Restaurant Recession, an update

I thought about this podcast while watching this video:

The most pressing quote from the guest:

[We have] 3000-5000 too many restaurants in this country.

Summarizing and a likely outcome:

Fast casual is taking diners away from dine-in casual as the food is getting better and the customer doesn’t have to pay a tip. Also, my take, is that with more automation in fast casual, fewer tips being paid to dine-in casual, and fewer employees needed as we close those “3000-5000” too many restaurants, jobs are going to start disappearing. The good news for diners is that the experience of dining in might start to improve as the wait staff starts to appreciate having a job as others lose theirs, which equates to better and more friendly service.

I love a good downturn.

Green and Red Marbles

In November 2007 I was in the audience for a presentation from a fellow financial planner (not a trader) on why it was “statistically smart” (his words) to stay invested in the market all the time. The timing of this speech missed the top of the market by a matter of a few weeks, and its main topic centered on the use of green and red marbles to make the speaker’s point. I thought that we were due for a red marble, which I will get back to in a moment.

A few months later, February 2008, I was asked to give a presentation on general economic conditions to a local chamber of commerce and its members. I focused my speech on the dangers of being invested in a wildly overvalued stock market and how the collapse of the housing market and its effects on the stock market was going to affect “almost everyone you know” (my exact words), and I warned the audience that “if they weren’t prepared to panic (i.e. – sell stocks) at the top,” which was already behind us on the calendar as I spoke, “then they better not panic at the bottom.” I also said, “that given comparable historical examples, the bottom is likely to be approximately -50% south of where the market rests right now.”

From the time of the speech to the subsequent low in the S&P500 in March 2009, the market lost -51.01%. Here’s the chart:

I really don’t mean to brag, so let’s call how close I was a lucky guess. Given what I know now about trading and how I have applied the lessons I learned over the last several years, there’s no way I should be bragging about that prediction because I made nary a dime from my own insight. At the time I was an asset allocator like my colleague in the first paragraph, so my bragging about that call is similar to what some mutual fund managers can claim from that era, that they lost less than the market did over that time frame. “Give me another wildly overvalued market like that one,” a refrain I have repeated many times since 2010, “and I will make my F.O. money* and walk away from this business and become a wooden boat builder or engage in some other pastime that does not have me staring at market prices, spreadsheets and economic data most waking hours of each working week.”

Well, here we are, overvalued again and ripe for a fall, similar to 2000 and 2007. My F.O. money is sitting in the market waiting for me to extract it after the inevitable decline. But what about those red and green marbles? Thanks for reminding me, as I have a point to make.

The financial planner’s argument for staying invested at all times was predicated on a simple statistic; since 1951 up to and including 2007, the S&P500 experienced 42 positive years and 15 negative years, or stated as it was in the speech, “70% of the time the market has a positive year.” Then he stated, “Now imagine an opaque jar filled with 100 marbles, 70 of which are green and 30 of which are red. You reach your hand in the jar to pull out a marble. Which color do you think you are more likely to grab?”

It makes absolutely perfect intuitive sense that you should answer, “GREEN!,” with as loud as your voice can fill the room. To go on record publicly with my cohort and since I liked to occasionally exercise my contrarian sarcastic side, I shouted out, “RED!” The speaker looked my way and smiled but did not pry to let me explain myself; he was, after all, a colleague and understood why I said that. His guests just thought I was being a smart ass, which was fine by me.

So why did I answer “red” when the correct answer to the marble question is clearly green? Because the market is not like an opaque jar of colored marbles, though in that scenario it is similar in that the jar would have a memory, so to speak. I will explain. In the case of actual market returns since 1951, the more green marbles that are withdrawn from the jar, the more likely it becomes that you will pull a red marble. Let’s look at actual returns since 1951, the first year of my sample. I’m going back in time now.

We’ll assume that the 70% rule still applies (actually it was 74% – 42 positive years divided by 42 positive years plus the 15 negative years = 74%) even if we don’t pull the marbles in their correct historical order. Each marble is labeled with a given year and its associated return. I randomly withdraw 1998, a green year. That leaves us with 41 positive years and 15 negative years, or a 73% possibility that the next draw will be positive. You know what’s going to happen from here, the more positive numbers you pull from the jar, the more likely that eventually you will pull a red marble.

The speaker’s argument, however, and to be fair, was more complex than that. He said we start each new year with the same number of marbles and the same probability, starting from 100 with 70% of them being green. My counter argument was and still is, that you have to take valuations into account when determining your odds of pulling a positive year out of the jar, or as I have alluded to, the market has a memory unlike a fresh jar of marbles waiting to be pulled one by one.

