The Float

Barrels on Set Revisited

This item alone will probably send oil higher again last week--not because we have even the remotest impact on markets(!)...but because of the near-inevitable karmic blowback against smug posts like this.

That said, we can't help but note that a little than three weeks ago (November 7th, to be precise), CNBC put two barrels of oil on its set in an epic act of inviting the top-tick. Crude prices fell back immediately after that memorable day...then eked out new highs before rolling over a little more decisively in the last week and a half.

We don't know where oil prices will go from here, but we do find this sort of thing endlessly entertaining.

Friday Reading

Maybe-kinda-sorta-flirting-with-1490-again edition...

• Where market sentiment is concerned, the team of Bernanke and Paulson turns out to be pretty potent. (Here's Yves Smith on the Paulson story.)
• Through all the noise, watch consumer spending, which didn't look especially strong in this morning's report.
• Calculated Risk comments on some OFHEO research on the relationship between foreclosures and prices. For our recent take on the question of whether falling prices matter "if you're not selling your house," click here.
• The Economist has a good state-of-play summary of the credit markets.
• Here's Jon Markman with an important reminder: Keep an eye on earnings.

Index Universe Piece

We're pleased to note that our Chief Investment Officer Kevin Price had a piece on exchange-traded funds in 401(k) plans published at IndexUniverse.com this morning.

Note: Parts of today's column appeared previously in this space (primarily here and here).

Factlet of the Day

The hard-charging advances of the last two days were the biggest two-day gains since April, 2001, for the Dow and March, 2002, for the Nasdaq. Conscious readers will note that neither of those moments were especially attractive times to invest. For a little more, we recommend this post from Barry Ritholtz.

Forcing the Issue

Market volatility has been nothing short of remarkable for a few months now, and the last two days' action is no exception. What's driving these enormous moves? As we noted a week ago, assigning explanations to inherently noisy short-term market movements is a hazardous--often downright silly--game. So we don't pretend to know.

Don Kohn's remarks ignited the animal spirits this morning, but we think that's only part of the story. (And it's a mildly odd part anyway, as the last two Fed cuts haven't done much to buoy the equity markets or change the underlying ugliness of contracting credit markets).

Another important part of the story, we think, is that traders have been pushing so hard on the short side that any evidence of a near-term bottom and rebound triggers the sort of massive short-covering we're seeing today.

Note a couple things about the adjacent chart. First, today did represent a potential breakout from the downtrend begun in mid-October. But note how each time the S&P 500 touched the upper Bollinger Band since mid-October, it moved sharply lower immediately thereafter. So this very serious two-day rally, not at all unimportant in its own right, remains an untested beginning more than a confirmation of a new uptrend.

Whatever the short-term fate of the major averages, the name of the game remains disciplined participation and prudent risk-management. As always, chasing and capitulating outside of a broader discipline remain decidedly bad ideas.

Wednesday Reading

Volatility-is-the-new-normal edition...

• We'll have a little more to say about this later today, but here's a summary of Fed Vice-Chair Don Kohn's market-moving comments from the WSJ's Real Time Economics.
• We'll revisit this one soon as well: PowerShares files prospectus for the first actively-managed ETF. (Minor caveat: "First" may not be exactly the right word, as PowerShares, among other providers, have offered semi-active "index"-based ETFs for a few years now. But as Matt Hougan of IndexUniverse makes clear in this story, this does represent a meaningful departure for the ETF marketplace.)
• In today's FT, Martin Wolf wrestles with a timely topic: "Why banking is an accident waiting to happen" (via Naked Capitalism).
• Commercial real estate: Not a pretty picture.
• Two perspectives on October existing home sales from Calculated Risk and Barry Ritholtz.
• Fortune's Shawn Tully asks readers to ignore the daily noise in favor of the bigger picture: a long-term repricing of risk--and, by definition, risky assets.

The Real Problem with the American Economy

Amid all the talk of expensive energy, credit contraction, dollar weakness, housing collapse, and various other economic bogeys, we think the Wall Street Journal found the real killer: e-mail overload.

Here's the most frightening passage in Rebecca Buckman's Tuesday story (emphasis added):

Last year, the average corporate email user received 126 messages a day, up 55% from 2003, according to the Radicati Group, a Palo Alto market research firm. By 2009, workers are expecting to spend 41% of their time just managing emails.

In the name of economic competitiveness, we hereby celebrate the timeless wisdom of "less is more."

Source

Rebecca Buckman, "Email's Friendly Fire," Wall Street Journal, November 27, 2007 (subscription required)

Tuesday Miscellany

A few items worth considering...

• Following up on yesterday's post on LaRue v. DeWolff Boberg, Supreme Court junkies can read the oral argument transcript here (via Peter Lattman of the WSJ's Law Blog).
• A sobering thought from the FT's Tony Jackson: 1973.
• Tim Price checks in again with more bracing British sobriety.
• Fortune's Colin Barr has a new blog. We recommend a bookmark.
• More from Fortune: Peter Eavis on what could be the next shoe dropped by the big banks (via Barry Ritholtz).

Charts of the Day

More evidence of some serious risk-aversion.

10-year Treasury yields head lower in a big way...

The Japanese yen continues higher against the U.S. dollar index as the yen-based carry trade unwinds...

Those "safe haven" emerging markets aren't behaving especially well...

The VIX (note the 21-day EMA in blue and the S&P 500 in red) is back to mid-August levels...

But the equity put-call ratio (again, blue = 21-day EMA, red = S&P 500) isn't quite there yet. Note in particular how close the March and August peaks in the 21-day EMA were, both topping out at about 0.77...

ERISA Liabilities in the News

Today the U.S. Supreme Court heard arguments in LaRue v. DeWolff Boberg, which raises the question of whether an individual 401(k) participant can sue his or her plan sponsor for the failure of plan administrators to execute the participant's investment instructions.

We aren't lawyers--and we don't play lawyers on this blog--but this is clearly an important case. For a handy summary of the relevant legal arguments, we recommend pages 3-7 (13-17 in the PDF) of the amicus curiae brief filed on LaRue's behalf be the U.S. Department of Justice.

We won't comment on the facts of LaRue (our first-blush understanding is that they aren't entirely friendly to the petitioner), but the law should provide some individual-level remedy for plan participants whose interests are harmed by the negligent action or inaction of plan fiduciaries. That said, it seems equally clear that the law should dictate a relatively high threshold for establishing fiduciary negligence.

The overriding imperative in ERISA-related law and policy is ensuring the greatest possible likelihood of long-term success for participants. Punishing fiduciaries who clearly breach their duties--and providing redress to harmed participants--is an important part of delivering what ERISA promises.

Nevertheless, one has to fear a spate of unjustified lawsuits in which participants sue plan sponsors and/or service providers for mistakes those participants made themselves. The likely results of such litigation would surely include higher plan costs, fewer plans offered in the first place, or, most likely, both.

We've argued repeatedly that the best defined-contribution plans, those that live up to ERISA's fiduciary principles, offer participants a small number of inexpensive, fully diversified investment options. The point: Reduce costs, simplify participant choice, and minimize the probability and consequences of poor decision-making.

A fiduciary plan is conducive not only to participants' long-term success, but, as LaRue suggests, to sponsors' effective risk-management as well.

Source

Greg Stohr, "Retirement-Fund Suits May Be Permitted by U.S. Supreme Court," Bloomberg, November 26, 2007