Business

A good magician misdirects your focus with clever patter, distracting gestures and a pretty assistant.  Why does that remind me about the current state of market perception and the economy? 

Perhaps in part because of the rosy picture the recent rally paints, while few notice the plunge in S&P 500 earnings.  That means the great bargain you think you are buying isn't such a bargain.

Stocks Are Expensive Again.

The chart below, from Chart of the Day, illustrates how this plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio).

Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s).

As a result of the current plunge in earnings and the recent 2.5 month stock market rally, the PE ratio has spiked to the low 120s – a record high.

Click here for a different perspective on this chart. 

Precious Metals Are Performing Well.

At the same time, there is another trend worth watching.  Money is moving to gold.

The chart displays the relative performance of several market sectors over the past few weeks.  The chart below shows the same data, but compared to Gold as the baseline.  It highlights how dramatically the other markets have under-performed recently.

The recent financial crisis has clearly re-ignited investor interest in precious metals.  Many believe that gold and silver are good bets during tough times – and a hedge against inflation.  So it doesn't surprise me that I'm hearing more investors using Warehouse Depositary Receipts to actually take delivery of the asset rather than just speculating.

What To Expect.

A short-term bounce wouldn't surprise me here.  The markets have held-up fairly well after the big rally.  So another test higher makes sense.  However, based on the weakening internals, the intermediate-term outlook is looking more bearish to me.

Business Posts Moving the Markets that I Found Interesting This Week:

• Will the Fed's Medicine have Inflationary Side-Effects? (WSJ)
• Treasury's Next Phase Of Bank Rescue: Buying Toxic Assets. (Dealbook NYTimes)
• Two Tech IPOs This Week: Is The Dry Spell Over? (NYTimes)
• Financiers In China Are Getting Leery Of Dollars & Are Accumulating Gold. (Forbes)
• Russians Offers to Invest $200 Million in Facebook at $10 Billion valuation. (WSJ)
• Despite Russia's Struggling Economy, Its Market Surges. (NYTimes)
• Is A Low VIX Good? Not In My Experience. Who's Afraid Of the Bear? (Money)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• How Well Can You Live In India On $2 Per Day? (Slate)
• Verne Harnish Insights & Best Practices for Growing Leaders and Companies. (Blog)
• In Praise of Dullness: the CEO Traits That Most Help Them Thrive. (NYTimes)
• When Will Computer Intelligence Surpass Our Own? (NYTimes)
• IBM Unveils Software to Find Trends in Vast Data Sets. (NYTimes)
• Kindle Books Now Account for 35% of Sales When Available. (Business Insider)
• Why Predictions Based On Search Were Wrong About 'Idol' Winner. (MediaPost)
• More Posts with Lighter Ideas and Fun Links.

A good magician misdirects your focus with clever patter, distracting gestures and a pretty assistant.  Why does that remind me about the current state of market perception and the economy? 

Perhaps in part because of the rosy picture the recent rally paints, while few notice the plunge in S&P 500 earnings.  That means the great bargain you think you are buying isn't such a bargain.

Stocks Are Expensive Again.

The chart below, from Chart of the Day, illustrates how this plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio).

Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s).

As a result of the current plunge in earnings and the recent 2.5 month stock market rally, the PE ratio has spiked to the low 120s – a record high.

Click here for a different perspective on this chart. 

Precious Metals Are Performing Well.

At the same time, there is another trend worth watching.  Money is moving to gold.

The chart displays the relative performance of several market sectors over the past few weeks.  The chart below shows the same data, but compared to Gold as the baseline.  It highlights how dramatically the other markets have under-performed recently.

The recent financial crisis has clearly re-ignited investor interest in precious metals.  Many believe that gold and silver are good bets during tough times – and a hedge against inflation.  So it doesn't surprise me that I'm hearing more investors using Warehouse Depositary Receipts to actually take delivery of the asset rather than just speculating.

What To Expect.

A short-term bounce wouldn't surprise me here.  The markets have held-up fairly well after the big rally.  So another test higher makes sense.  However, based on the weakening internals, the intermediate-term outlook is looking more bearish to me.

