Through The Glass Darkly

[XenaLives]

Flashback city here... In 2007 , the night before the election, I started researching Obama's cabinet choices. I decided that they were all Zionist puppets and spies.... I stayed home.

[otraque]

INSTITUTIONAL ADVISORS

May 14, 2009

BOB HOYE

Great Depressions Are So Methodical

One of the features of a great boom is the excitement of shared convictions about eternal prosperity. One of the features of the consequent contraction is bewilderment about how suddenly the bust arrived. Beyond those directly hit, the establishment becomes perplexed by the loss of liquidity and wonders where the money went.

With the 1980s crash in oil and property deals, a hearing run by offended politicians asked a particularly aggressive Oklahoma banker about "just where did the money go?". And as the Wall Street Journal faithfully reported "We spent it on wine, women and song – the rest we just pissed away."

As flippant as this may be, it is accurate and could be suitable in any example in any century. Fortunately, for consistency in any century, there is the classic definition of inflation that it is an "inordinate expansion of credit". In the 1930s, Keynes in a number of letters to the Fed twisted this around to mean that inflation was simply rising prices that had very little to do with central bank manipulations.

Fortunately, Keynes is not around to provide official confusion to the description that deflation is an inordinate contraction in credit. Relentless credit deflation started in 2007, and this implacable force has been part of every long depression.

Clearly, the title of this address puts me firmly in the bear camp. Just as clearly, the possibility of another great depression is highly controversial, particularly when such magnificent efforts are being made to restore the prosperity of a financial mania, which have always been ephemeral.

Perhaps my credentials should be reviewed. Everything I needed to know about the markets I learned on the old and notorious Vancouver Stock Exchange. For example, in a world of extravagant claims from big government, big academe and big Wall Street the old definition of a promotion is useful: "In the beginning the promoter has the vision and the public has the money. At the end of the promotion the public has the vision and the promoter has the money."

In 2006 to 2007 the public had the vision that policymakers could depreciate the dollar forever and were positioned accordingly. And for a moment the promoters looked brilliant as everyone thought they were wealthy. Moreover, as with any promotion the bigger it is – the bigger the crash.

There are two failures going on. The most obvious is in the financial markets and the other is in interventionist economics. The latter failure is in theory as well as in practice, and can be described as the greatest intellectual failure since the Vatican insisted that the solar system revolved around the earth, more particularly, Rome. Too many still believe that the financial world revolves around the Federal Open Market Committee.

Last year's disaster fit the pattern of the 1929 fall crash with remarkable fidelity. Such a crash was obvious and as the train wreck in the credit markets continued through the summer of 2008 the Fed continued its recklessness. But with some marketing skills, the objective of "stimulus" changed from keeping the boom going to the absurd notion that bailing out one insolvency, Bear Stearns, would revive the boom. As usual with a bubble, it was not just one bank that had been imprudent – most had been.

The establishment missing this recurring event was bad enough but there is another clanger and that is the hopeless notion of a national economy. Even in ancient times, Cicero knew that the prosperity of Rome was vulnerable to the credit conditions in the Middle East. In this regard, Mother Nature has again been providing some harsh lessons, and history suggests she and Mister Margin will ultimately be successful in teaching markets 101 to many policymakers.

In the meantime, coming out of the classic fall crash orthodox investments such as commodities, stocks and bonds were expected to rebound out until April-May. Until this hooked up, the typical GDP forecast was tentative in looking for the recovery to begin "by mid-2010”, but our "model" needed forecasts of the recovery starting much sooner. Then, thanks to the "Green Shoots" that began to appear with the rebound in March, confidence was gradually restored in high places such that the miracle of recovery would happen sooner. The higher the stock market gets the more popular this idea becomes.

And this gets us to another lesson from the old Vancouver Stock Exchange. "So long as the price is going up – the public can believe the most absurd story." This has been the best explanation of why Wall Street, the supposed bastion of capitalism, focused on every utterance from central planners in a central bank. Then when the price breaks, the vision disappears along with liquidity.

The next phase of the contraction has been expected to start after mid-year.

