| March 2009 "My concern is that recent events have squelched that optimism among consumers, and that the nation’s mood is even darker than it was a few months ago. Remember how Obama derided the “politics of fear?” He’s become its greatest champion. " ~ Liz Peek |
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The Professional Opinion S&P 500 Index: 696.33 This month there aren't many recommendations or prognostications. It's all about finding a bottom. Stock Market Outlook The Fed forecast has GDP slumping another .5 point to 1.3 points in 2009. They are expecting GDP growth to increase from 2.5 - 3.3 percent in 2010. (Good luck with that. I personally think the FED is inflating these numbers so our community organizer can spend more money that we don't have to fund his proposed ball- busting budget.) Unemployment is expected to remain in the mid to high 8's for 2009. They think the low 8's for 2010 is about right. (Good luck with that too.) Inflation is expected to remain low for the forseeable future. The health of the financial system is directly related to getting out of this recession. Banks need to start lending and consumers as well as businesses need access to credit. Bernake was noted as saying that the recession of 2009 would also be a year of recovery if financial markets are stabilized by government policy initiatives. Economic Recovery generally coincides with a stock market uptrend. (Believe it or not, there is a whole paragraph to support this rhetorical statement). Look for the final double bottom to occur before the markets start reversing direction. Credit markets did improve in the 4th quarter, but the 1st quarter real GDP numbers are expected to remain sluggish, stagnant or negative. The second half of the year is the earlies one would expect to see any signs of positive economic growth. "This is, by far the most difficult stock market we have ever seen. This is only the second time since the end of WWII that the YOY decline in the S&P 500 index has exceeded 35%" "A new bottoming process will be necessary in order to put an end to the bear market." Portfolio: SPY, VTI, IWV and DIA are rated buy. Everything else is rated hold. No changes to model portfolios. |
 This is a pick one doesn't see every day - Central California. |
Personal
Portfolio
 Huntsman continues to look promising so I took the allocation up to 5% and used this latest fear generated market dip to make the final buys. 17.39 percent yield at these prices is too tempting. If you become a share holder before mid March, you can take advantage of the dividend.
So how did GNMA's do over the course of 1 year? Looks like about a .50 cent price fluctuation and a yield last year of 7.84%. Not bad at all. There are slightly better performing GNMA funds out there if the option is available to you. This Month, opinions from others about the state of our country, our economy and our community organizer's involvement in it. First, a Contribution from Joel Williams who was kind enough to send this along: The Math Behind this Mess http://www.wired.com/techbiz/it/magazine/17-03/wp_quant Simple, elegant, and totally bogus. Read this article carefully. "For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels."... "The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time. But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are." "Yet during the '90s, as global markets expanded, there were trillions of new dollars waiting to be put to use lending to borrowers around the world—not just mortgage seekers but also corporations and car buyers and anybody running a balance on their credit card—if only investors could put a number on the correlations between them. The problem is excruciatingly hard, especially when you're talking about thousands of moving parts. Whoever solved it would earn the eternal gratitude of Wall Street and quite possibly the attention of the Nobel committee as well. To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price. But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 percent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1. And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1. If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much. But it's a very inexact science. Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis. Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer. As a result of the scarcity of historical data, the errors there are likely to be much greater. In the world of mortgages, it's harder still. What is the chance that any given home will decline in value? You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role. And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?"... "In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach." (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps."... In other words, ignore reality because it is too hard, and instead look at other people's perception of reality. That makes things so much more simple. It is also totally idiotic. "The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was. As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function."... "The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation. In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop." In other words the technical world is full of people who understand the technology but do not manage, and managers who do not understand the technology but make decisions anyway. Now we see the consequences of this. ""Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust. Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism." Li has been notably absent from the current debate over the causes of the crash. In fact, he is no longer even in the US. Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation. In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department. In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media." Well, I know enough math to see that the work was elegant, but I have too much common sense to believe it. Back at MITRE, I used to say that all we did was applied common sense. Not so in the banking world. Probably not always true at MITRE. Send this article to your favorite Geek. Joel Williams http://www.actwin.com/kalostrader This is from Liz Peek, a contributer to WoW Magazine: By Liz Peek Today marks the one-month anniversary of President Obama’s inauguration. In his brief time in office, the president has overseen three massive new spending initiatives — the $787 billion stimulus bill, the trillion-dollar financial stability initiative and, most recently, the $275 billion mortgage assistance program. That’s a lot of activity, and a ton of money, but so far the reaction to the new administration’s programs has been decidedly negative. Investors, among others, have panned the plans; the stock market is off nearly 10% from the day before the inauguration, or more than 800 points on the Dow Jones Industrial Average. Yesterday, in fact, we crossed a truly alarming divide. The Dow Jones average closed at its lowest point since October 2002, the bottom of the last bear market. The S&P 500 fell to 779, barely above the intra-day low of 741 of last November. For many market analysts, if the market crashes through that recent benchmark, it will next move significantly lower. Ouch. What is going to turn this beast around, and what should the president do? First of all, let’s dispense with the antiquated notion that only rich people own stocks, and that the market’s ups and downs are unimportant. Almost everyone has a stake in our financial markets, either through owning stocks and bonds directly or through pension plans. Even the neediest Americans who are fed or clothed by charities are hurt when those organizations’ endowments crater or donations dry up. Clearly, it is way too early for any of the new stabilization and stimulus programs to have taken effect. Why then is the consensus so pessimistic? Certainly the political wrangling of the past month has dispelled optimism that President Obama can change the contentious nature of American politics. Both Democrats and Republicans have spurned Obama’s leadership. The free-for-all over the stimulus bill portrayed Congress in the worst possible light — no surprise there — and led Americans to view not only the process but the bill with utter skepticism. Delivering a 1000-page bill to our legislators just two hours before the signing deadline (and then going on a long-weekend holiday before signing it) was outrageous. The mortgage relief plan hasn’t been received much better. Most Americans (ninety two percent, by some estimates) pay their mortgages on time; they’re darned if they know why they should bail out their neighbors. At the same time, Obama’s own administration seems sharply divided between pragmatists and ideologues. For instance, one camp is pushing for protectionist measures while the other recognizes the dire consequences that "Buy American" provisions might deliver. Over the realistic objections of the National Economic Council’s Larry Summers and Treasury Secretary Timothy Geithner, it is said that Chief of Staff Rahm Emmanuel encouraged Senator Chris Dodd to, at the last minute, attach a punitive pay cap on Wall Street execs into the stimulus bill. This tug of war may also account for the gaping holes in the financial bill delivered with child-like upspeak by Geithner, and similar inadequacies in the new mortgage plan. The housing program stupidly omits an obvious need to insulate mortgage servicers from legal claims that they abridged mortgage-holders rights. Because so many mortgages were packaged and sold off to investors, immunity from lawsuits is a necessity if we want servicers to change mortgage terms. The White House scramble has led to creeping fear that we’re dealing with the Junior Varsity. I’ve even heard people pining for former Treasury Secretary Hank Paulson — hard to imagine, right? (No one quite misses Bush yet; let’s hope it doesn’t come to that.) Now we need President Obama to quit the campaign trail and start looking presidential. He needs to take ownership of the country’s problems and solutions. We all get that he inherited this mess, but as a candidate he had a lot of answers on how he would manage the clean-up; it’s time to get on with it. He needs to push his initiatives forward as quickly as possible, and create some optimism that spending trillions of dollars will get us out of this crisis. We know that having the government patch up schools or revise mortgages will be untidy and expensive, but the sheer volume of money being thrown at these problems will ultimately have an impact. Even the expectation of help on the way could prove beneficial. I usually try to find some good news to share with wOw readers, and so I am happy to report that yesterday the Conference Board reported that its index of leading indicators rose in January for the second month in a row. The index turned negative in July 2007, heralding the downturn, and appears to have bottomed this past December. Items boosting the index are a strong rise in the nation’s money supply, improved credit spreads, a slight pop in new orders for non-defense capital goods and a modest rise in consumer expectations. My concern is that recent events have squelched that optimism among consumers, and that the nation’s mood is even darker than it was a few months ago. Remember how Obama derided the “politics of fear?” He’s become its greatest champion. And finally, an editorial from Lawrence Kudlow: Obama Declares War on Investors, Entrepreneurs, Businesses, And More Friday, 27 Feb 2009 | 4:39 PM ET Posted By: Larry Kudlow Let me be very clear on the economics of President Obama’s State of the Union speech and his budget. He