A Dash of Insight

Reacting to News: What to Make of Dubai?

Here at "A Dash" we try to identify the best experts on any subject.  Since we are free to position our clients in any way, we are consumers of news and analysis.  So are you.

While I manage client portfolios in real time, my writing is after hours.  I am not trying to advise people with short-term trading horizons.  Our TCA-ETF approach (still bullish) has a three-week time horizon.  Our program for long-term investors has an even longer time frame.

When I write, it is an honest assessment of my own views and an attempt to find the real authorities.  It is not trading or investment advice.  It is just something you might want to consider.

The Issue

Each night I get the daily report from Charles Kirk, a valuable service for his subscribers.  Charles (who is currently neutral on the market in all time frames) always includes a quotation with his analysis, and today's is especially apt:

"Look at market fluctuations as your
friend rather than your enemy; profit
from folly rather than participate in it."
- Warren Buffett

This is a great statement of the issue.  Is the Dubai reaction the start of something bigger, or an opportunity to "buy a dip?"

The Analytical Viewpoint

At TheStreet.com's Real Money site (subscription required)  Marc Chandler, a source for whom we have great respect, wrote as follows:

We stress again that the current troubles being seen in Dubai are a direct result of its efforts to tie its fortunes to global real estate, tourism and services, and are particularly unique to Dubai and should not have wider implications for sovereign EM risk. The property boom helped this strategy work in the good times, but the popping of the global real estate market has put severe strains on Dubai.

Developments in Dubai should thus be seen in the context of the entire country basically being geared toward real estate development and not in the context of EM sovereign risk and fundamentals. Thus, while the current period of risk-off trading could yet persist, longer-term investors should be looking for buying opportunities in EM during this correction.

We note the careful analysis of the nature of the problem, and how it might be connected to various markets.

The World Leadership Viewpoint

Other sources also provided perspective on this issue.

Banks, world leaders play down Dubai debt threat, from Reuters.  The article quotes leaders from the US, Britain, France and Japan.

The Bearish Viewpoint

Those who have been calling for a market correction see this as the start of something big.

Pimco, with a bearish viewpoint on stocks and now even seeking less risk in bonds, calls it the start of an "overdue correction."

Others, whom we will not name, see this as the first step in the decline of commercial real estate.  Or they say that we should not believe anyone who sees this as "contained" because someone or other said that subprime would be "contained."

The Trading Viewpoint

Barry Ritholtz, despite a continuing bearish tone from most articles, expected a rebound from the overnight bottom and was pretty accurate with his pre-opening call.

Our Take

There is a widespread acceptance that any warning of doom is correct, and every event is proof.  If so, the case against buying stocks is clear.  There will always be something to worry about.

Today's bears did not make a very good case.

I watched the currency trading closely.  The dollar flight to quality ended rather quickly.  The trade-weighted dollar is about where it has been for the last week.  And I am still waiting for someone to show a good link between low treasury rates and the ability to speculate on US stocks.

There were plenty of buys in individual stocks that have nothing to do with Dubai, European banks with big exposure, or even the dollar carry trade.

I don't know if Warren Buffett was buying today, but I was.

Sell in September? Time for Reality!

Anyone paying attention to market news must know that September is the weakest month for stocks.  Mark Hulbert, one of our favorite writers, calls it The Cruelest Month.  He provides a table of returns, summarized as follows:

Notice from the table that in all but one of the last 11 decades, September was a below-average performer. In more than half the decades, in fact, the month's rank was dead last.

Why, given such an overwhelming record, would anyone question September's bad record? Because there is no good theory for why the month should be such an awful month for the stock market. And, without such an explanation, there's the distinct possibility that the statistical pattern is just a fluke.

As one can see, Hulbert is well aware of data mining.  He mentions the popular "butter production in Bangladesh" example.

