San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Friday, August 23, 2013

New Home Sales Will Not Hurt Stocks

As investors and investment gurus continue to fumble around seeking some reason why the next Great Recession should occur before the end of the year, today's excuse for the next bear market is that single family home sales decreased by 13%.  Here is a headline from, "Sales of new US single-family homes fell sharply to the lowest level in nine months, a sign that higher rates may slow the recovery's momentum."   The conclusion I am expected to draw from the report is that the Socialist Democracy of America is teetering on the brink of another recession and it is time to sell all of my stocks and stuff the cash in my mattress.  Does any of this make sense?  We will look at the graphs below to answer that question.  The first graph is of "New One Family Houses Sold" since 1963.  Notice how housing sales were relatively stable around 600,000/year from 1963 through 1993.  Then, around that time, the federal government initiated a whole series of programs designed to get people who were not qualified to own a mortgage into a home.  Notice how new home sales skyrocketed to the peak in 2007 when the bubble burst.  We all know what happened then.  Also notice how the housing market bottomed out in 2010 and has since started to rise.  Although not yet back to the 600,000 units per year level, the housing market has risen nicely to the 400,000 units per year level......until now!!!!  Sound the alarm.  This recent blip of a downturn is going to destroy us all!!!!

Graph of New One Family Houses Sold: United States

The clear intimation of the investment advisers who would have us believe the state of housing is directly related to the economy and the stock market is an unfounded economic belief.  The two graphs below show the performance of the stock market since the late 1950s and the rate of interest charged for mortgages since 1972.  There is enough overlap between these two graphs and the housing sales graph above to draw some conclusions. Let's begin with the mortgage interest rate, which is the alleged culprit in the next expected market crash.
Mortgage interest rates were above 10% for the entire period from 1978 through 1987.  Furthermore, they were above 10% for almost the entire period of time from 1978 through 1991.  Did these astronomically high rates, by today's artificially low standard, destroy new home sales?  Look at the above graph for the answer.  New home sales experienced a significant drop from 1978 to 1982.  It would appear as if the data is supporting the argument, would it not?  But that is not the end of the story.  Home sales dropped to a low in 1983 because of the combined impact of two deep recessions in the early 1980s.  From 1983 until 1987 new home sales more than doubled.  During that exact same period of time interest rates ranged from 10% to 14%, and actually rose from 12.5% to 14% during that period of increased home sales.  If high or rising rates cause home sales to decline and recession to occur, why did not not happen from 1983 through 1987?  Quite clearly there is no economic connection between interest rates and new home sales.  Is there a connection to the stock market?  Look below.

Graph of 30-Year Conventional Mortgage Rate

This graph of the S & P 500 shows what we all know.  Stock prices rose significantly during the great bull market that started in 1983.  Many economists believe this secular bull market was a direct result of the Reagan tax cuts.  Regardless of the cause, the market marched inexorably upward from 1983 until the tech bubble burst in 2000.  Is there a correlation between the stock market and housing starts?  From 1985 until 1990 new housing starts dropped by more than half, from over 800,000 units to 400,000 units.  During that exact same time the stock market rose by over 150%, experiencing consecutive years of positive total returns from 1985 through 1989.  If new home sales are so crucial for the stock market, please explain how a period of time in which new home sales were halved was also a period of time during which the stock market more than doubled?  Quite obviously, there is no correlation between new home sales and the stock market.

Graph of S&P 500 Stock Price Index

I conclude as I always do.  Folks are scared.  Folks believe we are doomed.  The federal government loves the fact that folks are scared and believe we are doomed.  Fear is the health of government.  Ignorant and beholding media outlets perpetuate the lies of government about the many alleged demons that are just waiting to destroy our lives.  Nothing could be further from the truth.  The fact that so many people do not believe in this market is one of the primary reasons this bull market still has a long way to run.  Count on it, new home sales figures will not hurt stocks.

