December 2007

Back in my Econ classes, the professors laid out their version of the “proper” way to manage the Fed and the economy. Core to it was the concept of having orderly declines, rather than sharp, abrupt shocks to the system. In the 70s we had oil shocks, in 87 a single-day crash in the markets… If only (the academic argument proposed) the changes could be managed to be orderly, we would be better off as an economy.

As we can see with the current environment, this academic concept seems to have graduated to the policy makers… whether it is an orderly decline in the dollar, or stalling tactics by the Fed to let the financial stocks have an orderly decline (super-SIV anyone?), or spinning the stock markets with well-timed announcements… the Fed and the Treasury are aiming at maintaining order despite problematic situations.

The side-effect of this managed order is a lot of volatility on a short trip. The S&P 500 looks like it will finish the year with a 3.6% gain, despite having a range of over 15% throughout the year (as measured by the distance from 52 week high to 52 week low).

So, is the economy in for a recession, and by implication, is the market preparing for a bear market? I’m not sure… though the arguments are strong in either direction. I think the following quote sums up the bullish posture for me.

Week after week we?ve heard reports about the dangers to housing along with the specter of hundreds of thousands of home defaults. On top of that, we?ve read about the massive losses to the leading banks brought on by the subprime mess. We?ve been warned of a potential collapse in the entire domestic and international banking system. We?ve heard that lending by the big banks had come to a virtual halt.

In the face of all this ghastly news, the November lows in the D-J Averages have held like a rock. Increasingly, it appears, the Averages have discounted the worst that can be seen ahead. As I write, both Averages are well above their November lows.

-Richard Russell (Dow Theory Letters)

Naturally, stock market stability despite economic turmoil is not the final arbiter in our analysis of where the markets will head from here. Market efficiency is a process after all, and the markets may still be coming to grips with economic reality.

That said, I will be watching to see which way the prices break after volume returns in the new year.

It’s the time of year again for mutual funds to be disbursing their taxable income in the form of dividends… as we saw last year, some of the really good actively managed mutual funds have very large disbursements to make. The upside is that if you own these funds in a taxable account, they just gave you the funds needed to make your tax payments to the IRS.

If you were invested in the mutual fund for the whole year, you should have done well… but often these disbursements settle the taxable income from multi-year holdings, resulting in a tax hit for those who may have bought this year, but get to enjoy all the taxable events regardless of whether they owned when the mutual fund purchased the assets.

Here’s a shockingly too common chart ? ICENX is down 25% on its disbursement date (most likely 2% or so of the change is from daily changes in its holdings).

That means, if you bought in the last 6 months, you just inherited a tax burden that you didn’t “earn”.

While it’s great that the fund was able to earn 25%+ gains this year, this is an all-too-real problem for mutual fund investors. This is also one of the reasons why ETFs have gained so much in popularity… as the buyer and seller of an ETF, you get the benefit of determining when (and if) you incur a taxable event.

From Extremely personal investment:

If you want to know how the economy is really doing — check the boob job index.

Plastic surgeons report people are getting antsy about spending big bucks for bigger breasts or a nose job.

The Wall Street Journal reported that the slowdown was a hot topic at a recent meeting of the American Society of Plastic Surgeons in Baltimore.

Pittsburgh plastic surgeon Dr. J. Peter Rubin said the mortgage credit crisis is making people think twice.

Interested in watching the housing situation in painstaking, constantly updating detail?

Look no farther than They have aggregated a fair amount of publicly available data for your train-wreck watching enjoyment.

Here is a chart of the affordability index for Raleigh:

And the inventory for Raleigh:

Raleigh is starting to be affected by the nation-wide slowdown, but has not been hit as hard as a lot of other places…

The last two weeks have been quite the opposite of each other… Here is the WSJ’s weekly roundup of market performance for the weeks ending 12/2 (first chart) and 11/25 (second chart).

See anything notable? The best performers one week are the worst performers the next week (and vice versa).

Bill Cara recently noted that the efficient pricing mechanism of the markets has broken. Volatility is the result, and we have plenty of that.