The stock market mounted a fairly impressive rally this week, amounting to a rebound of about 17 percent off the Nov. 20 low. It also moved off the deeply “oversold” levels that were showing on some indicators I look at, some of which were at levels comparable to the market crashes of 1929 and 1987.
However, as of Friday, my short-term indicators were showing that the Dow has in fact moved into “overbought” territory. That’s not very worrisome in itself; these indicators almost always hit steeply overbought levels on any rebound from a sharp decline, and they can remain in overbought territory for some time while the index continues to post new highs for the move. But it’s at least a sign that the strongest gains for this move may already have been made and there may be some degree of pullback due.
Possibly more troubling is a divergence between the Dow industrials and the Dow transportation average. Back in the spring, in my former blog for The Post and Courier (which I gather has now been taken offline), I identified a Dow Theory sell signal after the transports hit a new all-time high while the industrials remained well below their own record high. The current situation isn’t nearly as significant, but it may be another signal that a downdraft lies ahead: The industrials as of today are back above all their October lows, while the transports remain below the short-term lows set on Oct. 9 and 15. In other words, the transports haven’t recouped as much of their losses as the industrials have.
Last spring, I was wondering how it was possible for the transportation average to rise to an all-time high at the same time fuel prices were doing the same thing; now I’m wondering why the transports are looking weaker than the industrials at a time when fuel prices have been falling pretty hard. It strikes me as an imbalance with at least modestly bearish implications.
There are plenty of possible news hooks due next week that could spark a decline, but the one that analysts and economists are the most worried about is Friday’s report on the national employment situation for November. Given the increases in weekly initial claims for unemployment insurance this month, it’s likely the unemployment rate will have risen substantially.
Of course, that’s already bad news for people who’ve lost their jobs, but from the perspective of economists and brokerage house analysts, the report will be bad news because it will suggest that “consumers” (who of course are mostly workers) will be spending less in the weeks and months ahead, further hampering corporate profits. I’ve never figured out why the bean-counters and MBAs always want to respond to slower sales by cutting jobs and then can’t seem to understand why their sales drop even more, but I expect we’ll be seeing more of that kind of head-scratching next week.
Friday, November 28, 2008
Wednesday, November 26, 2008
Off Balance
The economic news the past few days has been pretty thoroughly awful: a bigger decline in third-quarter gross domestic product than previously estimated, declines in consumer spending, sales of new houses, industrial production, consumer confidence, etc. etc. Yet the stock market has been rising.
Some of the financial media are attributing the gains to “bargain-hunting,” or speculative buying of beaten-down shares in the belief that the selloff of the past several weeks was overdone. But that strategy would have to be based on an additional belief that the economy won’t continue to deteriorate, and I don’t see much indication that any such belief is widely held (whether true or not).
Another possible cause of the rebound: Maybe investors have decided that the steps being taken by Washington to stem the economic washout will actually work, finally – at least as far as Wall Street’s needs are concerned.
For example, this week Treasury Secretary and former Goldman Sachs CEO Henry Paulson announced that we (you and me, taxpayers) are going to give the nation’s fourth-largest banking company, Citigroup, an additional $300 billion in loan guarantees and a $45 billion cash infusion, on top of the $25 billion we already handed them in the first round of “TARP” investments, which of course did us no discernible good.
Citigroup, as of Sept. 30, reported total assets of $2.05 trillion. You would think that might be enough to enable them to cover their own bad bets. And indeed, the company reported total liabilities of just $1.92 trillion, leaving them with $126.1 billion in stockholder equity.
However, like many other large financial companies, Citigroup has what it refers to (in its latest financial filing with the Securities and Exchange Commission) as “off-balance-sheet arrangements.” As the name implies, these “arrangements” enable companies to take liabilities off their balance sheets by setting up a separate business entity, called a “special-purpose entity,” or SPE. The liabilities are, as Citigroup explains, “recorded on the balance sheet of the SPE and not reflected on the transferring company's balance sheet, assuming applicable accounting requirements are satisfied.” Although SPEs were used by the notorious Enron Corp. to deceive investors and regulators, they’re perfectly legal when used appropriately.
