More good news…
“Davidson” Submits:
Again, details have obscured the larger trends. The past few days Meredith Whitney, Nouriel Roubini and Peter Schiff have yet once again been providing overly pessimistic commentary with the recent market decline. The focus on short term events reflects human nature and the need to not miss anything that might prove to be detrimental to financial/human survival. Samuel McClure’s “Separate Neural Systems Value Immediate and Delayed Monetary Rewards” SCIENCE VOL 306 OCTOBER 15, 2004, Steven Pinker’s “How the Mind Works” 1997, “The Blank Slate” 2002 & “The Stuff of Thought” 2007 each describe the biological fundamentals that are responsible for the “Fight/Flight Response” first described by Walter Cannon at Harvard Medical School in 1915. Much of what is in the media is a reflection of the “Fight/Flight Response” to single data points taken wholly out of context and presented by recognized professionals with the credentials of authority. I call investing based on the “Fight/Flight Response” as investing with one’s “gut”. But, financial trends develop over time horizons of several years with the most recent Household Employment and Capacity Utilization cycles spanning ~11yrs (see chart).
Value Investors counter the “Fight/Flight Response” by filtering single data points through the context of historical precedent. This results in a careful and deliberate action or even non-action to counter the “Fight/Flight Response” that causes so many to respond to peer pressure or herd mentality. (The herd response to danger is part of the human Limbic System and is a major survival mechanism in herd animals) The key element of being calm while others are panicking is being able to place single data inputs into historical context. Most of us must train ourselves to do this by seeking out relevant information ahead of time so that we are prepared to automatically place new information into meaningful context rather than accept some named authority’s view as fact. In short we must be able to think for ourselves even if those around us are not doing so.
The chart below provides a useful context with which to digest recent financial data points and news. This is the Jan 1992 to May 2010 chart of US Capacity Utilization vs. Household Employment Survey. It provides us with some interesting observations that help us to develop a Value Investor perception and stand firm while the throng panics.
Observations: US Capacity Utilization (CU) vs. Household Employment Survey (HES)
1. Both data series have the “noise” so typical of data that arises from statistical sampling methods.2. Both data series have “bottoms” that are correlated and one can see roughly 2 cycles over this 18yr time frame.
3. One can see that the most recent economic cycle lasted ~11yrs, i.e. cycles are long and monthly data points are ALWAYS misleading.
4. One can see that CU formed bottoms prior to that seen in HES. The CU is a leading indicator for HES.
5. In the recent cycle CU bottomed June 2009 and HES bottomed December 2009. Purchasing Manager Sub- Indices identified both of these.
6. One observes that both data series are in up-trends with CU in a very sharp rebound. This is very positive for HES.
Thus far the calamities forecasted over the past 2yrs, i.e. another Great Depression, collapse of all major banks, default of vast quantities of Commercial Real Estate, threats of employment reaching Great Depression levels have not occurred as forecasted by Roubini, Whitney and Schiff. To the contrary, it appears that housing, automobile and retail sales in general are recovering along with employment and capacity utilization. Important to this discussion is that we have always suffered the concerns of professionals during previous recoveries as they interpreted economic data points out of context. Being Value Investors we can see the trends while many do not.
We must acknowledge our short term trader benefactors as providing the environment that permits us to be able to invest at a discount. The economic trends remain quite positive in historical context. Now is the time for investment commitments. Later, when all have turned bullish we will take a course similar to today and again make our independent decisions within context.
For Value Investors this is a time for bullishness.
