The Rock Market Decoded

Imperfection being the constant of the human condition, equity valuations are always undershooting or overshooting, kind of like our putting stroke.  This condemns investors to watching our old pal Sisyphus push the rock uphill only to see it roll down again.  This is what economists, lyrical souls that they are, call “reversion to the mean.”

So, whether pondering the futility of our golf game or the arc of stock prices, one asks: “Where is that damn rock headed?”

To answer this, we are faced with another conundrum.  It can be said that equity valuations are predictors of corporate profitability, which, in the aggregate, depends on economic growth.  Those valuations should adjust as evidence accrues one way or the other.  This is what finance professors, ever the blithe spirits, call the “discounted cash flow or dividend discount model.”

But, as Mitt Romney was laughed at for averring, corporations are people.  If they depend on economic growth for wealth creation, they must – like each butcher, baker and candlestick maker who makes up the economy – be doing the growing themselves.

Or, in the words of another presidential candidate, the sage possum Pogo of yesteryear’s funny papers, “We have met the enemy and he is us.”

Which leads us to yet another riddle (Bear with us; fearless predictions will be forthcoming).  If we assume the market never gets it right, our task is to divine in which direction the rock is undershooting or overshooting.  This is what Wall Street wags mean when they say, “Nobody rings a bell at the top.”

We find it our task, then, to stand athwart the midpoint of 2012 and judge the direction of economic growth and its doppelganger, the rock on the hillside.  As always, the evidence is inconclusive, but try we must and, again like Sisyphus and our erratic putting, take pleasure in the effort if not its result.

First, let’s put the concerns of this vale of tears into four buckets in order of significance:

The Old World: Europe is falling into recession.  Greece is a mess.  Spanish unemployment is 24%. The break-up of the Eurozone appears imminent.

The New World: U.S. real GDP growth slowed to a 1.9% annual rate in the first quarter.  Jobs growth has plummeted from 200,000-plus per month in the winter to just 69,000 in May.  The “fiscal cliff” of 2013 looms.

The Orient: China’s gallop has slowed to what for it is a trot, with GDP growth at “just” 8% or so.

The Golf Course: Can we build a repeatable swing?

Next, let’s parse these concerns and spy which way the rock will rotate.

The Old World: Germany, already caving to the growth advocates, will accommodate them further.  The European Central Bank will cooperate.  Italy’s technocratic compromise, though far from the best of all worlds, will be copied.

The New World:  Romney could very well be president and inherit a recovering economy (the very one he is running against, reminiscent of Bill Clinton’s good fortune in 1992).  If Europe can muddle through (see above) expect the rock to signal economic growth.  Whoever is elected, we can’t believe politicians will be so thickheaded as to let sequestration and tax hikes to kick in January 1.

The Orient:  China may be the model for the rest of the policy makers in the civilized world.  With inflation slowing, the authorities have plenty of room to address slumping growth.  The central bank recently cut interest rates for the first time since 2008, and the government is looking to ramp up public investment projects.

The Golf Course:  Head down, eye on the ball, turn in a barrel, all without thinking about it.

Our conclusion:  Buy the dips and take one more club than your ego tells you.  Sisyphus would do no less.

Talkin' 'Bout My Generation

So we said to ourselves, “Selves, c’mon, man, give it up.” The torch must be passed.

One generation passeth away, and another generation cometh: but the earth abideth for ever. The sun also ariseth, and the sun goeth down, and hasteth to his place where he arose.

Confession: Despite being Papists, we’ve always preferred the King James version of the word of God.

All is vanity, baby. The aging A-Rods, Derek Jeters Kevin Garnetts and Johnny Vegas’s of the world will not miss any meals, but must bow to inevitable decline. Sure, supermodels, caviar and BMWs will be aplenty, but the ball game abideth. We believe there are folks with canes who wear hog hats in Fayetteville and hairy men in pink Red Sox hats and tank tops singing “Sweet Caroline” in Boston. The long suffering, while tuning in WGN, asked for tissues when the Cubs tanked in 1969. The young boy elated by pinstriper Scott Brosius’s home run in Game 5 cried inconsolable tears when a bloop single handed the 2001 series to Arizona in Game 7.

There is a Game 7 out there for all of us, even guys like us too dim to realize it until we approach those final innings. But hope springs eternal. Pitchers and catchers unlimbered in Florida and Arizona recently (a mystery: why not corner outfielders and utility infielders first?). And now we hear that Bernard Madoff has lost weight. He should write a diet book titled “Build a Ponzi Scheme, Always shoot 3 over Par Somehow and Go to Prison.”