Hulbert next considers a number of hypotheses and invites readers to share their own ideas.  His thought is that a good explanation would make the September story more convincing, although he shares the information that day traders do not wait for any hypothesis testing!  The sophisticated audience of "A Dash" may not find that very convincing.

Hulbert's Market Watch colleague, Irwin Kellner, has a number of reasons for September weakness, including the possibility of a self-fulfilling prophecy.

Why Both Articles are Wrong

Here at "A Dash" we are veteran debunkers of mythical market lore.  Most people (including our employers when we started in the business) just want to see the data --- all of it!  Traders all believe in patterns.  The more data the better.

The idea of random results is lost on most, like the "day traders" Hulbert mentions.  There are twelve months.  There will be a distribution.  Some will be good and others will be bad.  Always.

What if there is a reason?  A hypothesis does not really help.  When you already know the outcome, any smart person can invent a compelling reason.  New readers can revisit our discussion of this topic, where a group of very smart grad students were given a list of findings and asked to provide reasons.  They did very well.  Only after the class were they told that all of the relationships were reversed!

The scientific method works only when one begins with the hypothesis.

Let us try an experiment.  Instead of taking the currently constituted months of September, instead put all of the individual trading days in a basket.  (We know that this basket has a negative bias, but bear with us).  From this basket we create trading months.  From the days in the other months, we create comparison months.

This is an interesting approach to getting beyond the data mining issue.  It is (unfortunately) not our idea but that of Andrew Moe.  He writes as follows:

When comparing the months composing September to a random basket of days the results are random. Attempts to find seasons of non-randomness are frequently subject to data mining bias, as the same permutation test debunking the September drift is easily used to identify (falsely) statistically significant periods.

The study. Running a bootstrap permutation study on Dow data from 1960 to 2008 we estimate the empirical distribution of differences in monthly return between September and other months. We test the hypothesis that a random September is no more bearish than a composition of random days sampled with replacement. We find that the mean difference between populations is 0.0695%, yielding a p-value of 0.3612 – random.

Our Take

Here are four good reasons to ignore the September weakness articles.

1. This is a widely advertised theory.  Even if you do not believe in completely efficient markets, one would expect some anticipation.
2. We have already had a decline of nearly 2%, exceeding the expected monthly decline on the first day.  Should we now expect normal trading for the rest of the month?
3. The evidence shows that the September pattern is not a statistically significant deviation.
4. Other seasonal methods (Sell in May, Presidential Cycle) have not worked well in this time of turmoil

Quite obviously we do not know whether stock prices will mover higher or lower during the rest of September.  We do expect trading to reflect fundamental information about economic changes, as well as perceptions and trader lore.

How to Profit from the Obama Stocks

Understanding public policy decisions is crucial to investment success.

This has never been more true.  Government intervention is changing the nature of every business.  As an investor, you need to figure out what is going to happen, and whether it affects the companies in which you own stock.

Over the last several days we have emphasized how easy it is to make mistakes in the minefield of politics.

• You can misunderstand the difference between politically controlled agencies and the civil service.  We will explain how to tell the difference.
• You can confuse your role as citizen with your desire to make money as an investor.
• You can ignore good sources of information, just because you disagree with their politics.

We have some more mistakes to highlight in this series, but there is a positive side.  We strongly encourage readers wanting to follow this approach to review the links above.

We are going to show how to figure out where to get information, and how to use it.  Part of our success in client portfolios relates to a disciplined approach to public policy analysis:

We want to succeed no matter who is in power.  We put personal opinions aside.  We analyze the likely results, and figure out which stocks will gain.

It sounds simple, but hardly anyone can resist the temptation to confuse opinion with analysis.  Most of the current pundits are offering opinions about politics at the very time that stimulus dollars are starting to hit.  This is good for their ratings, but bad for your portfolio.

They jumped the gun months ago picking "Obama stocks" on his inauguration.  The earnings effects have yet to show.  Meanwhile, companies have gotten lean and mean.  Many are showing reasonable earnings even in a time of economic distress.  Let us find these winning stocks.

