Vast Under-Investment in Due Diligence
With everyone tsk-tsking the Madoff scandal -- the amount lost, the after-the-fact obviousness, the SEC incompetence -- I thought now was as good a time as any to look at the actual research, due diligence and manpower thrown at investigating managers and funds.
Not surprisingly, it is tiny -- at least, when compared with the heavy lifting of equity research. The asset management and brokerage industry is vastly under-invested in due diligence; the resources applied to hedge funds and managers is a comparative pittance.
Note that every major brokerage firm -- from Merrill Lynch to UBS to Morgan Stanley to Credit Suisse and beyond -- offer a platform to these managers. Their managed assets group, private wealth management, (even retail brokerage) have access to these funds and managers.
The Lost Decade
Fascinating chart via Jack Ablin of BMO:
The Big Picture Café
If you have been reading the Big Picture for any length of time, you know I have a pretty good eye for spotting insightful writers, talented analysts, and smart commentators. Many of you have written me to say that a number of your regular blog reads you first discovered at the Big Picture.
I always wondered, wouldn't it be great if I could pull together a group of very talented people all in one place? Mind you, not 100s of random authors you don't know anything about, or 1000s of anonymous people you have to sift thru -- but simply a small, concentrated group of extreme talent. The goal was to separate the wheat from the chaff, and offer you the Crème de la Crème of financial writers and bloggers.
Hence, the Big Picture Café.
I think we've accomplished that. We've put together a fantastic list of guest writers, some of whom are going to be regular weekly contributors to the site. I am going to keep this a tight list of contributors, all of whom I have personally selected and whose work I have been fond of for a long while.
Every Saturday, John Mauldin's weekly piece will appear here. This week's Electing the Janitor-in-Chief was posted yesterday morning. And on Sunday, the terrific weekly wrap up from my South African friend, Prieur du Plessis's Words from the (investment) Wise will show up. The week that was (Oct 27 – Nov 2, 2008) is already available for your reading pleasure.
You will also meet Chris Whalen, a former NY Federal Reserve trader, and was an investment banker (years ago) for Bear Stearns. He now runs Institutional Risk Analytics, and has been one of the few voices of sanity warning about the coming Banking crisis for the past few years. Wanna talk about inside baseball? Chris' dad was a senior policy advisor for the Nixon and Reagan adminsitrations, and was instrumental in getting Paul Volcker appointed as Fed chairman. Be sure to read his Roundtable: Fed Chairmen and Presidents.
One other regular who you will become familiar with is Marion Maneker. He is the Managing Partner at Colle, Hochberg and Grey, publishers of the Art Market Monitor. He is also a former editor at New York Magazine, and the Publisher at the HarperCollins business imprint. Marion has been observing the political and economic scene from a vantage point within the financial press for many years. Marion is going to be our Financial Media critic, covering the various print and electronic journalists that cover the market. Be sure to read his post Mayor Mike Bloomberg for Treasury Secretary, as well as the sequal, Department of Follow-Up Dept.
Lastly, I wanted to take this a step further. Not just bloggers, but several wall street pros who don't regularly publish for the public -- and who are not allowed to publish/blog by their firms. They are all well known to me, and their work product is excellent. They will be also contributing here, some in their own name, and some anonymously. Talk about the unvarnished, straight dope -- we've had to meet with attorneys to decide our response for if and when we get sued by either their firms or the companies they cover.
I want the Café to evolve into a special place. What it won't become is a Seeking Alpha or a TheStreet.com -- they are very different sites, far more comprehensive and encompassing than I want the Café to be. They have a specific purpose in the world, and I am not seeking to compete with them. Instead, I want to serve a different purpose, more like a tiny winery: Limited production, carefully grown and mixed, hand selected, delightfully refreshing.
I hope you find the writers here and their work as thoughtful and stimulating as I do.
Just How Bad Was October 2008 ?
Not too shabby a week -- plus 11% across the major indices, with some areas even stronger. Of course, that comes from deeply oversold levels, with stocks peak trough down 27% within October. The key question going forward is whether or not this past week's snapback rally has legs. But rather than guess about that, let's look at some of the more intriguing data points from October 2008.
