Floyd Norris  comments on the changes in accounting rules. The FASB and IASB have different rules.

As Norris points out, political pressure has led to the Boards backing off at times to as he puts it, 

by forcing banks to disclose what their dodgy assets are actually worth, as opposed to what the banks think they should be worth.

I would note that nothing the government has done has improved the 'assets' the banks hold. 

I suspect the markets will top out over the next few months. Then we will re examine what these 'assets' are really worth. 

I have preached almost endlessly that you will be graduating into a world very different from the 1990s. 

Take a look a this socionomics view of the size of houses. Or tour any neighborhood of sixty to seventy year old houses built after WW II, the size is about 1000-1200 sf. My parents house bought in 1953-4 was 1400 sf. 

It's back to the future. 

It took less than 20 hours of work per week to buy the S & P in the mid 1970s. 

Now it takes over 50 hours. This means we are no where near the bottom of this stock sell off yet. 

 

I believe you will be graduating into an environment like the 1970s. Volatility in the stock market will be extreme as emotions ratchet up and down.  INdeed I suggest you study this period of history to realize what you will be facing. Read study, learn to be a better writer, use every opoortunity in class to work on your speaking skills.

Above all do not naively believe that the action of the stock market is failing to predict what will happen. The US went exactly nowhere economically during this period. While I expect Texas in general to outpace the rest of the US as it does now, this will have an effect on our economy. Vacancy rates in downtown SA are already 20%. I notice more and more vacancies in smaller shopping centers and office buildings. You will need an extensive inventory of skills but more particularly an understanding of this period to be successful.  Most people will not understand what is happening.  They will undergo unnecessary frustrations in their job and likely personal relationships  as a result.

For example this period saw Nixon re elected in a landslide, then resign in disgrace, Ford took over and was beat by Carter who was then replaced by Reagan, a tough decade for Presidents.

I have distributed an article from Barrons on Sears Holdings. We study accounting  to interpret what is likely to happen in financial markets. That is the use of fundamental analysis. Technical analysis consists of using charts to analyze future price movements. Here the purple line is the Exchange Traded Fund for Retail, XRT.  I overlaid it with SHLD to see how Sears stacks up with the retail area in general. As you can see, retail stocks overall, shown in purple, have continued to climb. SHLD however has hit resistance at 70-80 and backed off.  THe markets are telling us they do not believe SHLD is as good a bet as the rest of retail. 

This is what the Barrons article predicted, now can you analyze the cash flow statement to see why this is true, again, this is why we study accounting.

George Will continues his profiles of what was the Golden State, the world's 8th largest economy. 

Or as Investors Business Daily puts it, Detroit with sunshine. AS he says, CA lags only New York in outward migration of residents and more would leave it they could sell their houses. 

Here he profiles another candidate in the Republican primary. But I put this up for a picture of what is happening to this state. This sort of disaster will not likely be cured in the next generation, even a new governor cannot change the make up of the legislature, gerry mandered into office and virtual life time tenure. 

Meanwhile the southeast US continues to attract the manufacturing  jobs and plants. 

Despite what you hear from all politicians, the world is undergoing a BEAR market. 

Bull markets are all about expansion. Since 1982 or the longer view, 1932, we have been accumulating, as George Carlin would say, STUFF. We now have so much stuff that we created another entire industry, the mini warehouse, to store out stuff.  Occasionally we got to the mini warehouse. But it is usually to store more stuff than to examine or discard the stuff we have. I wonder how many people move to a larger mini warehouse?  As the theme song to The Jeffersons put it, Movin' on Up!

Bear markets are all about removing excess capacity and getting back to the basics. Just ask Lehman, Bear Stearns or what is left of Merril Lynch. 

There were lots of clear clues that we had too much stuff. City Center in Las Vegas is a late to the party testament to that.  There are now blogs complaining about falling condo prices; these are maintained by condo buyers of course. When Vegas casinos sported three figure stock prices, well, that was an early clue. 

The Wall Street Journal is traditionally a newspaper about financial markets. However, responding to the STUFF craze, it added a new advertising section entitled Distinctive Properties. This featured mostly seven figure properties, the upper crust of flip this house. We all played this parlor game as children except then it was called Musical Chairs. Players circled the room as the music played, when the music stopped, one had to sit in a chair, but the room was always one chair short, so a player still standing was eliminated. Musical condos anyone?  Now as grown ups we are playing for real money. The lead ads in the Distinctive Property section are now all auctions…..

