August 17, 2009
Good morning. First down week in a while for the market, but only a little, with Friday’s late rally almost pulling the SPY even for the week. The SPY closed at 100.79, down from 101.20, or .4%. The VIX was actually down for the week, closing at 24.27, down from last week’s close of 24.76. The little damage that was done to the market was generally attributed to the surprise Consumer Confidence reading of 63.2 versus forecast of 69. This morning, early, the S&P Futures are being hit hard due to a large sell-off in Asia brought about by a shortfall in Japanese GDP numbers. Although the numbers showed Japan coming out of its recession (at least for a quarter) they fell short of expectations (3.7% vs. 3.9%). Remember that in the previous quarter Japan had a decline in the same number of over 11%.
Is the summer rally over? That is still to be determined, but if you look at the numbers coming out of Europe and Asia you envision a picture of very small growth enabling politicians and market pundits to pander ad nauseum about the “recession” technically being over, but not over enough to really help anyone. It surely is better than a continuing free fall, but as I have opined in the past our current economic state is not one that is sustainable. You do not have revenues across the board down significant numbers, like 10-30%, come back 2%, and be okay again. The only way you (as a business owner) can become “okay” again is by forcing down prices of the various factors of production (note the serious economic term), but that is a long and arduous process. For example, if you own a restaurant that is down 20% in revenue, you either are able to absorb it and still be profitable (not likely), can find a way to cut costs (maybe in long term if everyone is in same situation), or just say the restaurant business is not for you. You may be able to go to the lessor and say “You have to give me a break on rent” or the owner of the mortgage and say “We need to adjust the rate.” If you are successful you are, in essence, broadening the effect of the downturn through the system. Or, and what we have seen a constantly, you take it out on the employees. Unpaid overtime, fire one of six and expect somehow that the remaining five do the same job, cut benefits, those types of actions we have been seeing for a while as the contraction continues to be felt more broadly. Some (of dubious intellect) actually choose to call all the shifting of the burden to employees an increase in productivity. Some cases very well might be, but in a lot of instances it is just sharing the pain.
How can you get a feel for what is happening in the economy? Listen to “experts,” most of whom have dubious experience and serious reasons for not giving the true story. Maybe not the best way. One solid possibility is to look around and talk to people, the picture you get might be somewhat localized but maybe not that far off. In my area of Chicago, the DePaul University area, the picture has been one of growth, relatively high income and property value, etc. It was never really a part of the California or Arizona type of bubble, but did have somewhat of a run up in property values, both commercial and residential. One case in point is Armitage Avenue, a commercial strip that became very trendy and really achieved some real status as a destination for those shopping trendy boutiques. As you can imagine, the rents soared as the area took hold, and many old line retailers were forced out to make room for stores where you could pick up that much needed $600 blouse. Obviously, that business is down, and so far the owners have virtually refused to cut the rents to a level that (some would think) is more sustainable. Instead, there are many vacant stores, and some that have resorted to short-term rents to some kinds of consignment stores. The effect, if not there already, is to totally erase the strip from a destination high end shopping area. People do not go to boutique area for one store, and now the area (due in large part by owners refusal to see the new world) is in danger of falling out of the mix. Clearly the message there is that the commercial leasing area is weak in some areas, and maybe has not been as well reported, as possibly it should have been.
On a totally different end of the spectrum from boutiques on Armitage Ave., I had the opportunity to attend the State Fair in Milwaukee this weekend. It is always a good time, and a real picture of America. True to form, I found myself in a serious conversation with a young Dairy Farm operator in the dairy show barn. He was saying that virtually every dairy farmer is, to some degree, underwater due to increased feed costs combined with a worldwide milk surplus. Of course, some people are always losing to hear them tell it, but I was impressed with the knowledge, business acumen, and worldwide awareness of the fellow, and really learned a lot. Even the last couple year’s boom in some agricultural areas seems to have left some areas of the sector behind.
One of the mistakes (we have mentioned this before) of “the” government in the Great Depression was to raise taxes on the Federal level. So far that has not happened this time, but in my opinion increases in “fees” at ever level of government has more than made up for the restraint so far on the Federal level. Why don’t we have a dictator for one hour for the sole purpose of executing every politician who disguises a tax increase as a fee? I used to ask the question “Do they (politicians) think we really are that stupid?” but now I have amended it to “How did we become this stupid and weak spined?” We in Chicago have a Mayor who is really an Emperor, who has been allowed without challenge to make sweeping changes in the social fabric through the imposition of “fees” while holding the line on “taxes”. The latest is the absurd sale, really of the entire city, to an outside firm making the city one big parking garage. Instead of throwing a quarter into a meter for an hour, up to six PM, Sundays and holidays off, we are now up to a dollar an hour, to nine or later, including Sundays and all holidays. It gets worse, the meters are gone so you have to search out one of the pay boxes, and they do not take paper money. So for any kind of a quick stop, anywhere in the City, you have to get out, walk a half block, use your credit card, etc. The tickets, for failure to pay $1, are $50 minimum, and if you have two or more the car is booted. Ask any business owner, especially a bar or restaurant owner, the effect of this new policy on business, and you will hear 10-20%. Is Government the solution? Not!! It is really sad, even if they cared, do you think that anyone in the Mayor’s office, even the man himself, is capable enough to actually study the economic ramifications of so sweeping a change, especially in a recession?
I believe that we are being choked by government to the point of oppression. Look at the huge increases in fees legitimate securities firms are now going to pay for government’s failure to police people like Bernie Madoff. Clearly, in their bureaucratic mind, that failure has to be paid for by increased payments and even more useless regulation of firms that have no violations. Never mind firing all the bureaucratic hacks that did not do the job. Has anyone wondered why everyone (including wives or husbands), but surely government needs to know (through credit card records) where you parked, or when and where you went through a tollbooth? Is it just one more step to a cashless society? Before that happens everyone should really think what a cashless society would mean to personal freedom.
Ok, enough of that (or maybe never enough until we collectively wake up and do something). How do we trade this market, and are we in for a new round of sell-offs and increased volatility? Obviously, there have been those who thought the market was going to the sky. Those in the Protected Index Program have seen a period where the calls that we sold, at the time allowing for some decent market appreciation, become fairly deep in the money due to the rapid recent market run-up. We were able to roll all the SPY calls last week out to September, at prices where we gained some deltas and premium without sacrificing protection should the market pull back rapidly. This week we will do the same thing in the IWM. The extreme swings in the market the last couple of years have been challenging, how is that for an understatement, but really underlines the necessity of being hedged if you are in the situation (like most of us) where unlimited risk is not appropriate. Maybe this market will give us another chance to get in a lot lower, this time with the price of protection much more reasonable than last March. We will be ready.