Right out of the starters blocks this morning, the Reserve Bank of Australia (RBA) pulled the rug right out from under the “high yield status” of their economy, with another HUGE rate cut overnight… This time, the RBA cut 100 BPS, to an internal cash rate of 4.25%. This brings the total since September to 300 BPS! WOW! Talk about effectively unwinding seven years of tightening! The statement following the rate announcement leads me to believe that the RBA is probably finished cutting rates for now… It will be a wait-n-see what happens globally, before the RBA entertains any talk of further rate cuts… At least that’s my opinion!

Had a long talk with the legal beagles yesterday… The just don’t like what / how I say things. This all stems from complaints we’ve received that claim that, “I give investment advice”. Of course when the currencies were going up, up, up and away, in my beautiful balloon, for 6 years, we didn’t hear of any complaints or claims that I was “giving investment advice”… Any way… It is what it is… I call it “Market Commentary”… And everything I say is “Chuck’s opinion” not that of EverBank’s and the last time I looked… Opinion is: not to provide investment advice or to manage your money – THOSE ARE DECISIONS THAT YOU HAVE TO MAKE.

Well… Now that I’ve said all that… Guess what finally happened yesterday, that I’ve said was the case since January? Yes, the National Bureau of Economic Research (NBER) finally came clean and said that the U.S. has been in a recession since December, 2007. Here’s where I could go totally sophomoric on you and say, “I told you so!” but I won’t, no wait, I already did! But, that’s not my intention. I only carry on about his because recently I’ve had a few people tell me that I have no foresight, and that I merely react to things… Hmmm… I said this was a recession 11 months ago, long before the un-dynamic duo of Paulson and Bernanke would admit it, and long before your friendly neighborhood economist would admit it, and way before the NBER, the official arbiters of this call, admitted it.

The currencies remained in a very tight range yesterday with a bias to buy dollars, with the Huge stock sell off… The stock jockeys didn’t fall all over themselves on this news, and that surprised me… Here’s why… You see, most times, in the past, by the time the NBER gets around to calling a recession, the recession is either over or about to be over. So, knowing this, I figured the stock jockeys would be falling all over themselves, calling out that the light at the end of the tunnel could be seen…

The problem with that mentality is that not all recession calls by the NBER have signaled the end of the recession. Take… The recession that started in July 1981, which was announced in January 1982, and that recession ended 10 months later in November 1982. That’s the scenario I’m afraid that we are going to revisit this time. I’ve already said that I believe 4th QTR GDP will show a negative -5% figure, so that’s right now, and there’s no way, the economy rebounds from a negative -5% drop in a heartbeat… This is going to be a long, protracted recession, but then, the song remains the same here for me… I’ve said that for a long time now!

We heard from Federal Reserve Chairman Big Ben Bernanke yesterday… Big Ben said “further interest-rate cuts are “certainly feasible,” but he warned there are limits to how much such action would revive an economy likely to stay weak well into next year.”

Mr. Bernanke also said the “Fed’s powers don’t end with the federal funds rate, and its ability to inject liquidity into markets through its balance sheets “remains effective.”

I guess, that was the wink and nod that interest rates are going lower, and that… The Fed is going to continue to take in toxic securities on their balance sheet…

OK… There’s a story on the news wires this morning that according to the charts at the Bank of Tokyo, yen could push to 79.75 VS the dollar. WOW! I think these chartists should go back and check their angles again, because that’s a phenomenal move in yen, and I can’t believe the Bank of Japan (BOJ) wouldn’t be in the markets intervening (selling yen) to keep that from happening… But for what its worth… There you go!

Today, we’ll see U.S. Treasury Sec. Paulson speaking about the U.S. / China economic strategy… Hmmm… I wonder if old Hank, will ruffle a few Chinese feathers with his speech, or will he go quietly? I think that after yesterday’s .75% drop in renminbi, followed by a “regular” .30% drop last night, which puts renminbi at a 5-month low, that Paulson will be in a feather ruffling mood, especially, given the thought that he only has about a month left on his Treasury Sec. watch…

Remember about a month ago, I told you all about the early part of this decade, when the global economies were all fighting with recessions, and that the currencies were getting rewarded whenever a Central Bank cut rates to promote growth? I said then, that we could very well relive that scenario, and each time the RBA gives us one of those “mega rate cuts” I notice the A$ rallies… I guess, after we get through the next two weeks of Central Bank rate cuts, we’ll have a better idea if this is going to play out again, but for now, it sure is beginning to look like it will…