For most participants, post-bubble bear markets have been sudden and severe. The 1929 example ran for three years and the post 1873 example lasted for five years. The latter has been the best guide for our recent mania and its bust, but this will be expanded in a few minutes as it is worth reviewing the excuses offered by many in not anticipating that short-dated interest rates as well as gold would plunge in a classic fall crash. This was the pattern with the 1929 and 1873 crashes and knowledge of such a plunge in short rates should have ended conventional wisdom that a Fed rate cut would have prevented crashes from 1929 to 2008.

The quickest sign of a gold bug forecast going wrong is "Conspiracy!". With their latest disappointment Wall Street strategists described it as a "Black Swan" event, and therefore unpredictable. That has been a cheap out as each transition from boom to bust has been methodical. Others called it a "Minsky Moment". Minsky accurately described the mechanism of a crash, but being a Keynesian he also wrote that "apt intervention" could keep the economy on a successful path.

Actually, financial conditions reached the perfect "Keynesian Moment". As we all know, Keynes said "If you save five shillings you put a man out of work for a day." As part of the greatest mania in history the savings rate plunged to zero – Keynesian perfection had finally been accomplished. Many in the street, but only a few economists, knew this was dangerous. Econometric modelers, who still believe in the powers of regression equations, have long had their out, which has been "Exogenous", and in one memorable paper of 1983 there was "Super-Exogenity". This arrived in May 2007 when the yield curve reversed from inverted to steepening. Our research expected it to occur around June. By July of that fateful year, there was enough deterioration to conclude that "This is the biggest train wreck in financial history". It is not over.

Although crashes are grisly events, they share a common response from the establishment. No matter how shocking, bloody, expensive, ruinous or just plain shattering a crash is – within a week, there is no one in the street who didn't see it coming. As ironical as this is, there is a critical link from the stock market to the economy.

On the usual business cycle, the peak in stock speculation typically leads the peak in the economy by about a year. On the previous example, stocks set their high in March 2000, and the NBER set the start of that recession in March 2001. Using their determination this has been the case for most cycles back to 1854. But, at the conclusion of each great bubble in financial and tangible assets things change from normal. The failure in the financial markets and the economy beginning in 2007 have been virtually simultaneous.

As we all know, in 1929 the Dow made its high in September and the recession started in August. In 1873 the bear started in September, and the recession in October. This time around, the stock market high was in October 2007 and this recession started in December of 2007. Close enough to fit the post-bubble model, with implications that financial history is now in the early stages of another Great Depression.

This melancholy event is being confirmed by the behaviour of politicians and policymakers. After swanning around claiming credit for the boom politicians panic and then find scapegoats. Remember the "Goldilocks" celebration of perfect management of interest rates, money supply and the economy. Well, all five great bubbles from the first in 1720 to the infamous 1929 have been accompanied by such boasting, followed by what can best be described as frenzies of recriminatory regulation. If the political path continues – protectionism – will follow.

One of the worst such examples was called, in real time, the Tariff of Abominations. But, this is enough of dismal events and it is time to turn to irony for amusement and enlightenment. The clash between the establishment and financial history is rich with irony. Beyond that, financial history, itself, should be considered as an impartial "due diligence" on every grand scheme promoted during a financial mania by the private sector as well as by policymakers. Let's use a good old fashioned term – policymakers have been financial adventurers.

One of the richest ironies occurred with the 1873 mania and its collapse. With typical strains developing in the credit markets during a speculative summer, the leading New York newspaper editorialized:

“but while the Secretary of the Treasury plays the role of banker for the entire United States it is difficult to conceive of any condition of circumstances which he cannot control. Power has been centralized in him to an extent not enjoyed by the Governor of the Bank of England. He can issue the paper representatives of gold, and count it as much as the yellow metal itself. [He has] a greater influence than is possessed by all the banking institutions of New York.”

In so many words, because the treasury secretary was outstanding and had the benefit of unlimited issue of a fiat currency – nothing could go wrong. But it did; the initial bear market lasted for five years and the initial recession ran a year longer. The pattern of severe recessions and poor recoveries continued such that in 1884 leading economists began to call it "The Great Depression", that endured from the 1873 bubble until 1895.