So how much has Citigroup taken “off-balance-sheet” by this method? Again, according to its latest filing with the SEC, the company’s “total involvement” in off-balance-sheet arrangements was $1.29 trillion at the end of September.
Now, it’s very unclear how much of that “involvement” might end up back on Citigroup’s balance sheets if it were required to “consolidate” it, as the Financial Accounting Standards Board has suggested it might decide to decree. But just for the sake of argument, if we suppose that the company were forced to put the whole amount back on its statement of liabilities, the effect would be to drop its stockholder equity from a positive $126.1 billion to a negative $1.16 trillion.
Based on its officially reported positive equity, Citigroup currently has stockholder equity per share, or “book value”, of $23.13. In normal times, stocks of major companies customarily sell for a multiple of book value, but Citigroup’s shares currently are trading below book value. Today’s close, $7.05, was just 30 percent of reported book value; at the low on Friday, before the latest handout was announced, the stock closed at just 16 percent of book value.
On the other hand, if my hypothetical numbers above were used, Citigroup would have a book value of minus $212.87 per share.
So maybe the reason Citigroup’s shares are selling below reported book value is that investors are worried that Citigroup may, indeed, have to “consolidate” some significant portion of its off-balance-sheet liabilities, which would mean its current reported book value is a wee bit unrealistically high. And maybe that has something to do with why our Secretary of Wall Street is so anxious to hand the company big piles of our money.
Some of the financial media are attributing the gains to “bargain-hunting,” or speculative buying of beaten-down shares in the belief that the selloff of the past several weeks was overdone. But that strategy would have to be based on an additional belief that the economy won’t continue to deteriorate, and I don’t see much indication that any such belief is widely held (whether true or not).
Another possible cause of the rebound: Maybe investors have decided that the steps being taken by Washington to stem the economic washout will actually work, finally – at least as far as Wall Street’s needs are concerned.
For example, this week Treasury Secretary and former Goldman Sachs CEO Henry Paulson announced that we (you and me, taxpayers) are going to give the nation’s fourth-largest banking company, Citigroup, an additional $300 billion in loan guarantees and a $45 billion cash infusion, on top of the $25 billion we already handed them in the first round of “TARP” investments, which of course did us no discernible good.
Citigroup, as of Sept. 30, reported total assets of $2.05 trillion. You would think that might be enough to enable them to cover their own bad bets. And indeed, the company reported total liabilities of just $1.92 trillion, leaving them with $126.1 billion in stockholder equity.
However, like many other large financial companies, Citigroup has what it refers to (in its latest financial filing with the Securities and Exchange Commission) as “off-balance-sheet arrangements.” As the name implies, these “arrangements” enable companies to take liabilities off their balance sheets by setting up a separate business entity, called a “special-purpose entity,” or SPE. The liabilities are, as Citigroup explains, “recorded on the balance sheet of the SPE and not reflected on the transferring company's balance sheet, assuming applicable accounting requirements are satisfied.” Although SPEs were used by the notorious Enron Corp. to deceive investors and regulators, they’re perfectly legal when used appropriately.
So how much has Citigroup taken “off-balance-sheet” by this method? Again, according to its latest filing with the SEC, the company’s “total involvement” in off-balance-sheet arrangements was $1.29 trillion at the end of September.
Now, it’s very unclear how much of that “involvement” might end up back on Citigroup’s balance sheets if it were required to “consolidate” it, as the Financial Accounting Standards Board has suggested it might decide to decree. But just for the sake of argument, if we suppose that the company were forced to put the whole amount back on its statement of liabilities, the effect would be to drop its stockholder equity from a positive $126.1 billion to a negative $1.16 trillion.
