1933 All Over Again?

To those who keep bringing up 1933 as a reason to short the current rally, the Chart and Coffee blog proposes a cogent and extensive look at the facts and nothing but the facts. And the facts tell us that even if the "1933ers" are right, the market still has ample room to run up and the bears, multiple opportunities to get trapped.

Evil Big Government?

I noticed something strange, a conundrum as a former Fed chief would say:

the same people who are convinced the U.S. Government's greater involvement in the economy spells doom for the U.S. stock market are also wholeheartedly embracing the Chinese economy and stock market.

Now I haven't really looked into this so don't quote me on the numbers I'm going to throw out there but if I had to give a ballpark estimate I'd say the U.S. economy is 25% reliant on the government and the Chinese economy is 95% reliant on the government. So, even if that percentage were going up in the U.S. and down in China (which is actually not the case - I believe the state has increased its control over the Chinese economy as a consequence of the financial crisis), we still have a situation in the U.S. where the government is relatively small compared to the private sector.

So my question is this: why is the government bad for the economy in the U.S. but good for the economy in China? And don't tell me about the U.S. budget deficit: that's another subject altogether.

Latte, Anyone? What the Starbucks Chart Is Telling Us About the Economy

(Click to enlarge)

Most of those who doubt the resilience (or the very reality) of the bull market we've been in since March mention the death of the consumer as their main rationale. I thought I'd take a technical look at a consumer stock if there ever was one: Starbucks. Starbucks isn't just any old consumer stock, it's been THE consumer stock of the 1990's and 2000's, serving premium (some say overpriced) coffee to the hip urban professional class.

The first chart, a daily chart of Starbucks, shows us that SBUX has actually been in a bull market since its 11/20/2008 closing low of 7.17. After its November 2008 low, SBUX made a higher low on 3/9/2009 at 8.27 and then it was off to the races, reaching 19.71 last Friday, up 175% from its low. The stock is comfortably above its 200, 50 and 20-day moving averages which are all trending upwards. In other words, it is in a major, confirmed bull move and not showing any sign of slowing down.

The second chart, a chart of SBUX relative to SPY (the S&P500 ETF), is even more telling. It's showing us that Starbucks started underperforming the overall market as early as June 2006, way before the Great Recession of 2008 and basically when it became clear (to some people at least) the housing market - and by inference the consumer - was going to be in serious trouble. One can picture the marginal consumer of Starbucks Lattes and Frappuccinos, having extracted as much equity as possible from his or her home and finding out that house prices had stopped going up (and even started going down in many places), cutting down on expensive coffee breaks.

Conversely, the relative price chart shows that SBUX started to outperform the market as a whole in November 2008 and has been outperforming since. Having been so right in anticipating the recession, we are entitled to believe the Starbucks stock will also be right in anticipating the end of the recession. It would seem the consumer, after being dead for two and a half years, has resuscitated if we are to believe the sweet nothings the SBUX chart has been whispering in our ears lately.

Warren Buffett On The Deficit

Interesting Op-Ed piece by Warren Buffett sounding the alarm against the US deficit and its potential catastrophic effects. He makes a parallel with the effects of global warming:

"Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt."

He's apparently not the only smart investor to predict a less-than-favorable future for the US dollar as this Bloomberg piece summing up the general view at Pimco shows.

Why So Much Anger?

It's not often that I quote Barron's congenitally and permanently bearish Alan Abelson but this time he seems to have nailed a partial explanation of the current angry mood.

Abelson "can't help thinking that, perversely, the roaring stock market and the increasing volume of assurances by Wall Street, Washington and other suspect sources that you can kiss the recession goodbye and happy days will soon be here again only rub it in for Jane and John Q., who are in a real sweat over the prospect - or, worse yet, the reality - of loosing their livelihoods, their homes or both".

One can't mention Alan Abelson without thinking of his rigidly ideological (and ideologically rigid) colleague, Gene Epstein.

The Big Picture blog's own Barry Ritholtz, in a pretty heroic post, tells us just what he thinks of Mr. Epstein. Everything I've ever wanted to say about him is in there, only Barry says it more eloquently. The money quote:

"Of all the observers of the economic crisis of the past year, few have gotten it wronger than Barron’s Gene Epstein. This is directly due, in my opinion, to Epstein’s political ideology. He may or may not be a good economist, but we have no idea as to whether that is so, as his economic views are so dominated by his ideological rigidity and political perspective.