An index of farm land value in England fell almost every year from 1873 to 1895. Of course, academic economists were fascinated and for a couple of decades wondered how such a dislocation could have happened, or even worse, discussed how it could have been prevented. Ironically, this debate continued until as late as 1939 when another Great Depression was belatedly discovered.

Naturally the long depression was blamed upon the old and unstable Treasury System, and at the height of the "Roaring Twenties" John Moody summed it up with:

"The Federal Reserve Law has demonstrated its thorough practicality, and thus secured the general confidence of the business interests. The breeder of financial panics, the National Banking Law, which had been a menace to American progress for two decades, has now been replaced by a modern scientific system which embodies an elastic currency and an orderly control of money markets."

The probability of a depression has been discussed in the media. It seems that both sides have yet to provide adequate research, with the establishment's response limited to a classic non sequitur. "This is nothing like the Great Depression, where we had 25% unemployment". That was just the most recent example and sound research would compare unemployment numbers from the first year after the crash. In 1930 the number was around 8%, and in noting that there could be some difference in methodology today's number is an 8 percenter.

Will it get to 25 percent? This remains to be seen, but unemployment in the private sector will be the worst since the last great depression.

By way of a wrap we will take it from the top. In late 2007, Gregory Mankiw, boasted that the US had a "dream team" of economists as advisors, and as with all claims at the top of six previous bubbles "Nothing could go wrong". And even if things went only a little wrong there were the "safety nets" that Krugman claimed would prevent serious deterioration. Our view on Keynesian safety nets has always been that in a bust they would be about as useless as a hardhat in a crowbar storm.

In the post-1929 bust policymakers were realistic enough to know that the boom caused the bust. The SEC was established to prevent another hazardous 1929 mania. Also, one of the promoters of the SEC boasted that the SEC would put a "Cop at the corner of Wall and Broad Streets". Without much doubt the SEC has failed to live up to its billing. The discovery of malfeasance always accompanies the discovery of malinvestment.

Of course, the other act passed to prevent another 1929 mania was Glass-Steagal, which separated commercial banking from the evils of Wall Street. This was taken off the books in 1999 as too many banks were participating in the high-tech frenzy.

Has this happened before? I'm glad I asked the question. With the financial violence of the South Sea Company in 1720, the House of Commons passed the "Anti-Bubble" Act, which was taken off the books in 1771 – just in time for the full expression of the 1772 bubble. As with the climax of the 1720 bubble the Great Depression ran for some twenty years. This was also the case for the bubbles that blew out in 1825, 1873, and 1929.

This ominous sequence of financial excess and consequent disaster brings us to 2007, which will soon have the connotation of "1929", as the world experiences the sixth Great Depression. Quite likely, the only offsetting event could be the collapse of interventionist policymaking, that would eventually be seen as a blessing.

The title of this address, "Great Depressions Are So Methodical" is intended to be ironical, but some may be startled by the audacity of the statement. Actually it is the conclusion that anyone would make after a thorough review of market history. The real audacity is in the claims of charismatic economists that their personal revelations can provide one continuous throb of happy motoring. As Hayek said – Keynes, as a young scholar, was absolutely ignorant of financial or economic history. Only someone who was ineffably ignorant of financial history would claim that it can arbitrarily be altered.

The next Oscar in audacity goes to Paul Samuelson, who, in the 1960s, boasted that the business recession had been eliminated. Right!

Another such example was recently provided by Gregory Mankiw when he condemned the “old” Fed with "When you look at the mistakes of the 1920s and 1930s, they were clearly amateurish." Any impartial review of market history would conclude that the "Roaring Twenties" and the contraction was the way financial history works, after all it was the fifth such example. It is worth recalling that at the height of the 1929 mania John Moody had condemned the old Treasury System while reciting that the new Fed was the perfect instrument of policy.

Mankiw then bragged "It is hard to imagine that happening again – we understand the business cycle better".