Thursday, August 22, 2013

Rising Interest Rates Will Not Hurt Stocks

As investment advisers fall all over themselves trying to foolishly predict the next Great Recession they continue to bring up arguments that are not based upon the facts.  I have addressed the crazy idea that stocks are extremely overvalued here.  Earlier this week I addressed the equally wrongheaded idea that the end of quantitative easing is sure to bring about a stock market collapse.  Today I want to address the stupid notion being advanced by many right now that the stock market cannot rise at the same time interest rates are rising.
Thanks to the harmful monetary policies of the Federal Reserve Board the citizens of the Socialist Democracy of Amerika have experienced artificially low rates of interest for several years now.  Those artificially low rates of interest have distorted the capital markets and done harm to the economy.  However, it does not follow that the cessation of a bad policy is going to bring about negative consequences, as so many folks apparently believe.  In fact, just the opposite is the case.  As the Fed begins to curtail the amount of money it is producing out of thin air it will necessarily be the case that interest rates will rise.  When interest rates rise, certain things happen, but not all of them are bad.
First, bonds become cheap.  The price of a bond and the rate of interest are inversely related.  When interest rates drop, as they generally have the past thirty years, bond prices rise.  That is why the bond market has experienced a three decade bull market.  Conversely, when interest rates rise, as they have finally started to do, the price of bonds will drop. Sometimes those price drops can be dramatic.  The fact that we are at a low point in interest rates and rates are starting to rise is another good reason why investors should never own bonds.
Second, it becomes more expensive for companies to borrow money, either via commercial loans or via the bond market.  It is here, we are told, that rising interest rates will hurt the stock market and bring on the third bear market in thirteen years.  Although it is true that rising rates makes borrowing money more expensive, does it necessarily follow that increased costs of borrowing will have a negative impact upon corporate profits and stock prices?  That answer to that question is a resounding NO.  Look at the graph below.  This graph dramatically illustrates the relationship of rising interest rates and the stock market for the past fifty years.  The periods that are shaded in light green are periods of time when interest rates rose.  The dark green line is the Standard & Poor 500 stock market index (log scale).  Examine the graph and notice how it has never been the case that rising interest rates have depressed stock prices.

Ken Fisher is a stock market adviser who bases his recommendations upon a clear understanding of financial history.  He comments upon the above graph by saying:
"The chart spans nine equity bull markets, including the current one, and the 10-Year US Treasury yield has risen during each. Sometimes it rose (on balance) through a full bull and bear; other times it rose intermittently during a bull. Similarly, stocks have risen during periods of falling yields, but yields also dropped during most of the past two bear markets. There just isn’t a meaningful relationship between stocks and bond yields."  (Market Minder)
So, the next time somebody tries to tell you that you should sell your stocks and head to the hills because they are overvalued, or because they are doomed to drop because of the cessation of quantitative easing, or that we are heading into the next Great Recession because interest rates are about to go into a long term period of increase, give them a little lesson in financial history and inform them that you prefer to make your decisions based upon facts, not feeling.  I have been told that I should never let the facts get in the way of a good story but, when it comes to my money, I want the facts.  

