Q1-10 Thoughts

I’m hoping to be better at jotting down things, as I think of them over the next quarters, in the hope that there will be more structure (and some would say point) to these quarterly musings.  I say these, though obviously this is the first quarterly musing and in truth it’s more of collection of thoughts that I’ve pondered at various times since the middle of last year.  So, in no particular order, here we go:

Levels versus Changes
Generally speaking, we’re conditioned to look at the changes in things -- the S&P is up 0.67% today, Retail Sales were up 9.3% in March, Company X’s revenues were up Y% year-on-year, etc.   This makes sense in a world where things steadily increase, hence its prevalence.  However, given the depth of the recession, surely it makes more sense to keep the levels firmly in mind to.  The (same store) retail sales numbers were clearly good (at +9.3% yoy) but the level of those sales is below the 2006-2007 levels, somewhat less impressive.  At the end of the day, while we all focus on the changes as a short-hand for looking at the current situation, it’s the levels that matter…

Retail Sales
Speaking of retail sales, having the data is one thing but dealing with the major conflicting data and then trying to interpret it is another.  Clearly same-store sales have improved – I certainly don’t doubt that; but how much of that is as a result of stores being closed.  After all that improves the numbers in a couple of ways:
- Companies close down their under-performing stores (hence the average performance improves)
- Customers (some of them, at least, assuming brand loyalty) of the closed store go to one of the remaining stores, and hence same-store sales (for the remaining) look better than the underlying reality. 
But…given the rosy sales (and general consumption) data why are sales tax receipts so weak (here’s Texas, as an example...NY is the same)?
And why’s Wal-Mart (a price leader in many categories) looking to cut prices further. 
And why are other measures of consumer spending so muted?
Maybe, I’m just overly skeptical…

Treasury Bonds, Households and Say’s Law
It’s probably not surprising, given their size in the book, to hear that I ponder a lot about Treasuries and the 30-year yield.  Certainly, there’s been no change to the underlying thesis (a secular debt-reduction driven deflationary/disinflationary period) and circumstances seeming to back this up with both Commercial/Industrial Loans and Consumer Credit continuing to contract.   No, my ponderings have been more related to Households and if/when we’ll see a shift in their allocation towards Treasuries.  Currently, Households hold the substantial majority of their assets in equities and real estate, with barely a sliver in Treasuries. 

Demographics, with the median age of the boomers starting to creep into the late 50’s, would suggest that we should expect some shift from capital appreciation towards income generation.  Over the last year we’ve seen some of that, with a steady inflow of assets into fixed income funds and out of equity mutual funds, despite the strong rally in the equity markets.  Is it possible that Say’s Law will apply to Treasuries – can supply, really create its own demand...

Mandelbrot & "Trading Time"
Finally, an observation; I’ve been re-reading some Mandelbrot recently.  In particular, various things he’s written on trading time; the recent 4-6 weeks being a good example of “slow” trading, where things have meandered casually (never particularly dramatically) higher each day and yet, here we are up 12%+ in barely 8 weeks later.  For me, it’s been the time for working on researching future positions rather than actually doing anything with the book (which is flat over that period).  Hopefully, that research will come in handy when valuations are more to my taste and we’ll see some “fast” trading time soon.

And, yes I know I switched from the 3rd person…I think I’ve grown tired of it, for a while at least.