Current valuations on the S&P500 are very similar to 2000 and 2007. The likelihood of pulling a red marble is increasing. If I assign a weight to the next marble pulled from the jar, it may in fact be green labeled with some positive return, but the risk of pulling a red marble with a large negative number far outweighs the likelihood of another green marble no matter what the return.

I have not lost my marbles.

* – If you need an explanation for the letters F.O., look no further than Jackie Gleason’s character in Smokey and the Bandit. You can probably find it in YouTube.

Conditional Probabilities

I got caught up in the quiet hysteria of noticing that the S&P500 has not had a down day of greater than -1% since October 11th. Tomorrow will mark three months since; that seems like a long time. In fact I made reference to it in a tweet before I ran over to my spreadsheet to put the study into the context or perhaps view it through the perspective of whether or not the market is in a bullish or bearish phase, which I like to define as residing above or below its 200-day simple moving average (sma).

My spreadsheet goes back to January 7, 1988, or 7,312 trading days. My first glance of -1% down days revealed 894 occurrences, or ~31 per year. From the first glance is seems like we are well overdue for another occurrence. But then I remembered the criteria of where the market resides in relation to its 200-sma. Here’s a nice little table that shows the relationships:

above/below 200sma all days -1% days % occurrences
above 200sma 5,368 407 7.58%
below 200sma 1,944 487 25.05%
7,312 894

As with all things, context is important. If we’re looking for a -1% down day and the S&P500 is above its 200-sma, we’re only likely to see ~19 of them per year, but on the flip side, or better said, the “underneath side of the 200-sma,” we’re likely to see a -1% down day every fourth trading day, or ~62 times per year. The S&P500 is currently above its 200-sma and has been since June 28th of last year.

Stay safe out there.

State of the US Consumer, from Business Insider

First the link: State of the US consumer makes for a grim read

Quote of the day:

It’s pretty well known at this point that income inequality has gotten worse over the past decade. The rebound from the financial crisis disproportionately benefited the wealthy, the owners of capital, while wages have remained stagnant.

Two charts and then my two cents follows:

auto loans


Study those charts for a nanosecond and you can see that auto loans and credit cards are going bad at a faster rate. All that free money at low interest rates that the Federal Reserve has pumped into banks since March 2009 has only encouraged more lending/borrowing for what most cannot afford. This too will end very badly, just like all the other times that the academics at the Fed kept rates too low for too long.

Two Dates That Will Live in Infamy

May 7, 1997
November 12, 1999

Do you recognize those dates? Why should you? Chances are that you have bought and sold a home after those dates, and in a very rare case bought a home before the first date and still own it so its relevance is lost on you.

The first date is the Taxpayer Relief Act of 1997, and in that act was a very big bonus for home flippers. Here’s the summary from

Before May 7, 1997, the only way you could avoid paying taxes on your home-sale profit was to use the money to buy another, more-expensive house within 2 years. Sellers age 55 or older had one other option. They could take a once-in-a-lifetime tax exemption of up to $125,000 in profits. And in all instances, there was Form 2119 to fill out to show that you followed the rules.

Nice bonus, eh? Middle class America gets a break for once. Did this change to the tax law encourage house flipping? It certainly made it easier and less costly. Did the change to this tax law encourage more transactions? You bet.

Now the second date, which is a lot more obscure to the common voter, November 12, 1999. Here’s the picture at the scene of the crime:


That is President Bill Clinton enjoying a good chuckle after signing the Gramm-Leach-Bliley Act, which was a partial repeal of the Glass-Steagall Act from 1933. On that Wikipedia page is a nice description of the changes that that Act caused to the banking and investment banking industry along with (at the bottom of the page) criticisms of the Act. Go read that, and as you do consider how much more creative banks were allowed to be after the repeal of Glass-Steagall than before.

Still with me? Good. So why do I bring those up now?

Because this is an election year. While many people are of a mind to hate one candidate or another, and we are forced to choose a lessor of two evils, I think it is important for people to consider finally letting go of the hatred many people have for President George W. Bush. He was not in office in 1997 or 1999. This also means people have to let go of those nostalgic feelings attached to Bill Clinton and the ridiculous belief that our economy was so much better with him in office. Unintended consequences are real. They lurk behind every decision you and I make as voters. The potential causes of the housing bubble go way beyond the two things that I have listed here. More, and probably most of the blame can be laid at the doorstep of Federal Reserve Chairman Alan Greenspan, but that’s a discussion for another day.


We do not get to choose the Fed Chairman or any of the other central planners who pull the strings and turn the dials on our economy. We do get to choose who chooses those people, unless of course we choose not to play, and decide instead to just adapt, improvise and overcome.

on a personal note:

STFU about George Bush. The financial collapse in 2008 was not his fault.