Looks like the airlines are “hurtin’ for certain” as I saw two different ads in the weekend paper for $49 flights… Southwest and American Airlines were promoting those discount flights… Of course there were tons of “terms and conditions” but the key here is the offer of discount flights…

I see from the U.K. Telegraph that AIG is beginning to sell off assets in an attempt to pay back the $153 Billion “loan” the Gov’t gave them. And I see where JP Morgan Chase is going to lay off 9,000 employees. And that there are rumors that Britain is entertaining thoughts about joining the euro again… They can forget about that! The people of Britain are NOT going to vote for that to happen… At least that’s how I see it from the cheap seats.

And yesterday… The piece of data that “told me” we were in a recession, the ISM (manufacturing) Index printed… And the index number fell by a greater margin than the “experts” forecast, and brought it to the lowest level (36.2) since 1982! Again, folks, this is a very “telling” piece of data, and confirms my belief that we’re in for a long, protracted recession, as this looks like the early 80’s recession and not those willy nilly ones of the 90’s and 2000’s!

The only data we’ll see today, is the vehicle sales, which is expected to fall again… I see where Ford is going to announce that they are going to change their focus to small, fuel efficient cars instead of Trucks and SUV’s, hoping that will “win over” Congress to give them a loan… I also see where Ford is offering “employee prices” plus a rebate for a select group of their cars… (that “employee pricing” is a bunch of bunk if my opinion any way!)

So, there’s a collection of some of the items that’s will drag on the U.S. economy… And eventually the dollar, once we get past this credit crisis…

Next on the rate cut block is the Reserve Bank of New Zealand, (RBNZ) who meets tonight… I think the RBNZ will play a game of poker with the RBA, and say…”I’ll see your 100 BPS, and raise you 50 BPS”… That’s right, I think we’ll see 150 BPS rate cut from the RBNZ… Like I’ve said a few times now, rates are going lower all over the world folks, we should all get ready for this!

I sure ruffled a few feathers yesterday when I printed a comment from someone else about the Energy Dept… Folks… The point was simply that we don’t need the Gov’t operating private businesses, like banking… That’s all it was…

The Retail folks are “happy” with the sales figures from the first weekend of Christmas sales… But, “happy” isn’t “giddy”… And that’s going to be a problem for the retailers this Christmas… They’ll see sales… But they won’t be “giddy”… And wasn’t that a shame in NY where a Wal-Mart worker lost his life in a store opening stampede? That’s a shame, it really is… It’s not like Wal-Mart was giving stuff away free! I’ll stop there, the story is sad enough…

Time to head to the Big Finish…

Currencies today 12/2/08: A$ .6480, kiwi .5345, C$ .8040, euro 1.2670, sterling 1.4940, Swiss .8290, ISK 230, rand 10.38, krone 7.0875, SEK 8.3175, forint 206.35, zloty 3.0160, koruna 20.2860, yen 92.20, baht 35.50, sing 1.5285, HKD 7.75, INR 50.14, China 6.8875, pesos 13.55, BRL 2.30, dollar index 86.85, Oil $49.23 ( I paid $1.84 for premium gas this morning, YAHOO!), Silver $9.44, and Gold… $778

That’s it for today… My little buddy, Alex, was writing a paper on the Revolutionary War last night, and we were talking about “taxation without representation”, and thought for a moment before going to bed, that, I kind of feel like that’s what we’re receiving now, today!

Source: The NBER Finally Says So!

Investors Behaving Badly

The Financial Research Corporation released a study prior to the [2001-02] bear market which showed that the average mutual fund’s three-year return was 10.92%, while the average investor in those same periods gained only 8.7%. The reason was simple: investors were chasing the hot sectors and funds.

If you study just the last three years, my guess is those numbers will be worse. “The study found that the current average holding period was around 2.9 years for a typical investor, which is significantly shorter than the 5.5-year holding period of just five years ago.

[While the research below is from a few years ago, recent studies show exactly the same, if not worse, results. Investors in general are not getting any better.]

“Many investors are purchasing funds based on past performance, usually when the fund is at or near its peak. For example, $91 billion of new cash flowed into funds just after they experienced their “best performing” quarter. In contrast, only $6.5 billion in new money flowed into funds after their worst performing quarter.” (from a newsletter by Dunham and Associates)

I have seen numerous studies similar to the one above. They all show the same thing: that the average investor does not get average performance. Many studies show statistics which are much worse.