Wednesday, August 21, 2013

Ignorant Reactions To Obama's Preposterous Preschool Proposal

I missed the speech by our King in which he proposed a federal-state partnership that would conspire to steal money from certain unimportant people in order to fund government preschools.  It is not surprising that I missed Obama's speech.  Whenever he comes on the television I find myself compelled to immediately change the channel.  If it is one of those unfortunate instances when his speech is being carried by multiple channels I will switch to the Golf channel or a Spanish language soap opera in order to avoid listening to his pontifications.  Despite the fact that I missed his speech, I did not miss the reaction to it found in my Denver Post this week.  In the "Open Forum" section of the newspaper two different people wrote letters to express their opinions about his proposal.  I found them to be quite entertaining.  I also found them to be indicative of what I believe is the position of the majority of the members of the Socialist Democracy of Amerika.  Let me tell you about them.
Bill Jaeger of Golden is Vice President of the Colorado Children's Campaign.  I have never heard of the Colorado Children's Campaign and am not quite sure what it is.  Based upon what Bill wrote I think it is fair to say that the Coloado Children's Campaign is a lobby group that pressures career politicians to sponsor and enact laws that force people who do not have children to pay for the expenses of those who do.  Since it is conducted under the guise of "democracy", it is deemed to be a moral thing when money is stolen from one group and given to another.  As you might have guessed, Bill likes the King's preposterous proposal.  Here is some of what he wrote:
"Investing in young learners is one of the smartest decisions our state can make.  A growing body of research, and the experiences of families who can afford quality preschool, have repeatedly proven this....Every dollar we spend on quality early development programs for the young children who need it most delivers a 7 to 10 percent return on investment per child, per year....A recent national poll shows that 70 percent of Americans support a federal plan to help states expand early education.  Its time for our elected leaders to make this smart investment possible."  Wow, Bill is so wrong I hardly know where to start in my criticism of his position.  Still, I will try.  Allow me to ask a couple of questions of Bill.
First, how does a "state" make decisions?  According to Bill, a state has personal characteristics.  It can gather funds, spend those funds and make decisions about how funds are going to be spent.  I thought a state was simply lines on a map.  I guess I was wrong on that one.  According to Bill, the state is a person with a will and the ability to act.
Not only is the state a person, it (I assume it is neuter) can make "smart decisions about investments".  Now where I come from an investment is something that I use my money for.  When my neighbor makes an investment it is not my investment, it is his.  When my state, who is a person, makes an investment it is not my investment, it is his.  Only my investments are my investments.  This seems rather obvious to me but Bill disagrees.  According to Bill when this person called the "state" extracts money from me against my will and gives it to my neighbor to help him pay for his kids expenses, I have somehow made an investment.  Since I never see an increase in my net worth it is hard for me to figure out how I have realized a positive return on this investment.  That does not keep Bill from calculating my return for me.
According to Bill, the money that is stolen from me and given to my neighbor to pay for his kid's preschool expenses realizes an average annual total return of somewhere between 7 and 10 percent.  Bill does not tell me how he arrived at that number and he does not explain how it is that my net worth fails to go up despite this positive rate of return.  I guess I will just have to trust Bill on this one.  After all, we are doing this for the children!