As background, here is a recent article we wrote for TheStreet.com's RealMoney site.  It is a bit  introspective, but regular readers of "A Dash" may find it useful.

From RealMoney.com, 4/30/2009

When I started writing for RealMoney, I had an idea: I wanted to study how the nexus of politics, public policy and specific stocks could provide a big edge to readers. Almost two years ago, I launched a Web site, ElectionStocks.com, and hired some staff support. Since I watch political news and the markets for most of the day, I feed ideas to the team; I also write some pieces and review the work.  We started by covering about 20 candidates from both parties. We identified issues and stocks for each of them. As the field narrowed, we focused on stocks that could work regardless of who was elected. I was looking for names I could suggest as good stocks with great potential political drivers.

The Best Advice?

Sometimes the best advice is a warning against any particular action. We had no precedent for an election and transition in the middle of an economic crisis. Many analysts and researchers were going on TV with their "Obama stocks" at the time of the election, at the start of the year and on the day of the Inauguration -- the election cycle offered three chances for publicity.

The cold reality? This time was really different. Even when the election results were certain, no one could know which of the Obama proposals would survive in the Senate, nor how quickly they would be passed. More important, a single issue dominated all others: dealing with the "toxic" assets. The new administration did not seem to understand that this was the keystone for all problems. The first approach to the problem of price discovery was Treasury Secretary Tim Geithner's maiden voyage ... and a stock market disaster.

The biggest Obama mistake has been the failure to deal with this problem; no one on the team appreciated the significance. The result? We are getting the announcement about the particulars of the Public-Private Investment Program on May 15, more than six months after the election; Hank Paulson went to Congress in September. This will go down in history as one of the worst responses to a financial crisis, partly caused by the transition in administrations.

Simply put, this was not a time to buy stocks because of the winning candidate's positions. Those who did so had big losses, because the general economic questions overwhelmed any specific stock ideas.

I've been watching elections for 40 years and studying how the election cycle affects stocks for more than 20 years -- I taught political science and public policy for 13 years before entering the investment business in 1987. I also devoted particular focus to this cycle -- I'm confident that I'm among the most qualified analysts on the subject -- and still I refrained from pushing the investment ideas our team developed.

It was not right, and I knew it.

How to Make Money

Part of investment success is avoiding losses. I hope that readers of my commentary on Obama policies have shared my caution. When the stimulus package was passed, we identified some stocks that would benefit. As is often the case, the problem was the time lag. While the market attempts to look ahead, there are very few experts on government spending. It is very complicated. I follow everything said about Obama and stocks and filter the prospects through almost 40 years of training and experience. Here is my general conclusion:

• Initiating new policies is more difficult than you think -- much more difficult. Be skeptical.
• I always look for the "default policy" -- what will happen if nothing changes in the law.

Now Is the Time

It may seem silly to some, but now -- 100 days into the administration -- is the correct time to start thinking about Obama stocks. Here's my reasoning:

• The stimulus package was widely dismissed by market pundit, mostly because it did not do what they preferred. The actual spending is starting to hit, and will show up in corporate earnings.
• The budget process is prolonged. The Street hated the proposals as "too liberal." We are now about to learn -- for the first time -- what will really get passed. It is time to pay attention.
• We are getting policy details. People do not realize how long it takes to make a transition. The new secretary of Health and Human Services was approved just yesterday; how could we project health policy before this? The Specter party switch also affects prospects, especially for every health stock.

Unless you are monitoring factors like these, you are out of step with reality.

What to Buy

Over the next few weeks I plan to highlight several different groups of stocks, each of which may benefit from Obama policies. I will downplay those where I think congressional prospects are poor and emphasize those where prospects are good.