I picked a bad month to stop sniffing glue:
• October was the worst month for the Standard & Poor’s index of 500 stocks in 21 years — since the 1987 stock market crash. (NYT)
• The Dow dropped 14% drop over the past four weeks -- the biggest October decline since 1987, when the crash sent markets down 23% for the month. The S&P 500 was down 17%, and Nasdaq fell 18%. This ranked as the 15th worst monthly decline for the Dow Industrials since 1900.
• October 2008 was the most volatile in the 80-year history of the S.& P. 500. (see NYT chart, at right)
• We had the most down days in a single month since August 1973. (Marketwatch)
• Compare 3 recent SPX Bear Markets: -46% from October 2007; Compare that with 1973-74 down 48% over 23 months. The 2000-03 bear was 49 percent over nearly 3 years.
• The S&P 500 had the most volatile month since November 1929 (1% moves higher or lower).
• October had two days where the indices were up more than 9% -- the 10th time this has occurred over the past 80 years. (NYT)
• During an eight-day losing streak at the beginning of the month, the Dow lost 2,396 points.
• Consider days with 4% moves up or down: None from 2003 through 2007; Three throughout the 1950s and two in the 1960s. October 2008? 9 days with four percent plus or minus. That edges out September 1932's record of 8. (NYT)
• The Dow had its second-biggest point drop on record, of 733 points. The Dow posted two of it biggest point gains, climbing by 936 points (October 13th) and 889 (October 28th)
• US dollar gained 14.3% against the euro, 22.3% against the Canadian dollar, and 31.8% against the Australian dollar. This is the fourth best month on record (using data going back to 1967). March '91, November '78, and October '82 are the only three months where the US Dollar saw bigger gains. (Marketwatch)
• Perhaps the credit crisis is finally easing: Overnight Libor dropped to its lowest levels in 6 years, falling to 0.73125%, down from 5.09% on October 9th. (Bespoke)
• Copper and Crude oil had their worst one-month losses ever (Barron's)
• Crude-oil futures lost one third of their value, falling 33% during the month. This was their biggest monthly percentage drop since trading began in 1983. Average retail price for gasoline fell 31%, ($2.504 a gallon), down 14% from a year ago.
• Gold lost 18% for the month -- its worst monthly drop since 1980.
• Wheat had its largest monthly decline in 22 years; Copper and Aluminum had their largest drop in more than 20 years; Sugar for its biggest monthly fall in a decade. (WSJ)
• Emerging-market bonds popped 8% over Treasurys -- a six-year high.
• Market cap losses: Standard & Poor's global indexes lost $6.79 trillion (September's 2008 lost $3.4 trillion)
• European stocks rose 12% (Dow Jones Stoxx 600 Index) -- their biggest weekly gain since 2001. (Bloomberg)
• MSCI Emerging Markets Index fell nearly 30% -- the worst month since August 1998. Thats a loss of about ~ $900 billion. (Marketwatch)
• Japan's Nikkei 225 hit a 26-year low.
• Iceland's exchange crashed 81% for the month. (Marketwatch)
• Russia had the world's most volatile index, with 17 days with of more than four percent moves in the Micex index. For the month, the Micex lost 28.8%, but had a weekly gain of 42.5%. (NYT)
• Argentina's Merval and Brazil's Bovespa indexes were set to make their biggest one-month percentage losses since August 1998, with the Merval falling 37% and the Bovespa losing 25%.
Another Bullish Bear
We last looked at the Bullish Bears? back on October 21. Now, we have another Ursine to add to the bull camp: Steve Leuthold, Chairman, The Leuthold Group.
He is the subject of this week's Barron's interview:
Barron's: What is your assessment of the market's big selloff this fall?
Leuthold: There were two stages, the first being what we thought was a normal cyclical bear market. We thought the economy had peaked in last year's fourth quarter. And then, about six weeks ago, after the market had come down about 25%, it looked to us as though the market had discounted a recession. By that time, the recession was eight or nine months old. So we thought that, as normally happens, the market tends to turn up in the middle of a recession.
Then came the liquidity freeze, which was the second stage, and that took us down over the past six weeks and really hurt us. We were doing pretty well up until that point because we were defensive, but we turned bullish too early.