Based on its officially reported positive equity, Citigroup currently has stockholder equity per share, or “book value”, of $23.13. In normal times, stocks of major companies customarily sell for a multiple of book value, but Citigroup’s shares currently are trading below book value. Today’s close, $7.05, was just 30 percent of reported book value; at the low on Friday, before the latest handout was announced, the stock closed at just 16 percent of book value.
On the other hand, if my hypothetical numbers above were used, Citigroup would have a book value of minus $212.87 per share.
So maybe the reason Citigroup’s shares are selling below reported book value is that investors are worried that Citigroup may, indeed, have to “consolidate” some significant portion of its off-balance-sheet liabilities, which would mean its current reported book value is a wee bit unrealistically high. And maybe that has something to do with why our Secretary of Wall Street is so anxious to hand the company big piles of our money.
Tuesday, November 25, 2008
All Outside
I pulled out C.G. Jung’s Psychology and Alchemy (volume 12 of the collected works) last week for the first time in several years. It’s a large book, and a lot of it is aimed strictly at the practicing Jungian psychologist and is fairly unintelligible. However, the opening essay, “Introduction to the Religious and Psychological Problems of Alchemy,” is a lot more interesting than it sounds. Anyone who’s read Jung’s “Modern Man in Search of a Soul” or “The Undiscovered Self” will recognize some of the same themes. Here are some points I consider exceptionally well-put:
“Western man is held in thrall by the ‘ten thousand things;’ he sees only particulars, he is ego-bound and thing-bound, and unaware of the deep root of all being. ... The Western attitude, with its emphasis on the object, tends to fix the ideal – Christ – in its outward aspect and thus to rob it of its mysterious relation to the inner man.”
“Christ the ideal took upon himself the sins of the world. But if the ideal is wholly outside, then the sins of the individual are also outside, and consequently he is more of a fragment than ever, since superficial misunderstanding conveniently enables him, quite literally, to ‘cast his sins upon Christ’ and thus evade his deepest responsibilities – which is contrary to the spirit of Christianity. ... If the supreme value (Christ) and the supreme negation (sin) are outside, then the soul is void: its highest and lowest are missing.”
“It may easily happen ... that a Christian who believes in all the sacred figures is still undeveloped and unchanged in his inmost soul because he has ‘all God outside’ and does not experience him in the soul. His deciding motives, his ruling interests and impulses, do not spring from the sphere of Christianity but from the unconscious and undeveloped psyche, which is as pagan and archaic as ever. The great events of our world as planned and executed by man do not breathe the spirit of Christianity but rather of unadorned paganism. ... Christian civilization has proved hollow to a terrifying degree: it is all veneer, but the inner man has remained untouched and therefore unchanged. His soul is out of key with his external beliefs; in his soul the Christian has not kept pace with external developments. Yes, everything is to be found outside – in image and in word, in Church and Bible – but never inside. Inside reign the archaic gods, supreme as of old. ...”
“The Christian missionary may preach the gospel to the poor naked heathen, but the spiritual heathen who populate Europe have as yet heard nothing of Christianity. Christianity must indeed begin again from the very beginning if it is to meet its high educative task. So long as religion is only faith and outward form, and the religious function is not experienced in our own souls, nothing of any importance has happened. It has yet to be understood that the mysterium magnum is not only an actuality but is first and foremost rooted in the human psyche. The man who does not know this from his own experience may be a most learned theologian, but he has no idea of religion ....”
“Western man is held in thrall by the ‘ten thousand things;’ he sees only particulars, he is ego-bound and thing-bound, and unaware of the deep root of all being. ... The Western attitude, with its emphasis on the object, tends to fix the ideal – Christ – in its outward aspect and thus to rob it of its mysterious relation to the inner man.”