Meanwhile, my team has constructed a stimulus package portfolio. We have carefully monitored opinions from a wide range of experts featured on financial media. (RealMoney's own James Altucher's ideas are prominent in the portfolio.) The portfolio has had a positive result, but the results are nothing special so far. That's good -- most people bought the Obama stocks too early, got discouraged, and bailed out. This relative loneliness in the space provides a good opportunity.

Here is a preview of our coming articles:

• Health care: Information technology stocks will definitely do well. Other health stocks depend upon the yet-unknown details of the plans. Look at Athenahealth (ATHN) 
• Alternative energy: We like First Solar (FSLR) , and it is part of the portfolio. A number of other good choices (courtesy of James A.) are also included. 
• Infrastructure: There are several choices in this space -- check out KBR (KBR) . 
• Defense stocks: This is a surprise to many who see Obama as cutting defense, but cutting the costs for Iraq may not translate into lower returns for specific contractors. We see good prospects for many defense holdings. Jim Cramer also is noting this strength on earnings calls.

It is hard to believe. I would not have predicted it in advance. The best time to buy the Obama stocks is after the first 100 days. Stay tuned for more specific picks and how you can use Obama's policies as you craft your portfolio.

An Interesting Sentiment Indicator: Seeking Alpha

Here at "A Dash" we were early supporters of Seeking Alpha.  We have had a constructive relationship with the site and their leaders.

We congratulate them on their success, and their growing readership, becoming a top-ranked site in the ratings.

The Seeking Alpha Difference

There are some interesting metrics that one can derive from Seeking Alpha.  These stem from their approach, embracing the blogosphere and highlighting the news flow.

This is dramatically different from mainstream media sources, where writers choose their subjects and editors review the overall balance.

Please understand that this is not a criticism of the Seeking Alpha model.  We merely point out the difference.  The articles appearing there reflect blogger opinion and news flow, and it is done very accurately.

Why This is Helpful

The objective stance of Seeking Alpha helps us to gauge what people are thinking.  There are two excellent metrics.

Most Popular Articles

The ranking of most popular articles shows what people are actually reading.  Here is the current list (skipping the excellent daily briefings):

The Worst Case Scenario (Someone Has to Say It)

A Bull Market That Few Are Buying

Dollar's Purchasing Power Annihilated - The Chart They Don't Want You to See

Book Review: Great Depression Ahead

A Summary of Q1 Bank Earnings: World, You Just Got Hustled

Most Recent News

The site picks up news flow, as it happens.  Here is the current list:

A Summary of Q1 Bank Earnings: World, You Just Got Hustled

This sure smells like a sucker's rally,

Even GM (GM) can't figure out why anyone's still buying its shares,

will oil prices throttle the economy again?

Our Take

The overwhelming impact of these stories is self-evident.

Once again, we repeat that these stories are not a discretionary choice of the Seeking Alpha editors, who do a fine job.  It is an accurate reflection of reader sentiment and news flow.  That is what makes it so interesting.

While we have picked the leading articles from today, it is quite typical of the pattern throughout the recent rally.  It shows bloggers and readers, all fighting the rally.  It is a strong example of the wall of worry that we described a month ago.

If we looked to the most popular authors and commenters, we would see a similar pattern.  It is an accurate reflection of the skepticism of those active in online writing and commentary.  This might be a better sentiment indicator than Investors Intelligence or other similar choices.

Many people are wondering whether it is too late to buy stocks.  This is one indicator.

We think, like traditional sentiment indicators, it is a contrarian signal.  If and when the top stories, authors, and articles are all bullish -- well, that would be the time to think about taking profits from the recent rally.

Politics and Investing

We have been following markets for nearly 22 years from our special perspective -- applying expertise in neutral public policy analysis, following economics, and seeking investment implications.

There has never been a time when decisions in Washington had greater importance for investors.

Putting Aside Politics

Many of our readers labeled our approach as GOP-oriented and as Bush apologists in our early years.  Now, some may think we are fans of Obama.

Neither conclusion is correct.  We try to analyze policy proposals, regardless of the political stances.  It is a challenge.

