Archive for March, 2009

Stock Performance in 1930’s

As this interesting post illustrates, economic and stock market performance can be rather decoupled from each other.  Indeed, in terrible economic environment from 1932 to 1937, stocks returned 400%!  The conditions during that period were considerably worse than they are now.

March 31, 2009 at 3:32 am Leave a comment

Best Buy Helps the Market

Today, electronics retailer Best Buy reported a drop in its profits, but at the same time provided guidance that exceeded Wall Streets estimates.  As a result, its stock rose substantially and contributed to the advance in the overall market.  The fact that Best Buy sells consumer discretionary goods and its better outlook indicates that consumer spending decline is at least moderating.

March 26, 2009 at 4:29 pm Leave a comment

The Crash in Reverse

Today was a good day for the markets.  Investors apparently liked the government plan to buy toxic assets.  This, with some other positive news for housing and consumer sentiment that I mentioned in earlier posts, was good enough for a 7% jump in S&P.  Over the last couple of weeks, it rose by 21%.  So does this mean that the bottom is behind us, or is it a bear-market rally like we had from mid-November to the end of 2008?

Well, I am certainly not qualified to answer that question, and neither is anyone else.  The bottom of this bear market will be identified only when the next bull market is well on its way.  However, periods like these illustrate market’s ability to rally very sharply on good news, as well as importance of having a consistent exposure to stocks as opposed to jumping in and out of the market.  You don’t want and can’t afford to miss days like today .

March 24, 2009 at 12:02 am Leave a comment

Consumer Confidence Rebounds Sharply

Consumer confidence is unquestionably important for the economic recovery.  While this metric is not a measure of any specific performance, such as manufacturing activity or unemployment claims, how consumers feel about the future will ultimately decide when this slump will end.

The graph below show that consumer confidence improved dramatically over the recent week.  In fact, it took only five days for it to recover the losses over the last five months.  Of course, it can drop just as quickly, but nevertheless it is a good sign.

March 19, 2009 at 4:08 pm Leave a comment

Netflix at All Time High

Today, Netflix reached an all-time high of $42 per share.  This is a quite remarkable achievement in today’s market.  Please refer to my earlier post in January about Netflix earnings.

March 18, 2009 at 7:27 pm Leave a comment

Good News on the Housing Front

It is quite clear that stabilization of the housing market is an absolute requirement for turning the economy around.  Today, we finally got some good news on that front.  New housing starts jumped 22% and new building permits rose 3% — both much better than expected declines in both metrics.

In other piece of good news, core prices rose 0.2% in February.  This rate is quite benign (not too high) and it is also positive, which puts a damper on deflation fears.

While it is clearly early to call a bottom yet, any positive news are welcome.  Maybe the rally we had last week in the market was justified after all.

March 17, 2009 at 4:53 pm Leave a comment

End of Mark to Market?

Many in the financial industry claim that mark-to-market accounting has been a major contributor to liquidity problems plaguing the banking system.  On Thursday, House begins debates on a possible suspension of this rule.

So, what is mark-to-market accounting?  This simply means that bank’s (or any other business’, for that matter) assets are determined by their fair market value.  This seems simple enough, but what happens if the market for much of these assets has stopped functioning, as is the case for mortgage-backed securities?  It means that these securities should be reported at nearly zero prices, which dramatically drags down the balance sheet, and forces the bank to report huge losses.  Having smaller capital also negatively affects bank’s ability to lend.

This is not to say that mark-to-market rule is solely responsible for this crisis, but it could well have added fuel to it.  In fact, there is a train of thought that suggests that mark-to-market amplifies boom-and-bust cycles by overstating “real” assets, whatever they might be, during the good times, and understating them during the bad.

Suspension of mark-to-market rule will instantaneously bring banks’ balance sheets to much better shape, and it could be a huge boon to the stock market.

For basic explanation of mark-to-market, take a look at this video.

March 11, 2009 at 4:18 am Leave a comment

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Leon Shirman's long-term investment philosophy is summarized in his book, “42 Rules for Sensible Investing”, also available from Amazon.

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