In a recent research note, you wrote: "I remain bullish and wrong." Is that still your sentiment?
Yes, it is. I was just looking at an interview I did with Barron's in December 1980, and I was called a super bull. And then we got prematurely bearish in 1998, and people started calling me a perma-bear. Right now, though, I am not a super bull, but I am a very convinced and optimistic bull.
What underscores your case?
Certainly, the intrinsic value of stocks. In terms of our valuation model, it's the most positive we have seen since 1984. We look at 28 different factors, including price-to-earnings and price-to-sales, and they are quite decidedly positive. Because we look at normalized earnings, we smooth them out over a business cycle. We have always done it that way, and we are at about 12 times earnings now.
Is that on forward earnings?
No. What we do is we take the last 4½ years of historical earnings, and then we project forward only six months. Then we divide the whole thing by 20, or the number of quarters. We have found over the years that it is almost imperative that you do that -- that is, smoothing out the business cycle to get the underlying level of earnings.
How does that 12 times P/E ratio compare to other periods?
Looking back 55 years, we are in the 15th percentile, well into the bottom quartile, and this is where markets very often have bottomed out. So on a valuation basis, this is a really cheap market. At these levels, we are really down in bull-market territory. From here, on a one-year basis -- and this goes back to 1926 -- the market has been up about 18%, on average, in the next year.
There's more at Barron's, and their interviews often show up at Marketwatch of Yahoo finance.
INTERVIEW: A "Perma-Bear" Warms to Stocks Steve Leuthold, Chairman, The Leuthold Group
LAWRENCE C. STRAUSS
Barron's, NOVEMBER 3, 2008
Trick or Treat
by Chris Britt
by Tom Toles
Seven Deadly Sins of the Meltdown
Fabulous cartoon circulating by email -- if anyone knows of the original source, please let me know --
Source: Steve Breen, San Diego Union Tribune, 10/18/08
Relative performance of global sectors during 2008
My pal Mike Panzner points out that "Not surprisingly, defensive groups have been the star relative performers on a global basis during 2008.
YTD Performance Relative to S&P Global 1200
Bull & Bear Cycles
Market Cycles: 100 Year DJIA (September 09, 2005)
100 Year Dow Jones Industrials Chart (December 28, 2005)
Dow Jones Chart (1900-2004)
Analysts Forecasts Remain Too High
Well, now that we got THAT unpleasantness behind us, its time to look forward to earnings season! Its not going to be pretty. The question is from these still depressed levels, will there be any further damage wrought.
On that exact subject, I hope in the midst of the recent market activity, you did not overlook this article about earnings expectations. Its the key to where markets will eventually find themselves after the current bailout mania subsides.
As we have repeatedly harped upon this year, the analyst community is still way too bullish when it comes to S&P500 earnings consensus.
"Investors who are expecting a rebound after almost $7 trillion was erased from U.S. equity markets this year may be disappointed as earnings fail to match forecasts. S&P 500 companies that earned less than analysts estimated in the past year dropped 13 times more than the index's average decline, data compiled by Bespoke Investment Group LLC show...
Operating profit at S&P 500 companies fell 7.5 percent last quarter and will jump 28 percent this quarter, led by banks and brokers, according to analysts' estimates compiled by Bloomberg. That would exceed the record $222 billion they earned in the April-June period last year.
Six of 10 industries will report record profits or come within 5 percent of all-time highs, according to Wall Street projections, which are usually based on company outlooks.
"The consensus will have to go down significantly,'' said John Praveen, Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which oversees $638 billion. "The numbers are way too high.''
The Street is at $95, and I am at $65 . . . times a 15 multiple means we are actually near fair value. As long as earnings don't fall even below my pessimistic forecast -- and multiple compression doesn't rear its angry little head.
If that happens, all bets are off . . .
Pricey Markets? (September 03, 2008)
Analysts Overstate Earnings Once Again (July 30, 2008)
S&P500 Profits Ex 3 Oil Cos = Awful (May 19, 2008)
U.S. Stock Analysts Keep Estimates as Markets Fall
Bloomberg, Oct. 13 2008