The Harvard professor topped this late in 2007 with: "The truth is that Fed governors, together with their crack staff of Ph.D economists, are as close to an economic dream team as we are ever likely to see."

Now it is time to get into the way Great Depressions have worked. All six have started with soaring prices for tangible and financial assets that, typically, run against an inverted yield curve for some 12 to 16 months.

Then when the curve reverses to steepening it is the most critical indicator that the credit contraction is starting. This time around, the sixteen-month count ran to June 2007 and the curve reversed by the end of May. Our presentations in that fateful month stated that the greatest train wreck in the history of credit had begun. Deterioration through July prompted the advice that most bank stocks were a nice "widows and orphans" short.

Beyond the raw power of speculation, one of the key features is each mania has been accompanied by a remarkable decline in real long interest rates, sometimes to zero, and sometimes to minus. In our case the decline was to around minus 1.5% in January and the increase so far has been 5 percentage points. In five previous examples, the typical increase has been twelve percentage points, which has been Mother Nature's way of correcting untempered expansion of credit. And - in our times, untempered policymaking.

Lower-grade corporate bonds, have already suffered an increase of some 25 percentage points, which suggests that the 12 point potential for treasuries is possible.

There is another important distinction. At the peak of a great bubble, the stock market peaks virtually with the business cycle. In 1873, the stock market blew out in September and the recession started in that October. As noted above, a fiat currency with the potential of unlimited issue was not proof against yet another Great Depression. In 1929 stocks peaked in September and the economy peaked in August. This time around stocks set their high in October, 2007 and according to the NBER, the recession started in that December.

Since 1937 the average length of recession has been ten months, with six in the order of 8 months. This one has run for 17 months, which breaks a long-standing pattern. Following 1873, the initial recession lasted 65 months, and following 1929, it ran for 43 months. NBER data starts in 1854 and these were the longest recessions, with no others in this league. This one has the potential of being a long one.

This is a lot of history, but what is happening in the markets right now? Well, then the Green Shoots have finally encompassed chairman Bernanke. On May 5, Bernanke observed that the "broad rally in equity prices" is indicating that "economic activity will pick up later in the year."

At the height of a similar rebound to April-May of 1930, Barron's wrote:

“It is thus apparent that the public preference for stock is not only as marked as ever, but also the will to speculate is still a speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which current earnings are again being discounted indicate that it will be difficult to quench the fires of stock-market enthusiasm for long.”

Prompted by an animated stock rally, the Harvard Economic Society, but with more gravitas, concluded that it "augured" a recovery by late in the year. As we all know this did not last and what we should understand is that it is the dynamics of a crash that sets up the exciting rebound. Not policymakers.

Let's look at a classic fall crash, which we expected. The pattern is interesting. The 1929 crash amounted to 48%. The decline to the low in November 2008 was 47%, and within this the hit to October 27 amounted to 42%. In 1929 the initial plunge amounted to 40% to October 29.

The rebound was to November 4, in both examples, with 2008 gaining 17% and 1929 gaining 12%. The final slump into each November was 22% and 23%. Is it important to identify it as 1929 or 2008?

Our "historical" model expected the crash and the rebound, as well as the nature of the establishment's utterances. Another usual event is a frenzy of recriminatory regulation – all supposedly new, but delivered without knowing that their counterparts over the centuries have made the same futile gestures.

Ironically, today's excitement in the markets and convictions in policymaking circles are important steps on the path to a great depression. As disconcerting as this may be, it is worth reviewing another cliché of policymaking, which is the notion that lowering administered rates will restore the momentum of a boom. Massive declines in short rates, such as Treasury Bills have only occurred in a post-bubble crash. In 1873 the senior bank rate plunged from 9% to 2.5%, as the stock market crashed. In the 1929 example the fed discount rate plunged from 6% to 1.5%, as the stock market crashed.

This is getting a little heavy. Not so long ago, but in another world, financially speaking, when an economist would change a forecast on GDP from 3 % to 3.25% it was only done to display a sense of humor. Now policy wonks seriously debate whether the Fed target rate should be zero or a quarter of one percent (that’s 0% to 0.25%). It is patently absurd to debate what the rate should be or whether it would have any effect on financial history.

