.9%, respectively. Only quick and decisive Fed action prevented worse conditions. Since 1954, growth in M2 when adjusted for inflation slowed dramatically in the four quarters right before recession. The same thing happened with the slowdowns of 1966 and 1995. That is why both the yield curve and M2 supply are widely considered excellent leading indicators.

Growth of less than 1% in real M2 in the past four quarters, combined with a sharp contraction in total bank reserves, reinforces what the yield curve is telling us: The economy is headed for a slowdown. That means either less inflation, less real growth, or some combination of the two."

I hope that's not too wonky; it is as clear an explanation I've ever read, without dumbing it down too much. Note that the past 4 recessions were preceded by a Yield Curve Inversion, and prior flattenings have predicted a slowdown.

Here's a chart from today's WSJ:
click for larger graphic

chart courtesy of WSJ

UPDATE: December 31, 2005 5:13am

A reader asked for a study on inversions and recessions. Marketwatch reported that Merrill Lynch just released a study (on Friday!) on the subject:

"The historical record speaks for itself," said Merrill Lynch analysts in a report published Friday.

"In the past 30 years, the yield curve has inverted five out of the eight times the Fed has been tightening monetary policy. Each of those five times an economic recession has ensued one year later -- our fear (though not our base case) is that this time will be no different."

If anyone has access to this, please contact me about sending it.

Sources:
Examining an Inversion
TRADING SHOTS
WSJ, December 23, 2005
http://online.wsj.com/article/SB113528182051629707.html

Yields on Bonds Invert, Reflecting Unease About Economy's Future
MARK WHITEHOUSE
THE WALL STREET JOURNAL, December 28, 2005; Page A1
http://online.wsj.com/article/SB113569973698732182.html

Stocks could see rebound on data
Economic data and 4Q earnings to greet the New Year
Jasmina Kelemen
MarketWatch, 5:01 AM ET Dec. 31, 2005
http://tinyurl.com/849qk

Barron's picks up "The Real Job Growth Numbers"

Wednesday, December 28, 2005 | 05:45 AM

in Media

barrons_online

Barron's ran with last week's How Strong is this Jobs Recovery? in the online edition:

LATELY, THE WHITE HOUSE and Treasury Secretary John Snow have been trumpeting the fact that the economy has created 4.4 million new jobs since May 2003.

Inquiring minds want to know: How legit is that number? How was it derived? How does this job-creation data compare to prior cyclical recoveries?

First question: How did the White House come up with that 4.4 million new-jobs number? Is it accurate?

Measured trough to peak, there were actually almost 4.5 million new jobs created. In May 2003, there were 129.8 million people employed, according to the Bureau of Labor Statistics (BLS). As of November 2005, there were 134.3 million. That reflects 4.5 million new jobs. So the "over 4.4 million jobs created" statement is numerically accurate.

So if that number is mathematically accurate, what's the problem? That's our second question:

I like having a 3rd party publish sometihng, so that years later I can point back to an objective archive of it.

.
Source:
The Real Job Growth Numbers
INVESTORS' SOAPBOX AM | Online Exclusive
TUESDAY, DECEMBER 27, 2005 11:58 a.m. EST
http://online.barrons.com/article/SB113538056349330904.html

Read it here first: The Multiplex Under Siege

Tuesday, December 27, 2005 | 10:27 AM

in Film | Financial Press

Back in July, we discussed the 7 reasons why movie theatre attendance was declining.

If you blinked, you may have missed the WSJ's holiday weekend take on the issue -- The Multiplex Under Siege -- including what some theater owners are belatedly attempting to reverse the trend:

"With attendance down and movies popping up faster on DVD, theater chains are scrambling to pry you off the couch -- trying everything from discount tickets to curbs on rude patrons. Their fight to stay relevant in the flat-TV era . . .

The big theater chains say they're aware of the industry's problems and are taking steps to make cinemas more appealing. They're planning to improve picture quality with new digital projection systems and clamp down on rude audience members with more roving ushers -- they're even looking into jamming theatergoers' cellphones. At the same time, shrinking attendance makes it more critical than ever to eke the most dollars from each customer. And some of the primary options there -- increasing revenue from concessions and preshow advertisements -- risk turning consumers off more."

One of the things that caught my eye int he article was this line: "We have to be creative, and attack the concerns that our patrons have raised with us," says John Fithian, president of the National Association of Theatre Owners.

Here's my gift to the theater owners: Before each movie, stage some guerilla theater. Roll a fake preview clip, and then 30 seconds into it, have an audience plant cell phone ring LOUDLY in the theater. Stop the clip, partially raise the house lights, and then put a spotlight on the offender. Have two ushers confront the guy out -- he's wearing makeup and a corny outfit (i.e, zoot suit), so it looks real campy -- but have the goons drag him out, kicking and screaming. It should be both theatrical and real looking.