Marilyn Leff of Denver reacts to a previous letter from a fellow named Mark Larson and takes him to task for the fact that Mark did not think the King's preposterous proposal is a good idea.  Apparently Mark did not see why certain groups of people, always made up of politically defenseless minority groups,  should be forced to pay the bills for other, politically connected, majority groups of people.  Since I did not hear the King's speech I am not aware of the details but according to Marilyn the state of Colorado would raise its share of the money required to pay for these preschools by putting an additional tax on those who smoke cigarettes.  I can't think of a worse idea.  See here, here, here and here for additional posts on the war currently being waged against those who use tobacco in this sad land.  Mark Larson had apparently pointed out that an additional tax on cigarette smokers would be unfair and immoral.  He has that right.  Let's face it.  Cigarette smokers are the SDA equivalent of Jews in pre-WWII Germany.  We can do anything we want to them and they have no right to complain.  They should thank us for all of the tyrannical controls and taxes we put on them.  After all, we are only doing this for their own good.  If they don't thank us, we should banish them to the hinterlands, or worse.
Poor Marilyn is so filled with envy she is incapable of writing a rational response to Mark's assertion that the cigarette tax would be wrong.  Her counter-argument goes like this, "His viewpoint highlights the greed of lobbying groups like the Wyoming Petroleum Marketers Association, of which he is the executive director."  What does the fact that Mark is the executive director of the Wyoming Petroleum Marketers Association have to do with the cigarette tax being proposed to fund government preschool programs?  She doesn't say.  I guess we are all just left to assume that Mark is evil because he is associated with the oil business.  Since he is evil, everything he writes must be wrong as well.  She flat out states that he is greedy, also because he is in the oil business.  I wonder if Marilyn drives a car or heats her home in the winter.  What a hypocrite.
Marilyn concludes her irrational diatribe against Mark by writing, "His comments only highlight the 'me first' attitude of the business that he represents, not an ethic that puts the greater good of the whole community first."  Wow!  Marilyn has really lost touch with reality.  Her envy and greed have caused her to disconnect.  No business makes a profit if it adopts the "me first" mentality.  If Mark's oil business is making a profit it is only because he is giving his customers something they want to purchase for a price they are willing to pay.  It would not surprise me if Marilyn herself is unknowingly one of his customers.  But Marilyn is too envious to see this obvious truth.  She runs to the siren call of socialism that turns state entities into persons and theft into the moral high road.  Praise the state!
Marilyn's "ethic" puts the "greater good of the whole community first".  Now, I wonder, who determines what is the greater good for the whole community?  It would seem to me that having gasoline for my car and fuel with which to heat my home in the winter would have to rise somewhere near the top of the greater good for the whole community scale.  On the other hand, I have a hard time seeing how having money forcibly extracted from me by the government and given to my neighbor to pay for his kid's preschool expenses rises very high on the "greater good for the community" scale, whatever it is.  I don't know for sure but I would guess that Marilyn would flee to the argument that if the majority of the voting members of a particular governmental district agree to take the money of one group and give it to another, that is a good thing.  If I tried to take Marilyn's money at gun-point to pay for my son's preschool she would rightly have me arrested for robbery. When the majority of those who vote in my town agree to do the exact same thing, it is morally good.  Such is life in the Socialist Democracy of Amerika.  Welcome to Marilyn's greater good where the property of the minority is always subject to confiscation for the alleged greater good of the community, whatever that is.