It won't, because we are in a world of financial violence that is not random, and not due to the Fed not making the perfectly-timed rate cut. Instead it is due to a natural accumulation of private speculation, as well as a chronic experiment in policy by financial adventurers – to accurately use a Victorian term.

There are some early terms to describe the sudden loss of liquidity that marks the end of a bubble. In the 1561 crash Gresham wrote the “Credit cannot be obtained – even on double collateral.”.

Another term goes back to the 1600s when Amsterdam was the commercial and financial center of the world. The Dutch described the good times as associated with "easy" credit and the consequence as "diseased" credit. I'm sure that all in this room would agree with the accuracy of the latter description. Diseased credit.

What can be done about it? Nothing – since the 1500s the literature is complete with many comments that someone, or some agency can set interest rates – either high or low depending upon the personal concerns of the writer.

Misselden in the 1618 to 1622 crash earnestly believed that throwing credit at a credit contraction would make it go away. Despite all this history, Keynes and his disciples cannot be accused of plagiarism.

What's next?

Virtually, all of the "good stuff" likely to be revived into May is being accomplished. This includes investments such as commodities, junk-bonds and stocks, as well as positive statements from the establishment. Both technical and sentiment measures on the stock market are at "tilt" levels.

Because it is up at the right time, the conclusion is that the down will come in on time as well. This would be the next step on the path towards another Great Depression.

Of course, there is no guarantee that events will continue on the path. But, then there is no guarantee that it won't. Best to consider the odds.

BOB HOYE, INSTITUTIONAL ADVISORS

E-MAIL [e-mail]

WEBSITE: www.institutionaladvisors.com

[otraque]

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The New Plan

Executive Summary

As the market wends its way higher, the Secretary of the Treasury in the U.S., along with the FDIC and the Fed are trying to obtain from Congress new powers of regulation that arguably could have prevented the current crisis and may be necessary to solve it. This opens up the possibility of an efficient public-private partnership to address the persisting financial disarray. Off balance sheet "assets" that will be returning to the banks ledgers via defaults, however, may delay or derail the anticipated recovery, and securitization of debt, one of the underlying causes of the current crisis, appears to be getting a boost in the proposed solution, instead of being euthanized.

Meanwhile, some Consensus companies are barely feeling the effects of the recession. International Business Machines (IBM) posted a record quarter in Q4 of 2008. PetMed Express (PETS) is growing nicely, as well. Additionally, Sunoco Logistics Partners (SXL) is another high-yield pipeline company you should know about. All have PWR ratings above 60 and are profiled below.

The Best 4 Quants Model Portfolio finished last week at -5.9% vs. the S&P's +1.6%. So far this week the Best 4 Quants Model Portfolio has a return of +30.5% vs. the S&P's +6.7%. Since Inception 3/14/2003 the model has a return of +167.5% vs. the S&P 500's -1.7%. The Best 4 Quants Model has ten picks this week: MUR, LECO, DRQ, TRA, ACL, WBD, GTI, SSL, INFY, ZEUS.

For those who do not follow the Best 4 Quants model portfolio, we offer our TSR Timing Model as general guidance on the relative safety of the current market. On 3/23/09, the Timing Model went from +175% invested to +200% invested.

Detail

The S&P 500 advanced 7% last Monday in anticipation of a more detailed plan from Treasury Secretary Geithner to reverse the financial crisis. At the close of trading on Monday, the market had posted its largest two-week gain since 1938. We have already cited quite a number of parallels between this market and the 1930s, not all of them positive.

One characteristic to keep in mind is that the strongest rallies occur in bear markets. The bigger the bear, the bigger the rally. We did not have a single 6% up-day during the 2000-2003 bear market. During this decline, however, we have already had three days in which the market has advanced more than 6%. Our conclusion: a bigger bear does not a bull make.