Opinion pieces are easy to write and get a lot of attention and blog traffic.  Those that attack any proposal are especially popular.  There is always a ready audience.

Current Errors

Many popular authorities -- pundits, bloggers, economists -- pounce upon any proposal with plenty of criticism.  Here are some examples.

Criticizing Obama for being too liberal.  Most of this is based upon budget proposals that are far from passage.  Investors should focus on the immediate economic effects.  As Obama noted in tonight's press conference, there was no expectation that the budget would be accepted as proposed.  It is a long-term agenda.  The time for debate will come.

Focusing on debt.  There is a political perspective that debt is bad and that anything increasing debt will lead to the demise of our nation.  This is a matter of political values rather than an immediate economic forecast.  The right question is whether the plans stimulate a return to the economic norm of sensible lending.  Our economy depends upon this.  Debt may increase in the interim.  This is normal counter-cyclical policy.

Claims that the plans are a "patchwork."   One wonders what these critics would see as a comprehensive plan.  Our own notion of a good plan is that it has many elements.  What many see as a patchwork, we see as flexibility.  It is good for government (or for businesses) to have multiple initiatives.  It provides flexibility, permitting policy makers to do more of what is working and less of what is not.

Investor Implications

It is important to focus on the near-term effects.  The most important questions for the economy involve stabilizing housing, providing normal lending, and stimulating jobs.

Mainstream economic analysis suggests that the plans in place will have an impact, but with a lag.  No one knows the exact impacts or the precise timing of the lag.  More importantly, no one knows when market recognition will take place.

There will be a challenge in reducing debt.  There will be more tweaking of the level of leverage.  No institution should have 30-1 leverage, but the lending system runs on a reasonable level of leverage.  The critics seem to advocate a WARP speed death spiral, oblivious to the economic effects.  This concept is central to understanding current public policy on the economy.

We see this as a time of great opportunity.  Part of the logic is that so few share this opinion.

Why There is No Bottom: Politics

Here at "A Dash" we have argued that resolving the problem of troubled assets, called "toxic" by most and "legacy assets" by Geithner, was Job One for the Obama Administration.  We understand that a new President has many jobs, including in this case, the stimulus package, dealing with auto companies, a housing program, proposing a budget, and presenting to a joint session of Congress.  This agenda is dictated for a new President--dictated by circumstances, tradition, and the budget process.  It is not really a matter of choice.  The market does not distinguish between the broad agenda, which may or may not happen, and immediate plans -- those completely under the control of the Obama Administration.  Market participants are woefully ignorant about the norms of politics.  As a result they misinterpret many routine actions.

Unfortunately, a normal transition does not fit the current times.  Compared against other transitions, this one has been fast.  Given the crisis circumstances, it is still too slow.  It will be a great dissertation topic for doctoral students in public policy and political science.

Our take is that Geithner came in with an idea about troubled assets, got involved in his own confirmation issues, could not staff up quickly enough, and is still working on the details of a plan.  We like what we have seen so far, but the market will be very skeptical given the mis-steps and the delay.  We still await the details.

The failure to deliver on the most important issue has opened the door to criticism.  As the stock market declines, it is viewed as a referendum on the economy.  The average person interprets the stock decline as strong evidence about the economy.  It is a negative feedback loop.

Persuasive Presentation

While we are not regular viewers of Jon Stewart's The Daily Show, perhaps we should be.  (Thanks to a helpful reader for alerting us!)  It would be nice to have a great audience and a staff that could dish up some exciting video clips.  We also lack the wit and skill of Stewart.  Let us compare his take and ours.

The Santelli Tea Party

In our pondering professorial style, we suggested that Rick Santelli was playing to an atypical audience.

Jon Stewart, who invited Santelli to the show, made the same points.  We especially like the cheers from his audience, in contrast to the cheers for Santelli from our friends at the Merc.  Some of the comparisons and clips are unfair and out of context, but the concept captures the idea.