The New York Metropolitans baseball club, owned by beneficiaries of Mr. Madoff’s ledger main, is now apparently searching for someone to take Babe Ruth off their hands so they can produce “No, No, Nanette.”

C’mon, men (the Wilpons, that is). Time to give it up. Sell the team and settle your debt to Mr. Madoff’s losers. The Metropolitans are losers, too, so what’s the beef?

Which brings us to our beloved Cardinals. Given the economic events of the last few years, it’s surprising that Albert Pujols thinks he can rule the elements, as a dear friend of ours says. The St. Louis club can win without him when he’s 41.

We just turned 25 last year, though we find some that dispute this. Retail sales were up less than expected last month and inventories were up. Expect the stock market to drop and utility infielders to demand a few million less.

Weep No More, My Lady

The sun shines bright on our old Kentucky home, just as it does for each of us who longs for his Indiana home on the banks of the Wabash far away; or New York New York, the city that never sleeps; or the left coast where birides sing and everything; or Swanee, where you’d give the world to be among the folks in D-I-X-I-E, or Oklahoma, where the wind comes sweeping down the plains. Add to the mix New Mexico, for which no iconic lyric has yet been penned. It's home to a gelding named Mine That Bird.

But America is more than a home. It’s a romance that causes men and women, young and old, to sigh with joy that men in ten-gallon Stetsons, ladies in sleeveless crinoline and flouncy caps of their own and horseflesh as beautiful as a spring day exult in two minutes of glory as mud flies onto the silks of the jockeys. Anyone who didn’t tear up his losing ticket without a care and take a sip of his mint julep is to be pitied. As someone said, everything, including life, is too short not to partake. Needless to say, my pie-in-the-sky Exacta box of Dunkirk and Flying Private lies in shreds. I picked the wrong strong horse and the wrong long shot.

Mine That Bird, trundled to Churchill Downs in a trailer by his lame trainer, Bennie Woolley, a no-nonsense son of a gun with a broken ankle, sunglasses and no necktie, somehow slipped through a narrow opening at the rail in the home stretch and exploded when he and jockey Calvin Borel saw no equine haunches in front of them.

The sporting life has been bountiful today. Yankees at 1:00 pm, Mets at 4:00, Derby at 6:30, Bulls-Celtics at 8:00 (listening on the radio as I write, but will get to the TV shortly), not to mention a scintillating girls’ softball game at 9 this morning in Prospect Park to start things off.

The economic calendar next week is filled as well. Expect better news, culminating with the jobs report on Friday. The past week offered support for those who root for underdogs. The economic future may be a 50-1 shot, but improvements in the University of Michigan consumer confidence and purchasing managers’ surveys tell me that Miss Market sees daylight on the rail. Her nostrils are flaring.

Give Me V

Pity the noble swine. The animal that is always one step from going feral on us before it becomes breakfast was the focus of the great debate between Johnny Carson and Ed McMahon. Which is smarter, the pig or the horse?

The horse, Ed averred, was the obvious choice, Johnny backed the pig, or was it the other way around? Not so fast, camel breath. We need Carnac the magnificent, who divined answers to questions in an envelope that had been sealed “in a mayonnaise jar left on the porch of Funk and Wagnalls since noon today” to tell us what lies ahead.

I make fun, and I apologize. It’s a defense mechanism. Here's hoping you and yours remain safe, but this is certain: Young and old folks in the United States will probably perish from a virus that has been ascribed to a protein source that generations of Americans have relied on in smokehouses and frying pans since Dixie came to be.

But, of course, it will pass, prayerfully with few of our sweet babies and grandmas claimed. That’s what Carnac and the financial markets are telling us now. We the people die all the time, but the traffic outside my open window this summer-like morning keeps up its incessant hum of hope.

The big hope now for those depending on escaping pig viruses and paying the rent is continued greed that shoots stock prices and the prices of what we consume higher.

If inflation does not revive then we are all in the soup. Surely, it will. A tenet of the monetarist religion is that, in the long run, though we may be dead, MV=PQ, with V, velocity, being stable. Deflation Cassandras believe that V will wilt forever.

Policy makers obviously feel otherwise. Bernanke, Geithner, Summers, et al., are intent that V will do what it's supposed to do. They’ll crack open the champagne when inflation begins galloping. And most of America will welcome a dose of it before debts overtake them. Equities look good for the rest of the year. Bonds will suffer. Refinance the home now if you can find someone to give you a loan. Interest rates are going up.