The New Plan

That cautionary preamble notwithstanding, the good news is that a number of very smart uber bears, including Professor Nouriel Roubini of NYU, the well-regarded prophet of doom, have expressed positive comments on the Public Private Partnership concept proposed by the Obama administration. The plan is an alternative to continuing on the path of indiscriminant bailouts, which, after the AIG bonus scandal, are no longer politically feasible.

The New Plan creates a government partnership with bond funds such as PIMCO, mutual funds, hedge funds, private equity funds and pension funds to redistribute the toxic assets (what an oxymoron!) on banks' balance sheets to the private sector. The assumption is that a fair market price can be achieved that is higher than the current marks at the banks, and yet low enough to provide an attractive return for the investors. Commentators such as Bill Gross at PIMCO have long criticized the Shadow Banking system, which originally referred to the massive unregulated derivative market. Now, functioning as collective undertakers, Mr. Gross and his cohorts will have the job of performing an autopsy on the system and recycling its viable parts to healthier bodies.

The government will probably end up holding the worst of the loans to maturity, while letting private interests cherry-pick. Additionally, the plan will be implemented by the Treasury without having to bother with congressional approval in the form of a bill or other specific authorization, because most of the funds will come from the Fed and the FDIC. The plan also includes new powers to take over giant financial institutions whose condition pose a risk to the financial system. Approval from Congress for these powers is being requested and guidelines within that legislation would spell out under what circumstances the powers could be used.

We have no problem with increasing regulation over what is ultimately a public financial system in private hands. What worries us, however, is the lack of any proposals to fix the underlying problems within that system, one of them being the securitization of debt, which is not only being left alone for the moment, but is actually being used in the plan as a means to solving the crisis. Debt will be moved from the books of the banks and insurance companies to private and public hands via the same kinds of instruments, with the same kind of unrealistic valuations, as got us into this mess in the first place. Who, besides the taxpayers, are the chumps who will buy this junk, and what are they being promised to get them to do so?

Enron Redux

The stock market is reflecting some optimism about the Geithner proposal, but there is a particularly large and dark cloud on the horizon in the form of off-balance sheet "assets" at the major U.S. banks that is not being addressed by the Geithner partnership. At the end of 2008, the four largest U.S banks (Bank of America, Citigroup, JP Morgan Chase and Wells Fargo) held $5.2 trillion of asset-backed securities and other obligations off their balance sheets. These assets included mortgages, auto loans, credit card debt and commercial loans that were repackaged, securitized and sold by the banks.

We don't know which rating agencies, if any, rated these securities. They were originally created to make the balance sheets of the banks look healthier, which contributed to fueling the credit bubble. It is, of course, a myth that no one expected real estate to fall. Everyone I know did, it was just a question of when, and people kept betting that it would be after their next deal, or that it would fall and rebound again before they needed to sell. In fact, the end came when more and more people realized that prices had just gone too far, too fast, so they began being justifiably shy about buying. Then they began to wait for what they believed was an inevitable correction, and the more people waiting, the more demand dried up, and the correction began. Now, these are "retail" home-buyers who knew prices were too high and who knew a correction was coming. Who can believe that actuaries of Citibank and AIG didn't know? They knew, and like the retail home-buyer did until just before the end, they continued to bet that they could make their next big buck before it came. The risks they took, and convinced others to take, with their highly leveraged securitization of debt that they knew very well was doomed, must be considered criminal, and it is hard to imagine going too far in regulating this kind of behavior in the future.

There are approximately $2 trillion in subprime-backed mortgage securities on the banks' books right now that are expected to default in the next two years. If the banks are low-balling the off-balance-sheet risk, then the $1 trillion Public Private Partnership starts to look awfully puny. It may need to be 5 times as large.

Bye Bye Greenback

Concerns about the true magnitude of the debt crisis is one reason gold is rallying this week. The larger the hole in terms of dollars, the better gold looks. In fact, both the U.N. and China floated proposals this week to dethrone the dollar as the world's reserve currency and Secretary Geithner publicly endorsed the idea for about 5 minutes until he thought better of it. Geithner told the Council on Foreign Relations that he would be "quite open" to superseding the U.S. dollar as the primary global reserve currency. The alternative would be a hybrid currency such as the one developed by the IMF in 1968.