The Stock Market as a Tracking Poll

We characterized the market as a demanding, self-centered girlfriend.  Jon Stewart shows the ticker in the background in every Obama appearance, and even suggests that it be super-imposed upon his forehead!

Multiple Bailouts

We have suggested that it is past time to deal with troubled assets once -- and move on.  Jon Stewart, interviewing Joe Nocera of the New York TImes, does a funnier and better job using the AIG example.

Conclusion

We hope readers will watch the segments cited, or watch the entire show.  We enjoyed it, and so will you.

So what is the investment take?  This is Part 2 of our projected four-part series on why we cannot find a stock market bottom.  Each segment provides a clue about what might change, and how we might find a catalyst.  (Valuation and Technical Analysis on the agenda.)

For now, the failure of the Obama team to deal with troubled assets at banks has opened the door for criticism from all sides.  This failure has extended the attack on financial stocks and the overall market.  This allows critics to suggest all sorts of alternative causal models that do not really fit.

Like all investment managers, we continue to watch for more details on the Geithner plan.  When we get it, and when it is understood, it will be a winning trade and investment.

Be Like Mike? Or Shane? Or RIck? -- Looking beyond the Obvious

Here at "A Dash" we like the comparisons between analyzing sports and analyzing markets.  There is much more data in sports, and the risk/reward calculations are similar.

When it comes to the NBA, we are zeroed in on the Michael Jordan era.  To celebrate a birthday party for a famed Chicago options trader, one of our friends sent invitations to a party -- dinner and Bulls tickets for a playoff game that night.  Attendance was excellent!

Can We Learn from the NBA?

Shrugging off the current Bulls record, we try to remain open to new information.  In particular, is there any relevance for investors?

Investment experts are weighing in on the Shane Battier article by Michael Lewis.  In a reprise of Moneyball, Lewis shows how Battier is more valuable than his obvious stats indicate.  Briefly put, he makes everyone on his team better -- and stars on the opposing team worse.

Dr. Brett Steenbarger shows his typical excellence in drawing performance parallels.  We noted this when we reviewed his book on trader performance, suggesting then that anyone in any field could learn from the lessons.  Brett describes how traders could "be like Shane."

At another of our featured sites, Adam Warner also highlights the Lewis article.  He emphasizes the +/- aspect of the analysis, with bows to the Moneyball aspect and a humorous look to hockey.

Shane Battier is no Michael Jordan, but they share the characteristic of improving the players around them.  It would be interesting to see similar data on the Jordan era.

Investment Implications?

Our own take is implicit in the Lewis analysis. Investors should look beyond the obvious comments and stats, seeking the undervalued and poorly-measured effects.

Today's celebration of Rick Santelli's revolt is a good example of the obvious.  The story was featured in many places, but Adam Warner's piece is a good recap.  While we almost always agree with Adam, we dissent on his endorsement of the Santelli revolt.

Here is why.

Popularity is Easy on CNBC

It is easy to speak on your home field -- Rick's supporters on the trading floor, for example.  The audience on CNBC shares his political bent.  So does the readership of most blogs or mainstream media articles.

Being like Rick is not being like Mike.  His popular viewpoint weakens the surrounding team, encouraging them to fight a war that has already ended.

Any of the many government programs is an easy target.  Those of us who feel secure in jobs and did not engage in reckless borrowing can criticize everyone else.  We can complain that government money is helping the foolish, the dishonest, and the deceitful.  Readers and viewers will cheer.

It does not matter.  The election is over.  Our mission has changed.  No matter what our preferences were last November, it is now a new problem.  Any government policy should be judged in two ways:

1. Is there a societal benefit?
2. What are the investment implications?

Let us be completely clear.  We are not stating what will work, although it is on our writing agenda.  We are simply arguing for keeping a clear head about the criteria.

Too many analysts are taking the role of the taxpayer as investor, asking whether the return on investment is justified.  This is silly.  None of us would hire the government to be our investment manager.

