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Remaining on Guard…

Posted by Larry Doyle on April 4, 2009 10:07 AM |

I much prefer a rallying stock market, but I am not a day trader trying to catch moves for quick flips. I look for changes in economic fundamentals (incorporating both private sector and public sector inputs), assess those changes with market technicals (overbought and oversold conditions), and position myself accordingly.

The big wild card in current analysis is the impact of public sector inputs. Many of the maneuvers utilized by the Treasury and Federal Reserve have never been used prior to this economic downturn. Are they working? To what extent? What are the unintended consequences? What is the time delay from implementing a program to measuring its impact on the economy? These questions are the topics of protracted discussions by economists, bankers, analysts, and money managers around the globe. I’d also like to address them here at Sense on Cents.

My market instincts tell me that programs injecting trillions of dollars across wide swaths of the market are not without costs. These costs in the form of “crowding out“, distorted competition, changed behaviors (AIG undercutting insurance rates), moral hazards, and inflation are very real. The challenge is assessing the risks of these long term costs versus the necessity of providing sufficient capital and liquidity backstops to support the economy. 

I do think a particular challenge for our economy at this juncture is the public’s view of providing more bailout money. I heard more than a few times this week Secretary Geithner indicating that the domestic banking system may still be sitting on $1 trillion in embedded losses. Will the administration ask for another large capital outlay? Will Congress grant it? Will the public accept it? 

To that end, the relaxation in the mark-to-market will provide enormous capital relief to the Federal Home Loan Bank system, Freddie Mac and Fannie Mae, and a wide number of banks. I personally think it is a lot of smoke and mirrors to protect a number of institutions from realizing real losses. Believe me, Freddie Mac, Fannie Mae, and the FHLBs are not overly complicated portfolios. They do not own distressed, highly leveraged CDOs.

I am also very concerned about the pending defaults in the commercial real estate markets. While some owners of commercial real estate may be able to refinance existing mortgages as they come due, there will be plenty of mortgages defaulting. Will the commercial real estate industry receive a multiple hundred billion dollar bailout? I have to believe they will ask for one.  

On the plus side of the ledger, there are hints of positive developments within housing. New home sales and housing starts show signs of turning up. I want to see a few months worth of these numbers, though, because home prices continue to decline, unemployment is moving higher, and consumer spending is still anemic.

In regard to interest rates, I am concerned here as well. Yesterday, long term interest rates moved appreciably higher. Those rates have completely retraced the downward move that resulted from the Federal Reserve’s announcement of quantitative easing. If the Dow is fairly priced at 8000, I do not think the 10yr U.S. government bond represents any sort of value at 2.90%. One of those valuations has to give. 

In regard to the G-20, not surprisingly the powers that be put a happy face on the proceedings, as well they should. There remain more questions than answers. In thinking through all of the pronouncements, I keep wondering how they intend on “jumpstarting international trade.”

In summary, we have had a very nice 4 week rally in equity markets and seeing postive returns in the monthly statements is nice. In reading a market review this morning in the Financial Times, Beware the Bear Market BounceI was struck by the fact that the S&P 500 has rallied 23% from the lows 4 weeks ago. My feelings are that fundamental analysis in the market remains very clouded, as I have highlighted in this piece, and that the market is currently dominated by short term, technically focused traders. That 23% level just so happens to be a Fibonacci Retracement level. 

Is it time to take profits and sell positions?

In summary, I am remaining on guard!!


  • Bill


    Or is it time to continue working hard and staying cautious and prudent with investments, especially when major institutions like the NY Times are threatening to shut down the Boston Globe, which it owns, if it doesn’t receive major concessions from the unions.

    Remain on guard.

    • Larry Doyle

      The business model for print news has DRAMATICALLY changed given the growth in the internet.