I would expect as much from Al Franken or Rush Limbaugh, but one hopes for more from the economics reporter from one of the nation’s pre-emiment weekly journals. One would be disappointed."

Not Everything About The EMH Should Be Thrown Away

This is a very succinct and to-the-point piece on the Efficient Market Hypothesis (EMH) by behavioral finance guru Richard Thaler. It turns out not everything about the EMH is to be thrown away.

The EMH has two components: the "price is always right" component and the "no free lunch" component. What Thaler says is that the latter has been strengthened by the financial crisis (what looked like a free lunch was in fact an over-leveraged mirage) while the former, the "price is always right" component, has been dealt a mortal blow (just because bubbles can only identified in retrospect doesn't mean they don't exist).

Bull Market Blues

As I'm writing this, the Dow is down more than 140 points but never mind, I'll go ahead and make my point. If this proves to be a major top, this post will be very funny in retrospect and I'll have a good laugh at myself.

My point is this: some people, blinded by their political views and ideologies, are hating this major rally (I'll be bold and call this a bull market). The irony is that, from a sentiment point of view, the angrier the so-called smart money gets at this rally and the longer it sits it out, the greater the odds that the market will keep marching upward. As a fellow technician said about this bull market, if it looks like a duck and quacks like a duck, then it's probably a duck.

Can The Deficit Be A Good Thing?

The Dash of Insight blog makes the contrarian point that there is an alternative take on the looming US budget deficit crisis: namely that there won't be one.

Monday Morning Sarcasm

In a stunning reversal, Paul Krugman admitted today that Big Government, far from having helped us "avert the worst", as most people assume, actually made the economic situation worse. Ronald Reagan, it seems, was right when he quipped that "government was always and everywhere a problem".

The Nobel Prize laureate is now convinced that, had the federal government not enacted the stimulus package, saved the banking system and opened the monetary spigots, in other words, if the government had done what the great Hoover administration did in 1929-1930 (which is...nothing), things would be infinitely better by now.

The Trend Is Your Very-Hard-To-Read Friend

As Marcel Link says in his excellent High Probability Trading:

"A funny thing about trading is that what one person sees as a strongly trending market another person sees as an overbought market that is ready to reverse."

That is true on so many levels. First, most basic and most confusing, different indicators on different time frames can give you a totally contradictory read on the market. What appears to be a clear uptrend on a 30-minute chart, say, with rising Stochastics and rising moving averages can, at the very same time, look like an equally convincing downtrend on the corresponding 5-minute chart with falling Stochastics and falling moving averages.

The easiest explanation for this phenomenon is that it could be a quick correction within a larger upward move. If your trading time frame can be counted in hours or even days, the fact that the market or instrument you're long is crashing on the 5-minute chart should be of little relevance. What's happening on the 30-minute chart, on the other hand, matters a great deal. By the way, I'm dispensing with charts, mostly out of laziness but also because I'm trying to think this through in a general, almost abstract way.

I guess another way to understand Link's statement is to realize that the trend - or any visual conclusion one can deduce looking at a chart - is in the eye of the beholder. This goes back to the fact that classic Technical Analysis - by which I mean charting, visual pattern-recognition and more generally non-quantitative, non-systematic TA - is subjective, an art rather than a hard science. [As an aside, that is the kind of TA that is largely loved, utilized and respected in the TA community but reviled and ridiculed in the academic and fundamental analysis communities.]

Indeed, you and I could be looking at the very same chart, same time frame, same indicators, same trend lines and yet come to wildly different conclusions. It could be because you and I have more or less conscious and acknowledged preconceptions about where the particular market or instrument we're looking at is headed, preconceptions that may be based on factors unrelated to the chart at hand. It could also be because we are very different people personality-wise, we have different psychologies and worldviews. Let's say I'm a congenital pessimist, a glass half-empty kind of guy, the kind of person who stops at green lights because, hey, they eventually and inevitably turn red so I might as well stop now (not that I actually do that). And, for the sake of symmetry, let's assume you're a sunny optimist. A strong, lasting, robust trend with nicely up trending moving averages and trend lines, and rising, just-a-tad-oversold oscillators, will spell doom to me and an all-clear to you.

Op-Ed Dudes

Frank Rich and Tom Friedman sometimes veer off course in their NYT op-eds, the first leftward, the second rightward - if these terms still mean anything to anyone - but today they both wrote unsentimental, pitch-perfect, fact-based pieces on Gates-gate and the Settlers problem respectively.