People would talk about this for months.

Here's how the Journal rated the theater going experince at a variety of chains:

Source:
The Multiplex Under Siege
KATE KELLY
(with Bruce Orwall and Peter Sanders)
WSJ December 24, 2005; Page P1
http://online.wsj.com/article/SB113537776963930867.html

Promotion and Distribution via ITMS

Tuesday, December 27, 2005 | 09:42 AM

in Film | Intellectual Property | Music | Television

SNL is distributing a recent (and surprisingly buzzworthy) SNL skit via iTunes Music Store -- for free.

How smart is that? What a great way to generate free buzz and publicity for your show! Especially when your prime target audience is slipping away from TV, moving towards net, games, pods, etc.

Kudos to whoever at NBC managed to convince the knuckle draggers in management that this internet thingie is going to be big one day.

Incidentally, Slate podcasts on NPR.

click for free download

The full lyrics are here.

via Gothamist

4 Year Presidential Cycle

Tuesday, December 27, 2005 | 09:30 AM

in Markets

This is the first of 4 charts I plan on revealing this week. Each one will hopefully shed some insight into what we may expect in 2006.

This chart shows what is known as the 4 year or Presidential Cycle. The theory behind this is that U.S. markets have a tendency to make a high in the 4 year, and a low in the 2nd year of a president's term. It has held up quite well historically, with the notable omission of 1986 (Recall, however, what happened in 1987).

click for larger graphic

The chart suggests that a cyclicality is at play in direct contradiction to the random walk thesis. Given the upward bias of markets over time, regular corrections may be inevitable. What is truly astonishing is the very human tendency to downplay or even ignore these periodic dislocations.

This is not unlike yesterday's discussion of earthquakes, volcanoes and tsunamis.

I pulled this from my files, but unfortunately, I cannot find a source. ~~It looks similar to work by Investech's Jim Stack; I emailed them to confirm this~~. If anyone has any insight into where this may have come from, please let me know . . .

UPDATE 1: December 27, 2005 11:03am

William Hester has several excellent charts on the subject here:

Average Gain in Year Two of Presidential Cycle Hides Important Declines
http://www.hussmanfunds.com/rsi/prescycle.htm

UPDATE 2: December 27, 2005 5:03pm

James points us to BTR Capital Management (PDF) and this chart, which looks remarkably similar:

click for larger chart

and, it looks better in red!

Inverted Yield Curve: Its different this time (not)

Tuesday, December 27, 2005 | 06:17 AM

in Federal Reserve | Fixed Income/Interest Rates | Inflation | Technical Analysis

The yield curve, as measured by the ratio between the 10 and 2 year treasuries, is merely a few ticks away from inverting. This is something worth paying close attention to.

What's the significance of an Inversion?

It reflects a decreasing demand for capital (low long rates), and can also be read as the Bond Market's apprehension of a slowing economy -- why buy short Bonds if they are about to get even cheaper?

While not every inversion leads to a recession, every recession has been preceded by an inverted yield curve. Thus, it can be described as a necessary but not sufficient factor for a subsequent recession.

According to a Dow Jones article in today's WSJ:

"Bond analysts aren't holding out much hope that the 10-year Treasury note will end 2005 with a bang, but the yield curve may ignite some fireworks.

The benchmark 10-year yield, which is sitting just below the 4.4%-4.6% range it had been confined to for more than a month, probably won't stage a significant breakout during the last trading week of the year, analysts say.

But it's a different story for the two-year note. Amid upcoming supply as well as widespread belief that the U.S. Federal Reserve will raise rates one or two more times, the two-year yield is likely to head higher. A bond's yield rises as its price falls.

When the two-year note underperforms the 10-year issue, the difference between these notes' yields -- which slid to 0.01 percentage point last week -- has the potential to disappear altogether, and the two-year note's yield can even surpass the yield on the 10-year.

When shorter-dated yields overtake their longer-dated counterparts, the yield curve is described as inverted. It is a bond-market rarity that has historically foreshadowed recession."

The 2/10 relationship -- and whether it becomes inverted -- has been one of several traditional harbingers of ill economic winds. There has already been Inversion "in the shorter end of the yield curve, with two-year notes yielding about 0.04 percentage point more than five-year notes late last week."

Fed Chairman Alan Greenspan has noted that "its different this time." He has challenged the view that "inversion signals economic trouble, pointing out that the shape of the curve is less predictive than it once was."

Further, the depth and duration of the inversion also plays a hand in its predictive ability:

"While an inversion