“Christ the ideal took upon himself the sins of the world. But if the ideal is wholly outside, then the sins of the individual are also outside, and consequently he is more of a fragment than ever, since superficial misunderstanding conveniently enables him, quite literally, to ‘cast his sins upon Christ’ and thus evade his deepest responsibilities – which is contrary to the spirit of Christianity. ... If the supreme value (Christ) and the supreme negation (sin) are outside, then the soul is void: its highest and lowest are missing.”
“It may easily happen ... that a Christian who believes in all the sacred figures is still undeveloped and unchanged in his inmost soul because he has ‘all God outside’ and does not experience him in the soul. His deciding motives, his ruling interests and impulses, do not spring from the sphere of Christianity but from the unconscious and undeveloped psyche, which is as pagan and archaic as ever. The great events of our world as planned and executed by man do not breathe the spirit of Christianity but rather of unadorned paganism. ... Christian civilization has proved hollow to a terrifying degree: it is all veneer, but the inner man has remained untouched and therefore unchanged. His soul is out of key with his external beliefs; in his soul the Christian has not kept pace with external developments. Yes, everything is to be found outside – in image and in word, in Church and Bible – but never inside. Inside reign the archaic gods, supreme as of old. ...”
“The Christian missionary may preach the gospel to the poor naked heathen, but the spiritual heathen who populate Europe have as yet heard nothing of Christianity. Christianity must indeed begin again from the very beginning if it is to meet its high educative task. So long as religion is only faith and outward form, and the religious function is not experienced in our own souls, nothing of any importance has happened. It has yet to be understood that the mysterium magnum is not only an actuality but is first and foremost rooted in the human psyche. The man who does not know this from his own experience may be a most learned theologian, but he has no idea of religion ....”
Sunday, November 23, 2008
Imagine This
Imagine a world where no one ever dies, no one ever suffers any pain, no one ever loses anything they have, no one ever has to say goodbye to someone they love. Imagine a world where everything is always in flower, radiant with sunshine, suffused with warmth and pleasure, echoing with happiness. Imagine a world where every taste of life is delicious, every stroke of fortune is warm and fuzzy, every word is encouraging, every sight is a delight to the eyes.
Imagine such a world if you can, if you wish – and then forget it.
The world in which we actually live is very different from Paradise. People die daily, many for the wrong reasons. We all suffer pain. Everything physical passes into nonbeing, so we inevitably lose whatever we have, and anyone or anything we love will be ripped away from us sooner or later. The seasons change, the world rolls along its complicated path, and we take from it what we must have, if we can.
Accepting that we live in such a world is wisdom. Believing that we can live in the imaginary world of endless, perfect self-gratification is foolishness.
The Founding Fathers of the United States were philosophers. There’s an important distinction to be found in the words of the Declaration of Independence: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.”
The distinction is this: We have a right to pursue happiness, but not a right to be happy.
Further, each of us has a right to define happiness.
But if we decide to define happiness as Paradisal existence, free of any of the consequences that common sense would admit are integral to human existence, then we are asking too much. What we must acquire and spend to obtain such a life is too costly for ourselves and everyone around us. My Paradise creates your Hell.
Imagine such a world if you can, if you wish – and then forget it.
The world in which we actually live is very different from Paradise. People die daily, many for the wrong reasons. We all suffer pain. Everything physical passes into nonbeing, so we inevitably lose whatever we have, and anyone or anything we love will be ripped away from us sooner or later. The seasons change, the world rolls along its complicated path, and we take from it what we must have, if we can.
Accepting that we live in such a world is wisdom. Believing that we can live in the imaginary world of endless, perfect self-gratification is foolishness.
The Founding Fathers of the United States were philosophers. There’s an important distinction to be found in the words of the Declaration of Independence: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.”
The distinction is this: We have a right to pursue happiness, but not a right to be happy.
Further, each of us has a right to define happiness.
But if we decide to define happiness as Paradisal existence, free of any of the consequences that common sense would admit are integral to human existence, then we are asking too much. What we must acquire and spend to obtain such a life is too costly for ourselves and everyone around us. My Paradise creates your Hell.
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