Market Correction?

It's a confirmed Bull market, baby, you can take it to the bank. The guys in Washington have said the recession, depression, whatever they call it is over and all signals are that this running Bull is going to continue until it blows right through 14000 on the DJIA and head to 36000.

Really, Paul?

Nah, I'm having a little fun, dear reader, because there's been a lot of euphoric talk and whenever I hear grown men giggle and politicians starting to take credit for a job not yet finished I know something not so good is about to happen.

There was a recent article in one of the financial newspapers I receive written by someone who said he knew what he was writing about and he predicted a straight line recovery, an express to the penthouse, because, he said, the market collapsed nose first and it is only logical to assume it'll do the same coming back. It's the old straight down-straight up theory of investment management.

I am here to tell you that this was not a nose first market descent but it took almost a full year and a half. It didn't happen overnight, though we may think it did.

The same was true with the 2000 Internet bubble. It took two years to find a bottom and almost five to move back up before it started to fall apart again.

How do I know this? All you need to do is look at a chart of the S&P 500 and in March 2000 the index was 1527 before it tumbled and in October 2007, its most recent high was 1565 before making the trek down to where it is today. Whoever said that the markets nosedived and would quickly recover the same way has been too lazy to simply look at a chart that clearly indicates a market that took almost 1 1/2 years to find the most recent bottom.

Students of our domestic economy know that recessions last on average 16 months and periods of economic expansion average almost four years before pulling back.

We're almost a decade beyond the folly of the Internet bubble and we've yet to see the return of the NASDAQ high of 5132. No sharp V recovery for that market.

In 2008 the stock market didn't just fall off the cliff in one day. It started in 2007 and weakly crawled into 2008. Back in early 08 we were told that we'd be out of the mild recession by the elections. The experts were wrong and what we had was a bigger mess than 1987 and 2000 combined. This wasn't a sharply etched V but a slow slide that took almost two years to get to where we are.

Expect this recovery to slowly work its way through the mess banks and government created. It took years to make and it'll take another few years to get back where we once were. How do I know this? History, especially in markets, always seems to repeat itself.

A Bit of Good News Goes A Long Way

Professional money managers base their decisions on what to buy and when to buy on cold hard facts. Amateurs, for the most part, do their buying on hope and what their gut tells them. So far the amateurs are leading the markets higher, or so it seems because professionals shouldn't be acting like this.

Lat week the Aussies raised their interest rates and the markets responded by pushing equities, bonds and commodities higher. It's not supposed to work that way. Yes, we've seen the dollar get crushed lately, which should make oil sparkle, since it is traded in dollars. But, we shouldn't be seeing everything going up all at the same time, certainly not bonds and gold.

To give the investor their due their is a lot of money that has been idling on the sidelines and looking to be put to work. Any excuse to jump in seems to work. My concern is that gold is trading at all time high this year. This increase is signaling inflation, and seems to be sustainable while bonds are also holding their own. Bonds, if there is inflation, should be pulling back while gold should keep on trucking. That's not what happened and something has to give. Either we're seeing the a glimmer of inflation or we're not.

Our domestic equities have also held their own, moving higher as the dollar losses ground. Stocks in the S&P 500 are multi-national, meaning they make money here and there and everywhere. A weak dollar works just as well for our domestic based companies as it does for our overseas friends when the dollar goes kaput.

Geithner and Bernanke both agree we need more stimuli to get our economy percolating rather than a rate hike. Unemployment is predicted to hit 12%, home sales and prices are weak, commercial real estate is near life support, retail sales are anemic, workers have not seen their wages increase even though manufacturing had a touch of an increase but just a touch, and to be blunt we're not out of the woods by any stretch of the imagination. Increasing interest rates at this point is probably the last thing on this administration's mind. The economy is still fragile and while the investment folk like to point out that they 'look ahead' six months when making their buying or selling decisions there doesn't appear to be a lot of really great news on the horizon unless you do what the Wall Street folk appear to be doing which is squinting really hard and keeping their fingers and toes crossed.

The Aussie rate hike doesn't look like it'll start any stampede to higher rates by other central banks, although it did give a boost, of a sort, to the markets for a day or so.

Capital Marx

Back in the day, I'm talking 1960s not the dark ages, a lot of professional ball players had to have off-season jobs in order to make a living. They just couldn't make ends-meet with what they earned playing baseball, hockey, football or basketball. When the season ended they painted houses, worked construction and a few even sold life insurance. If the team won a championship it was highly unlikely the player could take the rest of the year off and bask in their celebrity status.

Detroit Tiger Hall of Famer Al Kaline, during his peak years, turned down a contract for six numbers because he didn't think he was worth it. Today some ball players get paid that much in a week and couldn't carry Kaline's dirty socks.

Which brings me to today's rant and the compensation of some corporate CEOs and the lack of value they bring to shareholders. These are the leaders that only know how to increase their corporate bottom line by firing employees, slashing benefits and selling off divisions. For this the top-level execs are compensated extravagantly and totally out of whack with reality.

Neill Minow, co-founder of The Corporate Library, an independent research firm, met with Treasury Secretary Geithner this past summer to discuss this exact subject of executive compensation.

She talked to Geithner about what the management at Citigroup was planning, earlier this year, to increase compensation to certain employees by 50% because of government mandated reduced bonuses. This was sort of a mulligan for loyal execs. Citi, which was close to first in line for TARP, and now a wholly owned government subsidiary, is not the only company not caring about shareholder value. Minow proclaimed that what Citi planned on doing was, '...doing more to destroy capitalism than Marx.'

A.I.G., another bailout poster child paid out $165 million to employees in the financial services division, the same folk who helped bring us the 2008-2009 recession. How does anyone justify this, asks Minow.

Many of us remember the lack of responsibility and run-away destruction at K-Mart that destroyed the retirement of thousands of employees and left shareholders with nothing. Not only was the leadership incompetent the same was true of the Board of Directors that did nothing to stop the corporation's eventual bankruptcy.

Minow has made significant leadership changes at American Express, Kodak, Waste Management and confronted Sears to implement improvements in their company's stock plan.
Manow cannot do this work alone. As investors it is our responsibility to ensure that we invest in companies that are responsible in all phases of their business and if we buy mutual funds to make sure that fund management is pro-active in demanding CEO and Board of Director accountability.

Failing that as consumers we vote with our pocketbooks and that certainly is something all businesses understand.