Business Posts Moving the Markets that I Found Interesting This Week:

• Will the Fed's Medicine have Inflationary Side-Effects? (WSJ)
• Treasury's Next Phase Of Bank Rescue: Buying Toxic Assets. (Dealbook NYTimes)
• Two Tech IPOs This Week: Is The Dry Spell Over? (NYTimes)
• Financiers In China Are Getting Leery Of Dollars & Are Accumulating Gold. (Forbes)
• Russians Offers to Invest $200 Million in Facebook at $10 Billion valuation. (WSJ)
• Despite Russia's Struggling Economy, Its Market Surges. (NYTimes)
• Is A Low VIX Good? Not In My Experience. Who's Afraid Of the Bear? (Money)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• How Well Can You Live In India On $2 Per Day? (Slate)
• Verne Harnish Insights & Best Practices for Growing Leaders and Companies. (Blog)
• In Praise of Dullness: the CEO Traits That Most Help Them Thrive. (NYTimes)
• When Will Computer Intelligence Surpass Our Own? (NYTimes)
• IBM Unveils Software to Find Trends in Vast Data Sets. (NYTimes)
• Kindle Books Now Account for 35% of Sales When Available. (Business Insider)
• Why Predictions Based On Search Were Wrong About 'Idol' Winner. (MediaPost)
• More Posts with Lighter Ideas and Fun Links.

"Sell in May and Go Away" is a popular market aphorism.  Still, the markets continue to hold up well despite less than favorable news.  Usually I consider that a bullish sign.

This chart shows that the S&P 500 Index has dropped dramatically the past two times it rose above its upper Bollinger Band line (indicating a market high), while the Bollinger Band Width was narrow (indicating low volatility).  Well that is where we are again, and with low volume as well. 

I am watching the 20 day moving average (which also serves as the recent up-move's trend line).  A break below that might trigger another big move down).

This Week's Featured Market Chart.

Many investors have looked at the early 1930s for some insight into the current economic/stock market environment. While there are significant differences in the global economy and political landscape between the current environment and that what occurred in the early 1930s, there are also many similarities (bank failures, bankruptcies, severe market declines, etc.).

For
some perspective on the current stock market rally that began on March
9th, the chart below illustrates the duration (calendar days) and
magnitude (percent gain) of all significant Dow rallies that occurred
during the 1929-1932 bear market (solid blue dots). For example, the
bear market rally that began in October 1931 lasted 35 calendar days
and resulted in a gain of 35%. As this chart illustrates, the current
Dow rally (hollow blue dot with the pale yellow "You are here" label)
is slightly below average in both duration and magnitude relative to
the average 1929-1932 bear market rally (hollow red dot, with the pale
blue label).

So, as big as this rally seems … It still might be a bear market rally.

What's Happening In the Legal Industry Says A Lot About the Market.

I
used to be a lawyer, and still have a number of friends who practice
law. I don't normally use law firm data as a trading indicator; but
these are not normal times.  I suspect that there are a number of early
indicators we can glean from watching this industry sector.

First,
this weekend a bankruptcy partner in a large Dallas firm told me that
he is seeing a big upswing in business. This implies a big increase in
the number of bankruptcies to be filed in the coming months. I'm
hearing similar things from friends around the country; that right now,
the hottest section in many law firms is its bankruptcy practice.

I
think that means that the economy hasn't fully digested the damage done
by the economic slow-down.  Frankly, I'd be surprised if it had.

The
other side of that coin is that law firms are downsizing and laying-off
people because there simply isn't as much transactional work as there
used to be.  The big example here is that Skadden Arps offered its associates one-third of their pay to take the year off.

At
Skadden, I'm sure many of them thought, nice work if you can get it. 
However, I also suspect that a lot of talent will jump ship to
corporate jobs.

This might be the economic season that lawyers
start to pursue other business interests.  Historically that has often
been a positive mutation for businesses.  Research shows that a
disproportionate number of corporate executives have legal degrees. 
So, I'm looking for more lawyers to join start-ups roll-ups during the
next downturn.  And I'll take that as an early indicator of recovery.

When
legal transactional work starts picking-up again because of mergers and
acquisitions … I'll take that as an even better indicator that the
recovery underway.

Business Posts Moving the Markets that I Found Interesting This Week:

• Stocks End Higher As Fed Sees Recession Easing. (AP)
• Only 37% of WSJ Readers Said They Think The Economy Is Improving. (Forums)
• Semiconductor Sales Fall 30%, Continuing Sharpest Downturn In Years. (WSJ)
• In Major Shift, Apple Builds Its Own Team to Design Chips. (WSJ)
• Starbucks Reports Steep Earnings Decline. (NYTimes)
• Microsoft and Verizon in Talks to Launch iPhone Rival. (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• You Can Catch Swine Flu From Money. (SmartMoney)
• Do You Have Swine Flu? Self Diagnosis Test. (DoIHaveSwineFlu.org)
• Michael Douglas to Reprise Gordon Gecko 'Wall Street' Role in Sequel. (FoxNews)
• Research Shows People Like To Exploit The Luck Of Others. (BPS Research)
• The Reverse Black Swan. (BW)
• Money Messes With Your Mind – Is Handling Cash An Anesthetic? (NewScientist)
• More Posts with Lighter Ideas and Fun Links.

