GE: A Long-Term Look

I've written before that I value Elliott Wave analysis for it's theoretical value more than it's practical value. I simply haven't found that it can be applied rigorously with any accuracy. I believe it's value is in it's concepts, more loosely applied.

One of the fundamentals of Elliott Wave analysis holds that corrective waves (in contrast to impulsive waves) follow an A-B-C pattern, as shown in the long-term chart of GE above. The A and C waves usually mirror each other.

Both the A and C waves in this example equal roughly 30 points. In addition, wave B retraced 61.8% of wave A. Both 0.618 and 0.382 (it's inverse) are very important numbers to EW analysis as the basic theory states that the golden ratio (and it's inverse) is pervasive in natural systems.

Elliott Wave practitioners would point to this example of GE as proof of the system's predictive ability. I simply find it fascinating, as I do the popular novel featuring the golden ratio, "The Da Vinci Code."

My Favorite (Tech) Things: G1, TweetDeck and Gist

I've had a fair number people ask me recently about some of the new technologies I've been using over the past few months and I thought I'd just share them with you here:


Lately, I've been into all things Google. I now use GMail, Google Calendar, Google Talk and own a G1 (Google phone). Because they are all internet based I no longer have to worry what information is on what device and how to synchronize it all. All the information I need is always at my fingertips no matter what device I'm using.

Speaking of synchronization, I've also been using Mozilla's Firefox browser with Foxmarks. It synchronizes my bookmarks between my desktop and my laptop, an invaluable service for me as I switch between both machines constantly.


Another Firefox plug-in I really like is Wisestamp. It provides a customizable email signature that allows you to include links to sites like LinkedIn, and Blogger. Below is an example:

Jesse Felder
Felder & Company

T +541-389-3345
F +541-389-3326
E jesse@felderandcompany.com

---

Contact Me:

But the coolest thing I've been using for the past year or so is Twitter. Some call it "microblogging" but I don't think that really does it justice. I like to think of it as blog comments or a message board on 'roids. It's a non sequitur paradise.


Some of my favorite Twitter tools are:

-Mr. Tweet: helps you find new and interesting people to follow
-Twitter Karma: helps organize your followers and who you're following
-TweetDeck: hands down the best twitter client out there

Follow me @jessefelder

Probably the one new service I am most eagerly anticipating right now (shameless plug to get an early trial?) is Gist. From the company: "Gist is an online service that helps you build stronger relationships. By connecting your inbox to the web, you get business-critical information about key people and companies."


Play it, Johnny.

My Favorite Things - John Coltrane

UPDATE:

I just got my invitation to the Gist beta from robert@gist.com (@robertatgist on Twitter) and I already love it. It brings together all of your contacts from Outlook, FaceBook, LinkedIn and GMail into one, user-friendly interface.

When you pull up a contact page you can see a history of your recent correspondence with them, links and attachments you've shared and any relevant news for that person in addition to their contact information - brilliant, and long overdue. Here's what Gist Ceo, Tom McCann's contact page looks like:


Bravo, Gist.

Send Robert an email for your own invitation to the Beta at Robert@Gist.com

Bend Home Prices Are Getting Cheaper [Obvious]

The chart above, courtesy of the Bratton Report, shows the awesome decline in Bend home prices over the past few years. We've now seen home prices here in town fall over 40%!

Today the Wall Street Journal ran a piece arguing that, "the relative cost of owning versus renting is swinging back in favor of homeownership in some U.S. markets, buoyed by several quarters of sharp declines in home prices." Here are the details:

Over the past 18 years, after-tax mortgage payments have averaged 26% more than rent payments, according to Green Street Advisors, a real-estate consultancy based in Newport Beach, Calif. In 2006, at the height of the housing bubble, mortgage payments reached as high as 66% more than rent payments. But by the end of 2008, average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300, assuming a rate of 5.5% on a 30-year fixed mortgage. That means mortgage payments averaged just 24% more than rent payments, the narrowest gap since 2001.

Applying the same math to Bend, the median after-tax mortgage payment now amounts to $903 ($233,000 median home price = $186,400 mortgage with an after-tax rate of 4.125% = 5.5% adjusted for a 25% tax bracket) versus median rent of $859. This amounts to a mere 5% disparity which is significantly more attractive than the national average.

After the crash we've seen in local home prices this should come as little surprise. However, it doesn't mean that prices won't continue to fall.

In fact, according to the measure used by National City (famous for calling Bend the most overpriced market in the country), despite the dramatic decline we've already witnessed home prices have another 15% to fall before they become fairly valued:


I guess this is what Mayor, Oran Teater meant when he told the Bulletin over three years ago that, "it used to be that when the state caught a cold, Bend caught pneumonia." What he didn't anticipate is that it didn't just "used to be" like that; it still is. The more things change the more they stay the same.