Devaluing the dollar is certainly not official U.S. policy by any means, but it is a direction that Geithner would presumably like to take because it would help stimulate exports and allow the U.S. to pay back debt in "smaller" dollars. In a deflationary environment, such as we have today, currency devaluation is not likely to boost inflation much at all, so this is the perfect time to quietly let the dollar fall.

We think the Chinese Yuan, which is pegged to the dollar, will fall along with it, which in the currency game of musical chairs means that the euro will probably rise. A research agency associated with China's most important economic-planning body said the government should permit an appropriate depreciation in the value of the Yuan as a strategy for increasing the nation's growth. The State Information Center made a statement advocating the devaluation of the currency enough to counter the effects of plummeting foreign demand for the country's products.

Bottomline: Consider protecting your assets from a devalued dollar by owning gold and/or gold miners, which we have recently profiled. Below, you will find some additional alternatives.

International Business Machines (IBM), P/E 11, Market Cap $132 billion, Yield 2%

"Breaking news. IBM just reported earnings that were up 26% year over year to $2.3 billion on an 11% revenue rise to $24 billion."

That was our lead line in our April 2008 profile of the company known affectionately as Big Blue. We noted in that profile the fact that IBM's shares were still trading slightly below where it was in 1999, but we nevertheless touted the company for a number of reasons, all of which still apply.

We noted its relative strength, which means it had not fallen with the rest of the tech sector. We identified it as an anti-financial defensive play, which proved to be the case. We remarked on the company's ability to deliver consistent earnings and noted that 18% earnings growth in a global economy that is expected to only grow 4% is an impressive accomplishment, especially for a large and mature company. Indeed, while many tech companies have disappointed analysts, IBM has exceeded earnings guidance for each of the past five quarters.

We also highlighted the fact that with 58% of its revenue coming from outside the U. S., IBM would be at least partially insulated from the slow-down in the U.S. economy. This has also proven correct. We commented favorably on the fact that IBM still had pricing power in its services segment, something that was rare in 2008 and even rarer today. Amazingly, IBM had a $118 billion services backlog a year ago and still does, give or take a billion.

We wrote then, "If the U.S. is headed for a recession, which we think is the case, it's time to think outside the box and recognize safe havens when they arise. We think Big Blue is a good port during the coming storm."

IBM UPDATE: The company has a take-no-prisoners attitude when it comes to the global recession. In fact, for IBM, there has barely been a recession. Chief executive Sam Palmisano wrote in this year's letter to shareholders, "We will not simply ride out the storm... rather we will go on offense." It already has. Earnings per share rose 17% in 2008 and the company set records for quarterly revenue, profits, earnings, and cash flow in Q4 of 2008, which was a horrendous quarter for most international companies. Big Blue is also sitting pretty with nearly $13 billion of cash equivalents, so it does not need to borrow.

One measure of the company's commitment to technological leadership is that fact that in 2008 IBM was the #1 patent filer, applying for more patents than Microsoft, Cisco and HP combined. Specifically, IBM wants to be the leading global "smart" infrastructure company and is already working to manage traffic in Stockholm, water systems in Brazil, power grids in emerging economies and automating health records in countries with aging populations such as the U.S.

Globalization in production, not just in market expansion, has been a key part of Palmisano's strategy. IBM has been steadily increasing its workforce in India while downsizing the U.S. contingent. Foreign workers now account for a whopping 71% of Big Blue's nearly 400,000 employees. In January, IBM laid off 4,600 people in the U.S. and this week added another 5,000 pink slips.

At $98, shares of IBM are trading mid-way in the recent range from $70 to $130. We suggest accumulating IBM at these levels and below. It will be a premier play on the global recovery, whenever it finally happens.

Petmed Express (PETS) P/E 17, Market Cap $383 million

You've probably seen the ads on your favorite cable channel: a simple low key comparison of the cost of pet medications purchased from a vet and the same meds purchased from PetMed Express. The difference in cost is substantial and shipping is free. So what are you waiting for?