"Sell in May and Go Away" is a popular market aphorism.  Still, the markets continue to hold up well despite less than favorable news.  Usually I consider that a bullish sign.

This chart shows that the S&P 500 Index has dropped dramatically the past two times it rose above its upper Bollinger Band line (indicating a market high), while the Bollinger Band Width was narrow (indicating low volatility).  Well that is where we are again, and with low volume as well. 

I am watching the 20 day moving average (which also serves as the recent up-move's trend line).  A break below that might trigger another big move down).

This Week's Featured Market Chart.

Many investors have looked at the early 1930s for some insight into the current economic/stock market environment. While there are significant differences in the global economy and political landscape between the current environment and that what occurred in the early 1930s, there are also many similarities (bank failures, bankruptcies, severe market declines, etc.).

For
some perspective on the current stock market rally that began on March
9th, the chart below illustrates the duration (calendar days) and
magnitude (percent gain) of all significant Dow rallies that occurred
during the 1929-1932 bear market (solid blue dots). For example, the
bear market rally that began in October 1931 lasted 35 calendar days
and resulted in a gain of 35%. As this chart illustrates, the current
Dow rally (hollow blue dot with the pale yellow "You are here" label)
is slightly below average in both duration and magnitude relative to
the average 1929-1932 bear market rally (hollow red dot, with the pale
blue label).

So, as big as this rally seems … It still might be a bear market rally.

What's Happening In the Legal Industry Says A Lot About the Market.

I
used to be a lawyer, and still have a number of friends who practice
law. I don't normally use law firm data as a trading indicator; but
these are not normal times.  I suspect that there are a number of early
indicators we can glean from watching this industry sector.

First,
this weekend a bankruptcy partner in a large Dallas firm told me that
he is seeing a big upswing in business. This implies a big increase in
the number of bankruptcies to be filed in the coming months. I'm
hearing similar things from friends around the country; that right now,
the hottest section in many law firms is its bankruptcy practice.

I
think that means that the economy hasn't fully digested the damage done
by the economic slow-down.  Frankly, I'd be surprised if it had.

The
other side of that coin is that law firms are downsizing and laying-off
people because there simply isn't as much transactional work as there
used to be.  The big example here is that Skadden Arps offered its associates one-third of their pay to take the year off.

At
Skadden, I'm sure many of them thought, nice work if you can get it. 
However, I also suspect that a lot of talent will jump ship to
corporate jobs.

This might be the economic season that lawyers
start to pursue other business interests.  Historically that has often
been a positive mutation for businesses.  Research shows that a
disproportionate number of corporate executives have legal degrees. 
So, I'm looking for more lawyers to join start-ups roll-ups during the
next downturn.  And I'll take that as an early indicator of recovery.

When
legal transactional work starts picking-up again because of mergers and
acquisitions … I'll take that as an even better indicator that the
recovery underway.

Business Posts Moving the Markets that I Found Interesting This Week:

• Stocks End Higher As Fed Sees Recession Easing. (AP)
• Only 37% of WSJ Readers Said They Think The Economy Is Improving. (Forums)
• Semiconductor Sales Fall 30%, Continuing Sharpest Downturn In Years. (WSJ)
• In Major Shift, Apple Builds Its Own Team to Design Chips. (WSJ)
• Starbucks Reports Steep Earnings Decline. (NYTimes)
• Microsoft and Verizon in Talks to Launch iPhone Rival. (WSJ)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• You Can Catch Swine Flu From Money. (SmartMoney)
• Do You Have Swine Flu? Self Diagnosis Test. (DoIHaveSwineFlu.org)
• Michael Douglas to Reprise Gordon Gecko 'Wall Street' Role in Sequel. (FoxNews)
• Research Shows People Like To Exploit The Luck Of Others. (BPS Research)
• The Reverse Black Swan. (BW)
• Money Messes With Your Mind – Is Handling Cash An Anesthetic? (NewScientist)
• More Posts with Lighter Ideas and Fun Links.