The real question is whether the entire package of government programs will address systemic problems.  As a government, we should act to assist groups for a societal purpose.

Conclusion

Instead of asking what each program does for us personally, we should ask whether the entire body of programs -- Fed lending, stimulus package, mortage rate reduction, housing help, and more -- can succeed in restoring a stronger economy, with normal and sensible lending.  Without such actions, our state and local governments will fail, our property tax rates will rise, our local services will decline, our investments will falter, our property values will sink, and eventually, all of our businesses will be threatened.

This question, like Shane Battier's stats, is not so obvious.  Understanding the less obvious effects may be the key to investment success in 2009.

Our current indicators are pretty bearish, reflective of the general sentiment.  Meanwhile, most pundits are confusing their political persuasion with a dispassionate analysis of policy impacts.  At "A Dash" we expect the multiple and massive government actions to be reflected--eventually-- in the upcoming economic data.  The market will respond, but it may be kicking and screaming all the way.

 

Parsing the President

In a state of economic crisis, it is natural for investors to pay attention to any public statement by President Obama.

There is a natural sequence of timing to the moves of the new administration.  Some policies can be changed by the stroke of a pen, through Executive Orders.  These are Presidential directives that have the force of law.  They state how the government will implement existing law.

Today's News and Market Action

The President issued some widely-expected executive orders today.  These involved some changes in signs at workplaces and relatively minor rules on how union informational costs were allocated.  For example, one of the rules has bounced back and forth -- from the first President Bush, to Clinton, to the next Bush, and now to Obama.  It is a natural partisan shift.

The announcement, symbolically important to organized labor, was made to an audience including labor representatives.  The President was speaking to the audience in front of him, including core supporters, and not to the market.  In a typical over-reaction, the market commentators flipped out as President Obama talked about the importance of organized labor.

Separating Rhetoric from Substance

The real market test of the Obama Presidency will come on the key issues of taxation of dividends, capital gains, and free trade.  We believe that the course will be a moderate one.  Our conclusion is based upon the Cabinet appointments and the strong overtures to Republicans.  We shall see.

Those with a bias, perhaps anti-union, are hard-wired to see the worst in any statements, no matter what the significance.  There were many such commentaries today.

The Bad Bank Plan

A similar scenario is playing out on the so-called "Bad Bank" plan.  We are encouraged that the Obama Administration is looking to a root cause -- the hard-to-value assets held by many financial institutions.  There are several ways of addressing this problem.  Regular readers of "A Dash" know our priorities:

1. Best -- a suspension of mark-to-market accounting.  Provide plenty of footnotes.  Heaven knows there will be plenty of attacks on the footnoting firms, so investors will be informed.  The key is that there will not be the destruction of regulatory capital, so "sensible lending" can resume.
2. Second Best -- a method of price discovery.  Since the securities on the balance sheets are complex, we need a good method of finding a true market price,  one which reflects the value if held to maturity.  This is not reflected in existing markets.
3. Third Best -- the "good bank, bad bank" idea.  If this concept is to get traction, the participants must quit thinking of the taxpayer as an investor, trying to make an astute buy.  The only justification for taxpayer involvement is the systemic effect.

Conclusion

There is a valuation for troubled assets that is both fair for the taxpayer and also acceptable to banks.  There is no more important problem for restoring economic strength.  There are many wise people on the Obama team, and they are consulting with key players.

We expect a favorable conclusion, but it will face a skeptical audience.  This helps to explain why we continue a generally bearish short-term market stance, while believing that the entire year will be quite positive.  The heavily biased Wall Street audience will remain skeptical.

Federal Commitments Total $5 Trillion

There is a rising tide of negativity about "bailout nation."  Public opinion has been in opposition each step of the way, most recently on the auto bridge loan, announced today and analyzed by us here.

