THE WEEK IN REVIEW

All three Dow Jones Indices posted risk premium declines. In addition, the Dow Industrials performance was not displeasing.  It climbed 783 points, closing out the abbreviated holiday trading week at 8,829.04, 9.7% higher.

§  The Industrial Risk Premium for the week ended November 28^th fell to 9.39% versus 10.30% in the prior week

§   Over the same period  the Transportation Risk Premium declined to 8.56% from 9.45%

§   Finally, the Utility Risk Premium number eased to 8.58% from 8.96%

The risk premium improvements were heavily influenced by stocks reacting favorably to the U.S. government’s assurance to craft a financial assistance plan for Citigroup. This development may have served as a relief valve, releasing the mounting pressure, at least temporarily, on the financial services sector. It was largely concern over the heath of financial intermediaries, notably Citigroup, having an adverse effect on the Dow Industrials to 7,552 the, its lowest close since March 11, 2003 when the index hit 7,524.

ARE STOCKS FINALLY CHEAP? NOT BASED ON A 20-30 YEAR TRIPLE TOP

Based on the input variables driving our Risk Premium Model, stocks may be “becoming cheap” based on a series of evaluation measures extending as back as 50 years.  In effect, by expanding the statistical time line, the bull market experienced early in this decade may have been the middle of triple-top of a bull market started much earlier, perhaps back to the 1980s.   We have long held to the view that equities throughout this slump have not necessarily been bargains particular when valuing them from the “top” down (August 2007). Our model has convinced us more than ever than we approaching the end of a much longer market cycle, rendering downturns in the intervening period mere blips along a cycle which may be 30 years or older.

But now we believe that valuations based on variables such as Dividend Yield, Book Value and Return-on-Capital are closing in on appropriate fair-market prices and that stocks are beginning to form bottoms which can offer long-term value. This is not to be confused with an expectation that stocks are expected to suddenly make a convincing bullish advance. (The lead-up dot-com and real estate bubbles were merely bubbles within an extended bull market which wiser observers knew could not be sustained. It is now our considered opinion that when the post mortem on this market cycle is completed, some investors may very well conclude that the U.S. economy was really experiencing a “W-shaped” bear market despite market upswings such as the 14,164 finish on October 9, 2007.)

THE CITIGROUP RESCUE

Given Citigroup’s large global presence and its market prominence, securing an aid program for the corporate behemoth was vital to the stability of both stock and bond markets.  Highlights of Citi’s accord with the U.S. Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation which have structured a $40-billion capital benefit program:

THE DETROIT BIG WHEELS

Meanwhile, investors (and, of course, employees and suppliers) in the three major U.S. auto manufacturers will be waiting to see what Congress will do for them.  In the kindest terms I can think of, Congress instructed the automakers to come back when they had made substantial progress on self-help plans. Their chief executives were chastised for using corporate jets to attend Congressional hearings and were encouraged to fly commercial.  It should be interesting to see what austerity plans they lay out. Many observers believe the chagrined Detroit grandees will enjoy a more sympathetic hearing the second time around.

TRAFFIC ON THE YELLOW BRICK ROAD IS GROWING

Not surprisingly, shortly after the auto industry made its pitch to Congress, homebuilders traveled down the yellow brick road to Congress. However, they did not find a wizard but a dead end.  Although the plight of the homebuilders is serious, the U.S. government cannot afford (literally) to underwrite the financial bailout of all sectors of the economy. There needs to be a brake on the government acting as the lender of last resort for all corporate America.  Congress needs to be judicious in the industries it can and is willing to help.  While the federal government is not normally in the lending business, its current substantial involvement in the financial sector is arguably its primary tool for preventing substantial economic dislocations.  But if there is a “moral hazard” (...I hate this phrase), it presents a risk that continuing handouts to corporate supplicants will undermine our capitalist economic system, causing a drift into socialism without us even realizing what or how it happened.

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