      When an individual has access to today’s news almost instantaneously via the web with analysis by experts such as you get here at Sense on Cents (MAJOR LOL) then why wait for the print version tomorrow…

  • lizzy

    It sounds like a huge rally when they say that the S & P is up by 23%, but the earlier decline was so severe that the stocks are still way down. The equity increase or decline doesn’t concern me as much as all the debt associated with the budget and the bailouts. At this rate I think that severe inflation or default of U. S. debt is unavoidable. I have a fair percentage of cash in my IRA. I saw a very brief piece in Marketwatch about putting real estate into IRAs. Do you have any ideas about the advisability of such a move. What factors should I consider and are there helpful sources I should consult. I have been looking for articles about the G-20. There are several things today at There was a piece from der Spiegel with some commntary about the summt generally and a good discussion of the growth in the US money supply.

    • Larry Doyle


      Investing in real estate can be a great way of generating solid returns with regular cash flow. That said, it is not without plenty of risks.

      Risks are a lack of liquidity (ability for you to sell if desired).

      Let’s Get Real About Real Estate

      Hope this provides a decent starting point for you.

      The level of debt in our economy should concern EVERYBODY. I was having this conversation with my better half last night and I do not think the general public has any real appreciation for it.

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  • oowawa

    Hi Larry. I’m used to reading your posts over at No Quarter, but this is my first visit here. Good looking site! Anyway, please excuse the naive question, but I am interested in the possibilities of market manipulation, especially nowadays, and I would like to know: Is there any way you can see that any substantial amount of the taxpayer bailout money could find its way into buying shares in the stock market, and thus artificially raising the Dow Jones Industrial Average? I have been puzzled by the current rally apparently going against market fundamentals.

    • Larry Doyle

      Oowawa…thanks for visiting. Is it impossible for something like that manipulation to happen? No, although I do not think it is likely.

      I do think it is very possible that certain economic statistics get “massaged” if not outright manipulated. The CPI, Consumer Price Index, is often thought to be massaged. Yesterday’s Employment report indicated a revision (revisions are very regular) for January but no revision for February. I do not think I have ever seen that happen.

      Hope you like the site and a number of the resources (primers, market data, economists, money managers, and Thought Leaders).

      • oowawa

        Thanks for the reply & the hospitality, Larry. It does appear that the “massaging” is working, as far as the job-loss numbers are concerned. I sure don’t think the March figure was really “only” 663,000!

        • Larry Doyle

          Rest assured that the February number will be revised to a worse reading next month. I firmly believe the Bureau of Labor is trying to make the case that the January number was the trough and we are now seeing improvement off that level as opposed to providing a revision to February into the 700k+ range and have the market think that the labor situation is worsening.

          I do not like being a conspiracy theorist but havng watched these reports for the last 25 years I can NEVER recall a revision of a report from two months prior without some sort of revision to the prior month.

  • Joe

    lizzy, it can be problematical to invest in real estate in an IRA. I looked into it a couple years ago and assume the situation has not changed. It is legal, but most IRA custodians are not set up to handle real estate and don’t permit it. You have to place those funds with certain special custodians, and there are higher fees associated. Plus, you cannot deduct expenses normally associated with real estate, such as taxes, depreciation, insurance, maintenance, etc. Bear in mind also that real estate is typcially a longer term holding, any gains from which are taxable at the long term cap gains rate. But with Obama and the democratic crowd in charge, who knows what will happen on the tax rate front. An alternative might be a REIT. Larry might have some better ideas on alternatives.

    • Larry Doyle


      Thanks for sharing your professional insights. I do have a small real estate holding in my IRA but you are right that it is a little bit of a technical challenge to manage it.

      Your other insights are appreciated and exceed my base of knowledge. To that end, I sincerely appreciate your sharing them. I hope you will share other insights as well. Ultimately, the more we share the more we all can learn.

      Please visit and comment often!!

  • donnie

    Hi Larry still checking in and appreciate the info from you and your readers.Thanks for keeping a eye on this mess for us.

  • lizzy

    Larry and Joe,
    Thanks for the information about real estate and IRAs. I hadn’t heard of the possibility before. I know that real estate is an illiquid asset. Since I live in New York City, I would have to have a mortgage I’m sure. In this economy I don’t want to assume debt. The attraction of real estate is that if there is inflation hopefully it will increase in value rather be eroded.

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