The problem in the media characterizations is that everything is described as a "bailout" since that is the story that plays.  There is also special emphasis on what the taxpayer will get in return, judged on the basis of investment potential.

Get serious!  The government is not a hedge fund.  The purpose of these actions is not a specific return on investment, but avoiding the collapse of the economy.  Many of the commitments have specific collateral.  Many are short-term in nature and some have already been repaid.  Others are showing a profit.  These are not just grants, and certainly not all "bailouts."

It is typical media punditry.  Describing a program as a bailout is an easy and popular story.  The source attracts many readers, blog hits, or ratings.  Analyzing the public policy costs and benefits is more difficult and pretty boring.

Readers can get some clarification from this interesting interactive graphic from Slate, allowing you to see the timeline and terms of each decision.

Investment Take

The investment conclusion starts with the notion that almost no one has any confidence in the specific plans or the effects, one of our items on the Wall Street Truthiness list.

We plan more detailed discussion, but the broad concept is easy.  Few of the existing pundit opinions and none of the econometric models allow for much impact from these programs.  Meanwhile, we have efforts of unprecedented size.

There is a contrarian opportunity.

Looking Back, Looking Ahead

Today marks some important changes both in market fundamentals and in psychology.  On such occasions we interrupt our regular writing agenda for more specific market commentary.  This is an occasion where readers unfamiliar with our recent work should take some time to follow the links.

In recent days we have tried to provide some perspective on the market turmoil and what to watch for.  Some of these ideas are starting to play out, but there is more to come.

A Review

Here is a brief review of the last few days.

We reviewed a number of popular myths and provided a brief assessment.  We then showed how some shallow thinking was leading many to be excessively negative.

We made timely shifts from bearish to neutral to bullish via our TCA-ETF system.  Investors in the program had a gain of 9.7% today.  Being in the right sectors means a lot.  Our current holdings seem to capture the rapidly revised thinking of market strategists.

We wrote about possible catalysts, including this suggestion:

Housing initiatives.  The Treasury is hinting at a new plan to reduce mortgage rates.  The Fed has already acted.  We expect the market to be skeptical of both, so it may take some real evidence to change opinions.

In addition to the Fed statement today, there was other important news, setting up the rally.  The Obama Administration seems to be embracing a major plan to cut mortgage interest rates to 4.5% for everyone.  We have the full story on our sister site, ElectionStocks.com.  This story is very big in many ways and for many sectors.

Being Modest

We are very cautious with a period of success.  There are so many who think they know so much.  In fact, investors should look not to a single market call, but to long-term history.  We tried to illustrate this with our football analogy.  In our own methods, we try to emphasize the long run.

Looking Ahead

Today's trading could represent a change in market psychology. There are plenty of fund managers who are either caught short or under-invested.  The negative sentiment has been palpable.  The news of scandals and the market declines have tested the resolve of many long-term investors.  We expect some managers and investors alike to shift gears.

There are more catalysts to come.  We continue to collect ideas on this front.  More to come, with several interesting ideas.  Briefly put, those making negative forecasts on the economy, on corporate earnings, and on stocks have a doubtful platform.  They are not just fighting the Fed.  They are also fighting the Treasury and the incoming Obama Administration.

Investors do not understand government policy, and have expected immediate reaction from the many programs.  They have been dazed by acronyms and have lost focus as a result.

There is a firm determination to avoid a major recession.  The market will look ahead, beyond the recession that is now a year old.  This may already be starting.

Conclusion

We have ridiculed strategists calling for a five-percent gain in the next year.  This is silly, when intra-day moves are frequently greater.  The only reason to invest in stocks is an expectation for a major rebound.  Few are willing to talk about valuation, when the consensus mentality disparages earnings prospects.  We note some courage on this front from Morningstar, where they see the Dow as 30% undervalued. (Hat tip to Abnormal Returns, helping everyone see what otherwise might be missed.  None of us can check everything!)

We shall comment further on valuation issues, with a focus on expected and trailing earnings.