Dow Jones and Nikkei Stock Index Comparison

Sol Nasisi over at BestCashCow just posted an interesting article comparing the Dow over the last twenty years to the Nikkei in its bubble years (1980s). Above is one graph from the article, comparing the two indices.

On the first chart, I performed an analysis that is similar to the one I did comparing the Dow today to its performance during the Great Depression. I graphed the Nikkei from 1970 to 2009. Using the other Y axis, I graphed the Dow from 1988 to 2009. The 0 point on the graph represents the high point of both markets – 1989 for the Nikkei and 2007 for the Dow.

You can see the result. From its high at 0 point to its drop three years later, the Nikkei shed 57% of its value while the Dow has shed 44%. If the Dow was to follow the Nikkei’s lead and drop by 57%, then we could expect it to bottom out at around 5,700 (where the yellow line meets the blue in Year 3).

Is this reasonable? Data from the Nikkei as well as from the Great Depression Comparison seems to show that with severe economic crisis, markets fall by over 50% and often by greater than 60%. In other words, the severity of the crash is proportionate to the level of the run-up. Japan experienced a huge run-up in the 1980s. The US experienced a large run-up before the depression. Both led to a severe crash in the markets. Since all economists seem to agree that we are in the biggest economic crisis since the depression, it’s fair to think that the stock market’s losses will reflect that.

Bank of America Disappoints; Stock Below $10

I once wrote that Bank of America was a well-run bank that offered a good investment opportunity. I still believe in the long-run, the company is well-positioned to be a dominant player in the financial services space - if it can survive.

Today, as Bank of America sought more money from the Feds, one has to wonder if Ken Lewis perhaps overplayed his strong hand. He had a strong, stable company that was relatively free of many of its peer credit problems. But the purchase of Countrywide and Merrill changed that.

Now, the bank is swimming in losses and forced to go to Washington to money. Bank of America was always looked down upon by NY for being a McDonald's of banks. But I'd rather be a McDonalds than having to go begging.

Obama Bonds, Rates at 0%, Are We Going Route of Japan?

The evidence seems to be mounting that the economic downturn that most resembles our own is not the Great Depression, but rather the Lost Decade in Japan. In the 1980s, Japan was the rising power that threatened to eclipse the United States. Its cars were dominant, its cash bought up American companies, and its culture and keiretsu culture threatened to overwhelm our form of capitalism. A square mile in downtown Tokyo was reportedly worth more than all of Manhattan.

Them the Japanese bubble popped. Real estate values toppled and brought down the banks (sound familiar). The economy ground to a halt and the government and Central Bank reacted with aggressive fiscal policies.

So, where are the similarities?

• Like in the US, the Japanese Central Bank cut interest rates, eventually going to 0%. The US Federal Funds Rate is headed to 0% also.
• The Japanese embarked upon massive federal works projects, backed by cheap government debt. Obama plans to do the same.
  
• The Japanese propped up their banks. In the West, we criticized this move and called them zombie banks.

So, how did Japan fair? It's stock market bottomed out 13 years after the bubble burst, having lost 80% of its value. Today, the Nikkei is retesting those lows, meaning that almost 20 years later it is nowhere near its bubble high.

So, are we in a Japan-like repression? Or, will we bounce right back to Dow 14,000 in the next 12 months? Join the discussion.

Ken Lewis and Other Bankers Criticize High Rate Banks

Lately, many banks have bucked the drop in the Fed Fund rate and are paying decent rates. As I and others have written, some banks are doing it to attract and retain deposits to stay afloat, while other see it as an opportunity to gain market share.

In an article on Bloomberg yesterday, several big bank CEOs criticized the practice.

“You have a whole raft of smaller banks out there, some of which are in difficulty, who are paying rates that are bordering on insanity,” James Wells, chief executive officer of SunTrust Banks Inc., said in a conference call with investors Nov. 13."

Ken Lewis, the CEO of Bank of America said that rival Wells Fargo ( a bank with uncompetitive rates) was a "rational pricer" intimating that high rate banks were not rational.

And one analyst even said that the Wachovia was purchased because the high rates it was offering were hurting other banks.

I think this is wrong. As I wrote on BestCashCow:

Bankers hate high deposit rates because they lower their profit. Of course Ken Lewis wants rates low. It makes his job easier and makes it easier to pay for all of the high rise buildings BofA operates in Charlotte, Boston, NY, and San Francisco. It makes it easier to pay for the Countrywide

and Merrill Lynch acquisitions.

But our goal isn't to make it easier for bankers, it's to get the best return for our money so we can pay the rent, send our kids to college, and maybe retire. Consumers, people like you and me should also be working to maximize our return.

BankMan on the Bank Deals Blog had a similar sentiment, writing:

The thing that I find unsettling about this Bloomberg article is how industry insiders appear to hold contempt against the banks offering the high rates.

I don't blame the bankers for wanting lower rates; it makes them more money. But I also think that as consumers, we have every right to put our money where it's going to earn us the highest return - and right now that's not Bank of America.

Savings Accounts Holding Up

Here's an interesting post from BestCashCow about how the rate on savings accounts have held up despite a number of Fed rate custs over the last year. As the chart below shows, savings accounts rates have not dropped at the same rate as the Fed Funds Rate or T-bills.

What is says to me is that banks have been hungry for deposit dollars and so they haven't been able to drop rates. This premium will probably continue until the banking crisis is resolved. Banks are trying to hold on to their deposit to prevent the kind of runs that brought down Indymac, WaMu, and Wachovia.

Will Paulson's Plan Work?

There's lots of interesting discussion about the $700 billion bailout plan engineered by Treasury Secretary Hank Paulson. He and Barnanke are smart guys but that doesn't mean the plan will work. It may not be the right plan, or perhaps doing nothing is a better option. Sol Nasisi on BestCashCow provides some interesting data that seems to be the question: if we restore the banks, is there anyone for them to lend to? The chart below, from the article, shows that consumer debt ratios have risen into record territory, tapping our consumer spending.

Money Market Funds Melting Down

I just wrote a series of articles on the meltdown that's occurring with money market funds. These are not to be confused with money market accounts, which are FDIC insured. Money market funds are basically mutual fund like vehicles that invest in what are supposed to be safe, short term debt, treasuries, etc. As a result, they very rarely if ever lose value. The price of each money market fund is set to $1 and is called the net asset value (nav). So, if you bought $30,000 in a money market fund, you'd purchase 30,000 shares at $1.

Some of these funds held Lehman bonds and its bankruptcy has blown a hole in their portfolio. As a result, several funds have seen the NAV go below $1, meaning that investors have lost principal. Remember, this almost never happens. Yesterday, the money market fund, the Primary Fund (RFIXX) halted redemptions for seven days until it can recover from a $800 million Lehman-related loss. That means customers with money in that fund can't withdraw it for seven days. When they do, it will remain to be seen if there will be any losses. Usually, the manangers of the fund, make the fund whole, bringing the NAV back to $1.

We also learned today that Putnam closed its $12.3 billion Putnam Prime Money Market Fund while Dryfus and Columbia (a division of BofA) injected funds to keep the net asset value at $1. When Putnam shareholders will get their money back and how much they will get back is unclear. Dryfys and Bank of America are being forced to reimburse their shareholders for losses in several of the funds they manage.

As we saw with auction rate securities, the question of what is a cash equivalent security is being tested. The definition of "safe" is redefined on a daily basis.

At the moment, the safest place to stash your extra cash appear to be FDIC insured savings accounts and money market accounts (not be be confused with money market funds), and FDIC certificates of deposit.