Just this morning I read that an organization entitled the Retail Federation of America figures American families have only completed 41% of their shopping, and egads, school has begun!  I suspect such a figure is a result of too many stores, rather than not enough shopping.  Today's fad is torn clothing, the knees are carefully torn on the horizontal. Once upon a time, Moms mended such tears rather than buy a new pair of pants.  Perhaps fashion has trumped necessity!  No need to mend, tear a bit more and hit the fashion curve!

A recent Barrons article wonders whether whiz kid Eddie Lampert will success with K Mart Sears now Sears Holding SHLD. He is after all standing in line with, let's count

WMT, Belk, Bealls, JCP, Target, Macy, Kohls, GAP, Old Navy, and so it goes, Mervyns has already gone

But our point, bear markets clean out excess. Everyone is not going to make it. Chrysler sales fell even with Cash for Clunkers, I doubt Chrysler will survive the next election. 

This fall I added the chapter on cash flow to the cost classes. And for good reason. Expect cash flow to move front and center to everyone's attention, after all that music keeps stopping again and again……

The Road Ahead

 

The
best analogy for 2000-2016  is
likely the period from 1966 to 1982. No, I don’t mean a revival of the Beach
Boys but music,  mood, and markets
will undergo substantial change. Let’s take a look.

The
Dow Industrials peaked for the firs time at 1,000 back in 1965 amid a
technology boom. Then it was the beginning of modern computers (University
Computing Company) as well as the ‘space race.’ That peak was comparable to the
14,000 seen in 2000. The Dow then underwent the following overall multi-year
percentage swings;

1966
Down 25%, 1968 up 33%, 1969 Down 36%, 1972 Up 66%, 1975 Down 45%, 1976 Up 76%,
1977 Down 26%, 1980 Up 36%

 

But
wait, by the time the Dow hit that last Up 36%, it had only returned to where
it started, yep, at Dow 1,000. Welcome to Sideways markets with lots of
volatility but no new highs.

The
price of oil, then as now, is the emotional barometer of the Public. Higher
prices project economic expansion, 
lower prices decreased activity. 
We have patiently tracked those changes this past year for you, do not
expect things to change. Volatility is the new certainty.

The
years of 1973-1980 were perhaps the best ever for Andrews. The oil price
underwent a steady increase. Its final parabolic rise going double digit in
1979 brought a frantic end to the prosperity Andrews enjoyed while the rest of
the country went haywire.  
Andrews will not be so lucky this time.   Volatile prices and an ever changing anti-carbon
policy will only exacerbate the price swings. The Administration, for example,
just canceled permits to construct multiple coal fired power plants.

In
politics Richard Nixon was threatened with impeachment and resigned. In a
preview of things to come,  Bill
Clinton underwent an unsuccessful impeachment vote. Bush was tossed out of
office, presiding over the loss of the House, Senate, and White House. Already
political divisions are deep and wide with disapproval of Obama’s health Plan
over 50% amid raucous Town Hall Meetings. Expect more of this, not less in
years to come. The gerrymandering of districts giving politicians virtually
defeat proof majorities guarantee Pelosi, Frank, et al will stay in office. The
Republicans wandered in the wilderness 
from 1966-82 and will likewise do the same again. Nixon squandered his
majority by staying in Viet Nam. Will the same fate befall Obama? Thus far he
has ignored Afghanistan to embrace cap and trade and Health Care, both already
unpopular.  Bush made the same
mistake with a prolonged war in Iraq.   By the way, Quentin Tarantino will finally do a movie
version of 1984, the story of an All
Powerful Government, next year.

Musically
the Beach Boys popularity, cheerful songs of cars and surf, peaked in 1965-66.
The British Invasion of the Beatles and Stones sprung from American rockers
like Chuck Berry. But mood turned Magical Mystery Tour, now seen in Harry
Potter and Twilight.  The Beatles would turn introspective
meditating on Indian mountaintops and then break up as a group. That by the way
preceded the 45% drop in the Dow….A comparable event now would be the passing
of Michael Jackson.