The study also showed something I had observed anecdotally, for which there was no evidence. Past performance was a good predictor of future relative performance in the fixed-income markets and international equity (stock) funds, but there was no statistically significant way to rely on past performance in the domestic (US) stock equity mutual funds. I will comment on why I believe this is so later on.

“The oft-repeated legal disclosure that past performance is no guarantee of future results is true at two levels:

1. Absolute returns cannot be guaranteed with any confidence. There is too much variability for each broad asset class over multiple time periods. Stocks in general may provide 5-10% returns during one decade, 10-20% during the next decade, and then return back to the 5-10% range.

2. Absolute rankings also cannot be predicted with any certainty. This is caused by too much relative variability within specific investment objectives. #1 funds can regress to the average or fall far below the average over subsequent periods, replaced by funds that may have had very low rankings at the start. The higher the ranking and the more narrowly you define that ranking (i.e. #1 vs. top-decile [top 10%] vs. top quartile [top 25%] vs. top half), the more unlikely it is that a fund can repeat at that level. It is extremely unlikely to repeat as #1 in an objective with more than a few funds. It is very difficult to repeat in the top decile, challenging to repeat in the top quartile, and roughly a coin toss to repeat in the top half.” (Financial Research Center)

This is in line with a study from the National Bureau of Economic Research. Only a very small percentage of companies can show merely above-average earnings growth for 10 years in a row. The percentage is not more than you would expect from simply random circumstances.

The chances of you picking a stock today that will be in the top 25% of all companies every year for the next ten years are 1 in 50 or worse. In fact, the longer a company shows positive earnings growth and outstanding performance, the more likely it is to have an off year. Being on top for an extended period of time is an extremely difficult feat.

Yet, what is the basis for most stock analysts’ predictions? Past performance and the optimistic projections of a management that gets compensated with stock options. What CEO will tell you his stock is overpriced? His staff and board will kill him, as their options will be worthless. Analysts make the fatally flawed assumption that because a company has grown 25% a year for five years that it will do so for the next five. The actual results for the last 50 years show the likelihood of that happening is very small.

Tails You Lose, Heads I Win

I cannot recommend highly enough a marvelous book by Nassim Nicholas Taleb, called Fooled by Randomness. The sub-title is “The Hidden Role of Chance in the Markets and in Life.” I consider it essential reading for all investors, and would go so far as to say that you should not invest in anything without reading this book. He looks at the role of chance in the marketplace. Taleb is a man who is obsessed with the role of chance, and he gives us a very thorough treatment. He also has a gift for expressing complex statistical problems in a very understandable manner. I intend to read the last half of this book at least once a year to remind me of some of these principles. Let’s look at just a few of his thoughts.

Assume you have 10,000 people who flip a coin once a year. After five years, you will have 313 people who have come up with heads five times in a row. If you put suits on them and sit them in glass offices, call them a mutual or a hedge fund, they will be managing a billion dollars. They will absolutely believe they have figured out the secret to investing that all the other losers haven’t discerned. Their seven-figure salaries prove it.

The next year, 157 of them will blow up. With my power of analysis, I can predict which one will blow up. It will be the one in which you invest!

Ergodicity

In the mutual fund and hedge fund world, one of the continual issues of reporting returns is something called “survivorship bias.” Let’s say you start with a universe of 1,000 funds. After five years, only 800 of those funds are still in business. The other 200 had dismal results, were unable to attract money, and simply folded.

If you look at the annual returns of the 800 funds, you get one average number. But if you add in the returns of the 200 failures, the average return is much lower. The databases most statistics are based upon only look at the survivors. This sets up false expectations for investors, as it raises the average.

Taleb gave me an insight for which I will always be grateful. He points out that because of chance and survivorship bias, investors are only likely to find out about the winners. Indeed, who goes around trying to sell you the losers? The likelihood of being shown an investment or a stock which has flipped heads five times in a row are very high. But chances are, that hot investment you are shown is a result of randomness. You are much more likely to have success hunting on your own. The exception, of course, would be my clients. (Note to regulators: that last sentence is a literary device called a weak attempt at humor. It is not meant to be taken literally.)

That brings us to the principle of Ergodicity, “…namely, that time will eliminate the annoying effects of randomness. Looking forward, in spite of the fact that these managers were profitable in the past five years, we expect them to break even in any future time period. They will fare no better than those of the initial cohort who failed earlier in the exercise. Ah, the long term.” (Taleb)