Ultimately, it makes more sense to buy versus rent today than it did a couple of years ago. There are certainly attractive opportunities out there in the local market right now. However, I still don't think it makes sense to anticipate a bottom any time soon.

Sources:
Renters Lose Edge on Homeowners
Nick Timiraos
The Wall Street Journal
February 25, 2009

Housing Valuation Analysis
National City/PNC Economics

Bank of Obama: Pay to the Order of Jesse Felder

The New York Times recently totaled up the government's bailout tab and found that it amounts to nearly $9 trillion!!! And to think people were pissed off about the original $700 billion Paulson Plan, aka the TARP.

The total of all the new initiatives works out to roughly $75,000 per taxpayer. If you'd rather receive that amount personally or send it to a friend, you can now go to BankofObama.org and cut your own check.

Still, it might be hard to find a bank these days capable of cashing a real $75,000 check, let alone one to make good on phony government paper.

Sources:
Adding Up the Government’s Total Bailout Tab
The New York Times
February 4, 2009

The Escher Economy

I've been an M. C. Escher fan since I was a kid. I turns out his drawings make for perfect illustrations of the classic cycles within the economy:




(HT, Ritholtz)

Source:
M. C. Escher - Economist
Mark McHugh
Across the Street
February 21, 2009

Raging Bull: Feeling Like Jake LaMotta

(Click for video)

On Friday, while the stock market was getting pounded yet again, I posted the following over on Twitter:

I've never been more bullish on the general stock market in my career than I am right now, fwiw. 10:51 AM Feb 20th

Once-in-a-generation opportunity for long-term investors here. Pounding the table! 10:51 AM Feb 20th

To expand on this idea (beyond Twitter's 140 character limit): this is the cheapest stock market in decades, extremely oversold and sitting on long-term support and current investor sentiment is a contrarian's wet dream.

Ironically, the hardest thing to do right now as an investor is to stand up in the face of unprecedented negativity and proclaim unreserved bullishness. I believe, even beyond the investing world, that the hardest thing is usually the right thing.

And that's why I'm doing my best Jake LaMotta impression these days.

What Opportunity Looks Like

Today's selloff has taken the S&P 500 back to its November 2008 lows, once again slightly below the 2002 lows set during the last bear market. As the RSI at the top of the chart shows, the stock market has not been this oversold in more than 25 years.

Make no mistake: the convergence of support and the long-term uptrend right here is nothing but bullish. Many investors are obviously throwing in the towel today but I ain't giving up that easy. Stocks are damn cheap and I view this as a once-in-a-generation buying opportunity. Right now, when it feels darkest, with rational analysis and emotional fortitude, future fortunes are being made.

LEI: Least Expected Incidence

I'm not a big fan of economists but one guy I do respect is Paul Kasriel, aka "The Econtrarian" (great name) and Director of Economic Research at Northern Trust. In his latest missive titled, "The Great Depression – Just the Facts, Ma’am," he finishes with this:

We can debate whether the federal government should increase any of its spending. But the facts of the 1930s appear to be pretty clear – monetized increased federal government spending does result in increased real economic activity in the short run.

The economic data are likely to be abysmal through the first half of this year. The popular media will reinforce the gloom of the data. The same pundits who did not see this downturn coming will not see the recovery coming either. My advice to you is to keep your eye on the index of Leading Economic Indicators. If history is any guide, the LEI will signal a recovery well ahead of the pundits.

Today, the Leading Economic Index for January was released and guess what it showed: the second consecutive monthly increase. Good things happen when you least expect them. Is there anything less expected than an economic turnaround right now?

Getting Better - Smash Mouth

A Bigger Bargain Than Buffett Bought

One of the complaints people made about Warren Buffett's investments in financial companies last year was that regular investors weren't able to secure similar terms for their own portfolios. In 2008, Buffett invested in companies like Goldman Sachs and General Electric receiving preferred stock that pays a dividend of 10% and warrants to purchase common stock at a set price.

Well those people should take a second look. Right now, regular investors can secure terms even better than the Oracle of Omaha. GE common stock currently trades at a 50% discount to the strike price on Buffett's warrants AND currently pays a dividend yield significantly greater than 10% (this may be reduced in the near future, however, to help maintain GE's AAA credit rating).

Instead of taking advantage of the opportunity, however, the same folks who criticized his superior terms are now calling Warren an idiot for overpaying. You just can't please some people.

"The Catastrophe So Far"

I typically refrain from commenting on politics as I'm politically agnostic and believe that the political environment typically has little impact on the financial markets. However, the stock market's reaction to the administration has been simply uncanny. We've now seen the worst post-election stock market performance in history. As the cartoon above illustrates, the stock market has reacted very poorly to the administration's attempts to deal with the current financial crisis.