Tuesday, August 20, 2013

Rude Americans On Display At Solheim Cup

I thought about going to witness the Solheim Cup this past weekend.  It was being held at Colorado National Golf Club in Parker, which is not very far from my home.  For those who might not be aware, the Solheim cup is the ladies equivalent of the Ryder Cup in men's golf.  I have never seen the ladies play golf.  I have been to several PGA events, as well as some Senior PGA events, but I have never been to an LPGA event.  I thought it might be fun to watch the women hit the little white ball around a difficult course.  I was deterred by two things.  First, it cost $67 for a one day grounds pass.  I have attended PGA events for both the regular tour and the senior tour and never had to pay anywhere near $67 for a daily grounds pass.  I know the ladies tour is struggling financially but I don't see how charging twice what the men charge is going to help them build a following and solve their financial problems.
The second thing that deterred me was a photograph on the front page of the Saturday Denver Post.  It was a picture of a group of folks who had attending the event on Friday.  For the most part, they were all decked out in red, white and blue.  They had flags draped all over themselves.  They were wearing shirts, shorts and even socks that resembled the holy icon of the Socialist Democracy of Amerika.  I read in the report that followed the photograph that frequent chants of "USA, USA" would erupt from the crowd.  I decided that I wanted nothing to do with a jingoistic patriotic rally.
As it turned out, my decision to not attend the Solheim Cup was a very good one.  I watched a fair bit of the competition on the Golf channel on Saturday and Sunday.  I also read daily reports about it in the newspaper.  What a fiasco it turned out to be.  The stereotypical rude American was on perfect display throughout the three days of the tournament.  But don't just take my word for it.  Here is what Denver Post sports columnist Mark Kiszla approvingly wrote about the tournament:
"A very feisty and very irked Azahara Munoz stopped after hitting her tee shot on No. 10 to scold some American hecklers in the gallery for letting the booze do their talking.  Hey, since when is screaming 'Hook it!' as Spaniard Carlota Ciganda takes a club from the bag considered impolite?  All's fair in love, war and the Solheim Cup.  Munoz obviously took offense at Americans who had the lungs and the gall to actually try to establish a home court advantage of one of golf's few us vs. them events.  As Munoz approached the gallery ropes to teach these fun-loving Americans a little golf etiquette, a male spectator shouted:  'We play football here.'"  Kiszla just does not get it.
Golf is a gentlemen's sport.  It is one of the few activities left in this world where it is wrong to get drunk and scream your lungs out at the opposition players.  Glorying in the fact that idiotic US fans got drunk and heckled the European players does not show class.  It just showcases rude Americans at their best....or worst.  Golf is not "us vs. them".  It is a test of skill between opponents who respect the skill and ability of their opponents.  Creating artificial conflict because of an arbitrary geo-political boundary is just plain stupid.  There is no "home court advantage" in golf.  Try as he might, Kiszla's attempt to turn a golf tournament into a basketball ball game just does not work.  As Munoz explained to the press later, "Carlota was about to hit her drive, and the crowd started screaming.  I said, 'I understand you scream USA! And that is totally fine.  But don't scream when we're playing.  I told the fan 'all right buddy.  C'mon, don't do that.  Its golf, and its a gentlemen's sport.'  I understand all that about screaming for USA.  Go for it.  But don't do wrong things.  Don't scream when she' getting ready to stand over the ball.  That's not cool."  And Ms. Munoz is right.  The US fans were not cool.
I was watching the foursome play on Saturday afternoon.  The game was best ball match play.  There were four matches that afternoon involving sixteen players.  The Americans got clobbered, losing all four matches.  On one hole the US team of Michelle Wie and whoever she was teamed up with purposefully committed a serious error in etiquette by walking off the green and on to the next tee box while the European players were still putting.   They did it twice that I saw.  That is a sign of terrible disrespect for your opponent.  It is totally classless.  It is typically rude American.  The television commentators noted that it was bad etiquette but gave the Americans a free pass because they were displaying "youthful exuberance".  Hogwash. They were just being jerks and they know they were being jerks.  They should have been required to forfeit the round at that point.
Despite the fact that the US women were having their collective lunches handed to them (they ended up losing the three day tournament by a record margin of eight points), the crowds ridiculously continued to chant "USA, USA".  It was as if they were all too drunk or stupid to see what was going on.  Meanwhile the European ladies went about their business in a extraordinarily professional and courteous style.  They played very good golf.  Too bad the fans were too dumb to appreciate it.  It did not take long before I was cheering for the Europeans.  They played the game the way it is supposed to be played.
By Sunday afternoon the handwriting was on the wall.  The Americans were going to lose big.  It was almost over before it started.  Twelve match play rounds were scheduled.  It did not take long before the Europeans had accumulated enough points to guarantee victory.  It was only a question as to how much they were going to win by.  While winning the Cup in convincing fashion the European ladies had nothing but good things to say about their US opponents.  In interview after interview they complimented their opponents on their play.  Meanwhile, as the US ladies arrived in the clubhouse the television cameras focused upon them sitting in the corner sobbing uncontrollably.  It was a fine and disgusting example of total self-absorption.  What selfish jerks they were.
To be fair, several US ladies played with some class.  Christie Kerr, the senior member of the group, appeared to me to purposefully stand next to the green and wait until the European team putted out.  Her behavior had the appearance of trying to make up for the rudeness of her teammates.  In addition, Paula Creamer, the US second seeded player behind Stacey Lewis, showed some class after getting creamed by her opponent, 17 year old Charley Hull.  Hull has only been playing professional golf for six months.  She beat Creamer 5-4.  When the match ended Creamer gave her a big hug and they exchanged friendly words.  Then, in perhaps the most charming moment of the entire tournament, the youthful Hull asked the defeated Creamer to autograph her golf ball!  Creamer laughingly obliged.  Too bad the entire tournament was not characterized by that sort of sportsmanship.  Instead, those who tuned in to watch were treated to another example of selfish, rude and arrogant American behavior.  What a shame.