Founded in 1996, PetMed Express is America's largest pet pharmacy, delivering prescription and non-prescription medications and other health products for dogs, cats and horses. Slacking on medical care for one's pets is not an option for most owners, but offer someone an alternative to high priced meds in today's recessionary environment and customers will beat a path to your door. The company acquired 154,000 new customers in the fourth quarter of 2008, a 21% growth rate year over year.

Net sales were $43 million last quarter, up 16% year over year. Net income was $4.9 million or $0.21 per share, a 15% increase. These are not stellar numbers in ordinary times, but you probably remember that Q4 of '08 was the quarter during which retail spending bit the dust.

Shares of PetMed Express have been trading sideways for several years, which in this market climate is an indication of tremendous relative strength. One reason for the stock's stability is that management repurchased 336,000 shares last quarter. About 25% of the outstanding shares of PETS are sold short, which bodes well for an eventual breakout to new highs

Sunoco Logistics Partners (SXL), P/E 10, Market Cap $1.5 billion, Yield 7.4%

Like Buckeye Partners (BPL), which we profiled last week, Sunoco Logistics Partners, founded in 2001 and based in Philadelphia, is an MLP, which means it pays out most of its profits to shareholders in the form of quarterly distributions. The company buys, sells, transports and stores refined products and crude oil in 13 states in the Northeast, Midwest and Southwest. Its Eastern pipeline system operates about 1650 miles of pipe, while its Western network owns 3200 miles of pipeline outright and has ownership interests in 1500 additional miles of pipe, along with a fleet of tanker trucks, truck loading facilities and 36 refined product terminals with an aggregate storage capacity of 6.2 million barrels.

We like the simple strategy of the logistics business: generate stable cash flows, increase pipeline and terminal throughput, pursue complementary strategic acquisitions and all the while improve operating efficiencies. SXL is not as acquisitive as Buckeye and has completed only five acquisitions in the last three years, but the company managed to grow 2008 revenues 36%, while net income almost doubled to $214 million. SXL has demonstrated pricing power, has enjoyed increased volumes within its Western pipeline system in 2008 and managed to decrease interest expenses.

The credit-worthy company has no trouble borrowing. SXL has a five-year $400 million credit facility and last month issued $175 million of 8.75% senior notes, due February, 2014. The company has increased its cash distributions each quarter during the last three years. In Q4 of 2008, SXL boosted its distribution to $0.990 per unit, a 13% annual increase in payout.

There are 28 million shares outstanding, with a mere16 million in the float. A full 42% of outstanding shares are held by insiders, which fully aligns management with shareholders. Only 28% is owned by institutions, which means a transfer of ownership from insiders to institutions is likely over time. This process would be very beneficial for the share price. We consider SXL one of the premier Consensus dividend plays.

TSR Timing Model

Our timing model is a purely mechanical system that follows the momentum of the NASDAQ Composite index. The table below shows the triggers that would cause the investment level to change. Please note that our Model Portfolios are not affected by the Timing Model. The Models are always 100% invested.

Last Changes: On 3/23/09, The Timing Model went from +175% invested to +200% invested.

Current level is +200% invested.

Triggers for Increases or Decreases in Model's Investment Level Investment Level will go to:
First Upside Trigger: A new close at or above Nasdaq 1607.2 +200% (Maximum level)
Second Upside Trigger: A new close at or above Nasdaq 1645.2 +200% (Maximum level)
Downside Reversal Trigger: A closing price in the Nasdaq that is 6% below the highest intraday level since 3/25/2009. Note that this trigger cannot be anticipated as new highs in the market would continue to raise this reversal trigger. In the event of a reversal, the Model will decrease its investment level to -25% invested. Each additional 3% decrease in the Nasdaq would cause the model to decrease its investment level in 25 percentage point increments. If a reversal is in turn reversed again before it is "confirmed" by another 3% move in the same direction, then the second reversal returns the model to the same position as before the first reversal -25%