There is a growing feeling, at least among the financial community, that the administration is "winging it" and may be in over their heads. The last thing I want to do is endorse partisan politics but Karl Rove's editorial in today's Wall Street Journal speaks to these concerns well. So far, the administration has failed to answer this type of criticism with confident, decisive and detailed action and communication and until they do, the economy and financial markets will continue to suffer from a crisis of confidence.

Sources:
Editorial Cartoon
Chip Bok
February 18, 2009

Is the Administration Winging It?
Karl Rove
The Wall Street Journal
February 18, 2009

Cheapest Stock Market In Decades

Everyone knows that the stock market has been roughly cut in half over the past 18 months or so. We're basically seeing a 50% off sale in stocks right now but how do we know if they are really cheap?

Let's take a look at the numbers. The chart below plots the S&P 500 Index's price-to-earnings ratio over the past 50 years with its average over that time. (I like to use an average of the trailing 5 years' earnings to reduce the noise level - ala, John Hussman).


As the chart shows, this is the cheapest p/e we've seen in over 20 years. Not since the early 1980's have stocks been this cheap relative to their earnings.

This next chart looks again at earnings but in a different way. The "Fed Model" is a tool compares the earnings yield of stocks to the yield on the Long Bond to determine their relative attractiveness (again, I use 5-year trailing earnings, rather than forward earnings, divided by the yield on the Long Bond).


The chart above shows the ratio of the S&P 500's actual price level divided by the Fed Model's hypothetical valuation. At no time during the past 50 years have stocks been this attractive using this measure.

The next chart again uses the Long Bond to determine the relative cheapness of stocks. It uses the S&P 500 dividends, however, rather than earnings. Like the previous chart, it shows that stocks haven't been this cheap relative to the Long Bond in at least 50 years.


The bottom line is stocks are cheap - and not just cheap - they are cheapest we've seen for decades. Maybe this is why the most successful investor in the history of the world has decided to go "all in."

Source data:
Online Data Robert Shiller
http://aida.econ.yale.edu/~shiller/data.htm

Two Charts Diverged

Stocks are selling off this morning in a fashion reminiscent of late last fall. Blame it on that drunk at the G7; blame it on the Keebler elf but the cause doesn't really matter for our purposes.

What I'd like to look at, specifically, is the technical similarity to the selloff of October and November of last year. The chart below shows the S&P 500 and, below it, the Volatility Index.


Typically, as stocks make new lows, the VIX moves in the opposite direction and makes new highs. However, last November when the S&P took out its October lows, the VIX did not make a concomitant new high. That divergence led to a significant rally.

Similarly, as stocks make new lows for 2009 today, the VIX is once again diverging in failing to make a new high.


This is a bullish development and it's pretty obvious with this renewed selling pressure that the bullish path right now is "the one less traveled by." In other words, it's a contrarian's playground.

Will Smith on Success

(Click for video)

HT Alwyn Cosgrove

Clusterf#@k to the Poor House - Wall Street Bailout

The Daily Show With Jon StewartM - Th 11p / 10c

Clusterf#@k to the Poor House - Wall Street Bailout

Daily Show Full Episodes
Important Things With Demetri Martin

Funny Political News
Joke of the Day

$550 Billion Disappeared in "Electronic Run On the Banks"

Over the weekend I came across an enlightening video over at Live Leak:


In the video, Rep. Kanjorski discusses the happenings surrounding the Lehman bankruptcy and the Reserve Funds breaking the buck. He tells us that back in mid-September over $500 billion was withdrawn from money market fund in an hour's time and that $5 trillion would have vanished had the Fed not acted to "stem the tide."

Who withdrew the funds? Where did the money go? From which institutions? Why are we just hearing about this now? Don't we, the taxpayers ultimately footing the bill, deserve answers to these questions?

Clusterf#@k to the Poor House - Economic Recovery Plan

The Daily Show With Jon StewartM - Th 11p / 10c

Clusterf#@k to the Poor House - Economic Recovery Plan

Daily Show Full Episodes
Important Things With Demetri Martin

Funny Political News
Joke of the Day

Cheap Oil: Who Woulda Thunk It?

The chart above shows the ratio between the price of Oil to the price of Gold. As you can see, it's been ten years since oil was this cheap relative to the price of gold.

Back in 1999, oil bottomed at about $10 per barrel. It subsequently tripled in price over the next year-and-a-half.

I don't expect a repeat performance but I do believe oil is oversold and overdue for at least a bounce. And if the economy begins to recover it may lead to more than just a bounce.

Is Inflation Rearing Its, er... Pretty Face?

Dr. Copper, along with most assets, had a pretty ugly 2008 declining about 70%. Considering the widespread deflation (economic contraction and falling asset prices) we saw last year this should come as no surprise.

However, it looks like the good old doctor may be perking up a bit lately. If so, it would suggest that inflationary forces are once again taking hold. And I think everyone would appreciate a little inflation for a change.