Monday, August 19, 2013

QE Taper Will Not Hurt Stocks

An article in the Sunday edition of the Wall Street Journal carried this headline, "A Sudden Selloff Slows the Bull Market's Long Run".  The article goes on to report that, "The stock market tumbled last week, hit by disappointing corporate earnings and growing fears that the Federal Reserve is poised to wind down or 'taper' its cheap money policy, known as 'quantitative easing'...the Dow Jones Industrial average fell 2.23% while the broader S & P 500 Index fell 2.1%....Some economists argue current profit margins are unsustainable, and are due to fall once the economy returns to more 'normal' conditions....In normal circumstances signs that the job market is improving and that inflation is around normal would be considered positive for the stock market, but these aren't normal times.  For several years, the Fed has been engaged in unprecedented programs to pump the economy with cheap money....Quantitative easing has entailed large-scale bond purchases by the Fed in order to drive down long-term interest rates....Economists say last week's positive news on the economy increases the likelihood that the Fed will start to wind down this policy sooner rather than later....Cheap money policies have helped drive the stock market to levels considered very expensive by some long-term measures.  The S & P 500 now trades at 24 times average corporate earnings of the last 10 years...such valuations...have historically been associated with poor subsequent returns."  Wow, that's a mouthful.  And so much of it is dead wrong.  Allow me to explain.
First of all, note the general bias of the article.  Calling a 2.1% drop over the period of a week a "selloff" seems a bit hyper to me.  Here is a graph of the VIX, the most popular measure of volatility in the stock market, for the past year:

Chart forVOLATILITY S&P 500 (^VIX)
Yes, there is a bit of an increase in volatility.  Compared to the past year, however, it hardly seems worth pointing out.  It seems as if the author of the article is trying to set up the readers for a prediction of certain stock market doom.  As has been the case throughout this entire bull market, nobody wants to be caught out when the next bear market happens.  The memories of the two previous bear markets still linger.  The VIX was above 80 during the 2008-2009 bear market.  Current machinations do not seem very interesting in light of recent historic reality.
By far the dominant theme of the article, and the dominant theme in the financial press this past week, is the erroneous idea that a reduction in quantitative easing will inevitably result in a bear market in stocks.  This idea is predicated upon the equally erroneous belief that the Federal reserve has been propping up stock prices with phoney money and the stock market is ordained to fall the moment the Fed stops printing this phoney money.  That idea requires some examination.
While it is true that the Fed has dramatically expanded the monetary base as a result of its foolish and misguided policy of quantitative easing, it does not follow that its policy has resulted in a dramatic increase in the supply of money nor that the alleged extra dollars have all gone into the stock market.  Look at the graph below.

As you can clearly see,  the rate of expansion of the monetary base is astronomically higher than the increase in the money supply, as measured by M2.  Why is this so?  Because the money that has been created by the Fed is not being put into the economy by the banks which hold it.  Rather, the banks have made the logical decision to keep those "excess reserves" on deposit with the Fed and earn a guaranteed rate of interest on those deposits.  It is easy money for the banks, at taxpayer expense of course.  The notion that the stock market has risen due to excess money flooding the market is simply not borne out by the facts.
Declaring economic conditions today to be not "normal" is standard practice for financial writers with amazingly short memories.  It seems as if every time there is a change in the stock market or economic conditions we are informed that things are no longer normal.  There is no such thing as normal.  Things change all the time.  Stock market prognosticators who are basing their forecasts upon erroneous concepts of "normal" are as wrong as global warming/climate change advocates who predict dire weather conditions in the future because Denver set a record high temperature last week.  It is all utter nonsense.
The article admits that economic conditions are good and that under "normal" conditions would be most likely resulting in further stock market gains.  Then, by using a wildly irrational and biased metric, the author concludes the stock market is overvalued.  Did you notice how the author assigned a Price/Earnings ratio to the present stock market based upon average corporate earnings for the previous 10 years?  Here is a graph of corporate earnings for the past ten years:

FRED Graph

Do you think the Great Recession had anything to do with the multiple of 24 the author comes up with?  Anyone who would consider this to be a reasonable way to value present stock market levels is a blithering idiot.  This only shows that the author's bias is so strong he will do anything to bring himself to the conclusion that the stock market is overvalued and doomed to dramatically fall in the near future.  Don't believe a word of it.  This bull market still has a long way to run.