Not
surprisingly a movie ‘celebrating’ the 40^th anniversary of Woodstock
is set for late summer release. 
That event brought a host of new groups onto the scene like Crosby
Stills and Nash, Ritchie Havens, and others. On a milder note, American Idol is perhaps the television
of Woodstock for another generation.

 

The
Cold War soldiered on in that era. Putin, a KGB trained spy, seems determined to
bring the Soviet Union back as a Union. 
This will be resisted by member states but hamstrung with too much debt
and bogged down in Afghanistan there will be little for the US  to do but sit and watch, I hope…..

The
rise of China and India may take another generation but is well underway. Just
as Britain took several decades to descend from its world stage, the same will
be true for the US.  Like Rome and
Britain, attempting to maintain far flung military outposts and an aggressive
welfare state at home will eventually cripple the currency. The  ability to project power across the
world is already diminished.  The
rise of Islam in Europe can only be checked by  a revolt of Islamic women, will that happen?

On
a positive note, like Prohibition in the Depression, the War on Drugs will
likely end in the next ten years. Mexico, amid a rising body count, has
legalized small amounts of marijuana. 
The US  Government has failed
to enforce behavior among drug users, incarcerating tens of thousands and  corrupting public officials along the
way.  Like FDR, this or the next
President will likely conclude legalization is more profitable and less
destructive.  It will no doubt require
more violent events on this side of the border, but it is going to happen.   The Public is already tired, is
Washington listening?

Knowing
what to expect can make the future much more manageable. Both the Depression
and the 197os saw technical advance. Wozniak ushered in the Apple in 1978.  That same sort of advance is happening
with Apple’s iPhone now.  The DC 3
made commercial passenger transport possible in the 1930s. So technology
marches on despite the economy.

 Americans voted for Change, they are
going to get just that. 

You may have noticed that the government, federal that is, has ideas about your car, your house, 

your electricity ues, your health plan and yes, your weight. 

Meme Roth at NAAO believes the government should have mandatory counseling for overweight teens. Reject that you and you reject your ability to access Medicare, Medicaid, etc. Hmm, will this stop with teens? This is happening in Britain. 

Since when did anyone listen to a counselor?  The jails are full of drug addicts as testament to 

Just Say No, simply does not work. 

The Federal Government did finally manage to change one behavior after years of public announcements failed to do the trick. Yep, smoking. When I was in high school a pack of cigarettes was 35 cents, I observed that I never smoked. Now that cigarettes are $5 a pack, smoking is down. Well since that worked so well and since we have deficit spending, how about yes

A Consumption Tax

French fries, cheeseburgers, fired foods, gravy, yep no comfort food would be safe.  As with cigarettes all the FEDS have to do is increase the tax until we can see results. That $5.99 Whatameal or Big Mac Supersize, how about a $10 surcharge making it $15.99.  Sprouts and tofu, well try $4.99.

Don't laugh, Austin outlawed cigarette smoking in public and New York City is cracking down on trans fats. Is this the Change you voted for?

A couple of years back I speculated that after home builders the next crash was surely Vegas Casinos, oh that I had bought puts!  

Now condo buyers have even started blogs commiserating with one another. 

I was there last summer and it was ridiculous then. Just how much market is there for what appeared to be unlimited condos on the Strip?  And clearly no one planned to live in them. Like Miami it was a sort of time share but not even that, just a bet that Vegas would always expand and that a million dollar condo could be flipped. At least in NYC there is some justification for a high priced Central Park view apartment, it is a center of business. This is hardly the case for Vegas. 

Most of the real lestate problems are centered in a few stats like CA, AZ, NV and FL, how about we auction those states off to say George Soros, he believes in government…

Kai-Fu Lee has moved from Microsoft to Google to his own operation in China.

he is funded by 'angel investors' and will be working on e commerce and cloud computing. Jim Rogers said several years ago that it was only  a matter of time before China came up with its own operating systems putting Windows out of massive market share. Well…..here it comes I would guess. MSFT sued when lee left then so they take his talent pretty seriously. 

As I pointed out in class despite great earnings and lots of cash MSFT stock has gone nowhere for many years. This is the reason, MSFT is no longer an innovator. The world wide yawn at their latest effort with Yahoo is a good example. 

Go East Young Man…