is declaring war on investors, entrepreneurs, small businesses, large corporations, and private-equity and venture-capital funds. That is the meaning of his anti-growth tax-hike proposals, which make absolutely no sense at all — either for this recession or from the standpoint of expanding our economy’s long-run potential to grow. Raising the marginal tax rate on successful earners, capital, dividends, and all the private funds is a function of Obama’s left-wing social vision, and a repudiation of his economic-recovery statements. Ditto for his sweeping government-planning-and-spending program, which will wind up raising federal outlays as a share of GDP to at least 30 percent, if not more, over the next 10 years. This is nearly double the government-spending low-point reached during the late 1990s by the Gingrich Congress and the Clinton administration. While not quite as high as spending levels in Western Europe, we regrettably will be gaining on this statist-planning approach. Study after study over the past several decades has shown how countries that spend more produce less, while nations that tax less produce more. Obama is doing it wrong on both counts. And as far as middle-class tax cuts are concerned, Obama’s cap-and-trade program will be a huge across-the-board tax increase on blue-collar workers, including unionized workers. Industrial production is plunging, but new carbon taxes will prevent production from ever recovering. While the country wants more fuel and power, cap-and-trade will deliver less. The tax hikes will generate lower growth and fewer revenues. Yes, the economy will recover. But Obama’s rosy scenario of 4 percent recovery growth in the out years of his budget is not likely to occur. The combination of easy money from the Fed and below-potential economic growth is a prescription for stagflation. That’s one of the messages of the falling stock market. Essentially, the Obama economic policies represent a major Democratic party relapse into Great Society social spending and taxing. It is a return to the LBJ/Nixon era, and a move away from the Reagan/Clinton period. House Republicans, fortunately, are 90 days sober, as they are putting up a valiant fight to stop the big-government onslaught and move the GOP back to first principles. Noteworthy up here on Wall Street, a great many Obama supporters — especially hedge-fund types who voted for “change” — are becoming disillusioned with the performances of Obama and Treasury man Geithner. There is a growing sense of buyer’s remorse. Well then, do conservatives dare say: We told you so? © 2009 CNBC, Inc. All Rights Reserved  More power coming on line, late 2009. Estimate this footprint and compare it to a lets say, 600 MW of wind generating capacity. If math is not your long suit, imagine standing in the middle of a wind farm and seeing windmills extending over the horizon in all directions. If you think green power is ever going to contribute to the grid in any meaningful way then I suggest you sign up for exclusively green power purchase agreements for your home and give it a try. Don't forget to invest in a good UPS power source for critical equipment, which usually doesn't care for intermittent power. I wonder how many raptors and migratory birds are going to get chewed up in blades of all these proposed wind turbines. You would think the eco-crowd would be going nuts about what this deadly change of landscape would do to their avian friends. Could do with a few less Canadian geese though. Closing Comments I am generally a 'glass is half full' kind of guy but these idiots which we Americans elected to office I am sure do not have our best interests at heart are really making it difficult to maintain a positive, forward looking attitude. They are a bunch of self serving sycophants whose only interest is in saving their own political skin and in doing so prostrate themselves in front of the altar of special interests which they are beholding to. It really is disgusting. 1. Want to make sure banks work the way they are supposed to? Why not bring in bankers no matter their political stripe, who have been successful and will continue to be successful to help guide policy. 2. Want to catch corrupt businesses and other associated financial schemers? Why not bring in those who for how many years informed an arrogant and grossly inept SEC of ongoing scams (why does Made-Off come to mind) and let them run the show? 3. Want to secure our energy future and look at the Mid East and their consortium of blackmailers way back in the rear view mirror? Why not enlist the help of some of the brightest minds in the country, even if they are talk show hosts. Dr, Bill out in California is a prime example. Charlie Maxwell while he is not a talk show host, is a well respected energy analyst with Wheaton & Co. and is well worth listening to. 4. Want to start fixing health care? Start fixing our borders and kick out all illegal aliens, back charging the country from which they left for the monies we spent in emergency rooms and all other charges pertaining to their deportment, including jail time. Health care is not a right, it is a service to be paid for. It is not special. Treat it as a pay for play service and I think that would be a huge step forward in controlling costs. And while we're at it requires a real ID to get service, kind of like I do and every other taxpayer does when going to the emergency room. If they can't produce a valid ID and appear to be illegal aliens, stick them in an examining room and call the border patrol. 5. Bring in people who know what they are talking about, have actually made a living in their industry of choice and have done well at it. Keep the socialist dreamers and their Utopian experiments out of it. That would be 'change' I could believe in. |
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