Some Scary Thoughts for Halloween

by JDH on October 31, 2009

Happy Halloween. I’m dressing up as a stimulus check. The White House announced this week that the first $150 billion in stimulus funds have “created or saved” 650,000 jobs.

“The White House said the actual number of jobs created so far is likely closer to 1 million, since its report on stimulus job creation only focused on $150 billion of the $339 billion in American Recovery and Reinvestment Act funds spent so far.

“We’re solidly on track to create or save 3.5 million jobs by the time this program winds down,” administration economist Jared Bernstein told CNN on Friday. “There’s a lot more ammunition in that Recovery Act. The stimulus package is absolutely working, both in GDP terms and in terms of saving or creating jobs.”

So best case scenario, $150 billion creates or saves 3.5 million jobs. That’s a cost of over $42,000 per job.

Of course if you take the total $339 billion spending so far and divide that by 3.5 million jobs, that’s a cost of just under $100,000 per job. And if you take the worst case, which is $339 billion divided by the 650,000 jobs created or saved to date, that’s a cost of $521,000 per job.

That’s scary. Happy Halloween.

Even at $42,000 per job, would it not have been easier to simply take the $339 billion and just send a cheque (sorry, that’s a Canadian word, “check”) to every American? There are around 307 million people in the USA, so for that money every single American could have received a check for $1,000. Every family of five would have received $5,000. They could have spent the money and stimulated the economy. By the end of the bailouts the $339 billion will be over a trillion, so that’s around $15,000 per family. An ABC News report says that Jared Bernstein, chief economist and senior economic advisor to the vice president, said the cost per job was actually $92,000. But I digress.

Do you think that this week’s market action was caused, in whole or in part, by the realization that we are not out of this mess yet? Or that maybe it will get worse? Here’s a chart of the S&P 500 for October:

SPOctoberWe bottomed on October 2, had a nice run until a double top on October 19 and October 21, and then gave it all back, and then some, closing the month around 2% lower than where we started. Sort of like September, where we bottomed at the start of the month, made a peak on the 21st, and then faded for the balance of the month:


That’s not the pattern every month, but it’s close; here’s 2009, with the highs for the month:

SP 2009

Mathematically, this year, the top for the month happens on the 18th of the month. In the last four month the average top is on the 25th of the month. What does all of this mean?

Nothing. Absolutely nothing. Going back 100 years I suspect that the average high for the month is the 15th, since that’s the average of the numbers 1 through 30. Keep moving, no trends to see here, except that the market is very volatile.

This week, based on my belief that we were more likely to go down than up, I bought some puts. That’s the first time in a long time I have bought options; normally I sell them as part of a conservative covered writing strategy.

On October 24 I bought 10 contracts of the S&P November 925 put for $1.35 each. My timing was wrong and the market increased, so the next day, on October 25, I bought another 10 contracts for 95 cents to average down my cost. By October 28 the market had fallen, so sold my 20 puts for $2.50 for a nice quick double. The market bounced after I sold them, so I thought I was brilliant. Of course than the market crashed on Friday, so had I waited I could have sold for over $5. Oh well, you can’t worry about what could have been.

I wasn’t playing with serious money, but I wanted a bit of downside protection.

Then, on Thursday, AEM.TO – Agnico-Eagle Mines Ltd. announced lousy results, so I picked up a few shares at $61.78 (Canadian). I thought that was a great move, since I had sold those same shares back on October 8 for $76.26. Wrong again; the further weakness on Friday brought the shares down even more, so on Friday I averaged down and bought more at $57.

AEM Agnico Eagle

So,was buying more a smart or stupid move? Time will tell. As you can see from the chart, Friday’s close has brought the stock back to the July 13 level, before the stock ran to $76 two months later. The next support is $50, and if that doesn’t hold, we could see the under $30 level achieved in the crash last fall. In hindsight I wish I was buying back during the crash last fall. Obviously Agnico-Eagle has some issues, but a $20 drop in the share price in three weeks seems like a buying opportunity to me.

A close look at their results shows that most of the loss was due to foreign currency translation for reporting purposes. Agnico has expenses in Canadian dollars, but for reporting purposes reports in U.S. dollars, so any movement in the U.S. dollar will impact on paper profits. But that’s the point: we’re talking about paper, not about reality. Going forward Agnico’s production costs remain unchanged, and expected production over the medium to long term is also unchanged. I think the market over reacted, so I’m a buyer.

Lest you think I have lost my mind, let me remind you that as of today I am 81% in cash, down from 85% last week. I don’t trust this market, so while I will place some small bets, I expect further weakness in November, so I will hold my cash.

My only holdings now in my main account are conservative gold and silver plays: AEM.TO – Agnico-Eagle Mines Ltd., K.TO – Kinross Gold Corp., G.TO – Goldcorp Inc., PAA.TO – Pan American Silver Corp., and SSO.TO – Silver Standard Resources, Inc. I may shop for bargains over the next few weeks, but I don’t expect to be parting with my cash any time soon.

I still worry that interest rates will suddenly increase. I’m probably totaling wrong on that, because low interest rates depreciate the currency, which makes it easier to sell goods abroad. That’s why every country is keeping their interest rates low. Unfortunately a low currency also makes purchases from foreigners more expensive. Do you raise interest rates to protect the dollar? That would increase unemployment, and plunge us deeper into recession.

No easy answers, I’m afraid.

My final worry is the H1N1 flu. Here in Ontario it’s front page news. Long lines at vaccination clinics (all of which are free to the public here in Canada). Now there is shortage of the vaccine, which is increasing everyone’s worry level. My 11 year old son woke up at 6:00 am this morning having difficulty breathing, so my wife immediately took him in to get him checked. His lungs were clear, and he has no fever, so he was home an hour later, but that shows you the heightened sense of worry we are all feeling.

Absenteeism at many schools is over 20%. Everyone knows many people who were off sick this past week. Sadly there are now stories of children dying from H1N1. H1N1 is serious, and it’s not going away.

Last week I wrote about the End of the World (Maybe), and I quoted from the work of George Ure and who were predicting a “turn” in our emotional tension around the October 25/26 period. Did anything turn? Are you more nervous and tense today than you were last week?

If you invest in the stock market, after Friday’s action you may be more tense. If any of your family or friends have H1N1 you may be more tense. I’m not saying their doom and gloom predictions were correct. I’m just saying that today I’m not a rosy-eyed optimist.

I’ll hold my cash, and we’ll see how I feel next week. Happy Halloween. This may be one of our scarier Halloweens in recent memory, for more than the usual reasons.

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