March 7, 2014

Sunday marked the five year anniversary of the S&P 500's nadir. March 9, 2009. The stock market bottomed out at 667. Representing the beginning of the end to the most extreme financial catastrophe mankind has ever seen.
There was little fanfare. Just another Sunday. Families attended church. Walked their dogs. Dined. Watched television. Read the paper.
Recall the state of affairs only five years ago. Then, the U.S. financial system teetered on extinction's ugly precipice. Retirements were postponed. Families walked away from mortgages. Left keys in the mailbox. The bank's problem now.
Jobs were lost. As was the ability to pay for tuition. Cars. Cable television. Food.
Anxiety levels rose. As did the suicide rate.
On that March day in 2009, the world seemed a volatile, chaotic and unfriendly place. Nor did it appear as if things would improve anytime soon.
To worsen matters, denizens of Main Street hardly understood what was causing the chaos. How could they? Wall Street's grotesquely misshapen financial wizardry was largely beyond the pall. A confluence of ill-conceived financial engineering that, in aggregate, sparked a financial cataclysm.
Fannie Mae, Freddie Mac, lending money to anyone who could fog a mirror. Those "subprime" (read: less than desirable) loans were then bundled with decent and better-than-average loans and packaged into collateralized-debt obligations (CDOs).
Greedy, lazy financial institutions like Merrill Lynch loaded their balance sheets with these toxic instruments. Couldn't help themselves. Nor did they know better.
In Michael Lewis's boon on the financial crisis, The Big Short: How Wall Street Destroyed Main Street, hedge fund manager Steve Eisman explained Merrill's role in the crisis as follows:
"We have a simple thesis," Eisman explained. "There is going to be a calamity, and whenever there is a calamity, Merrill is there. When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit." That was Eisman's logic - the logic of Wall Street's pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things."
Yet, I digress.
As variable rate mortgages rose, homeowners were increasingly unable to pay. So, they began walking away. Leaving keys in the mailbox. Somebody else's problem.
As loans began to default, those subprime strands of the CDOs quit paying. And as with any packaged financial instrument, if a one-percent facet of the instrument goes bad, the entire product becomes worthless. So, the prices of CDOs plummeted. Became illiquid. Toxic.
Next, FAS 157 instituted mark-to-market accounting in November 2007. All these banks had been happily collecting income from all these CDOs. Suddenly, nobody wanted them. They became illiquid. And FAS 157 forced institutions looking to sell any instrument to place a value on those instruments. Which was, essentially, zero. Billion of assets marked down to nothing.
Balance sheets were destroyed. Firms like Merrill Lynch which only the day before had been thoroughly addicted to the CDO's easy income streams were now forced to unload them for 20 cents on the dollar. Which forced other banks to mark their CDOs at 20 cents. Causing further write downs. More chaos.
Eventually, mighty Merrill, now insolvent, was handed off to Bank of America in a government-arranged shotgun wedding.
Other firms, like Lehman Bros., were no more destitute than was Merrill Lynch. They were simply solvent longer. And so were too late to attract a suitor.
The destruction wrought by the ensuing collapse? Mythic. Millions of jobs lost. Thousands of companies eviscerated. Trillions of dollars in market capitalization, wiped out. 57 percent of the S&P 500's value, gone.
Even today, with markets having risen 183 percent from the '09 low, investors still quiver like wet Chihuahuas with each market decline. There remains a bit of post-traumatic stress disorder at work. Both on Wall Street, among those who caused the cataclysm, and on Main Street, which took the brunt of the blow.
In 2009, much of the populace believe that the U.S. was to be forever relegated to emerging market status. Never would the American economy gain back the wealth, jobs, GDP, optimism and opportunity lost within the swirling vortex that was the 2008 crisis.
Much of the so-called intelligentsia believed that 2008 marked the beginning of the end. The fall of Rome. The nexus at which the nation's hubris, ambition, greed and innovation integrated in a lethal cocktail of cultural decimation.
And yet. Resilience has always been among the least understood attributes. It is not granted the lofty accolades of fellow adjectives like talent, genius, ambitious or focused. Yet, resilience generally outlasts them all.
Five years later, American GDP leads those of all major developed nations. Jobs are slowly returning. The domestic energy sector is flourishing. American social networking technologies are helping the world to communicate faster, cheaper and more effectively. Company IPOs have returned to Wall Street. And shoppers the world over are once again clamoring for U.S. retail technologies, clothing and consumer products.
The U.S. economy has not grown dramatically. Still, grown it has. When nobody thought it would.
Despite a frequent lack of leadership from both parties in D.C., the American people, led by the private sector, with an occasional assist from the public arena, have managed to rise from their knees, bloodied but unbowed. Having shaken off the dust and grime, the American worker has again shown what it means to be resilient in the face of seemingly insurmountable odds.
While stocks have climbed 183 percent off of the lows, achieving new highs following a 14-year consolidation, opportunities remain. This most hated of all bull markets continues to lack the frothy enthusiasm that generally marks an end. Investors continue to complain about the Fed's stimulus programs. The surplus of paper money. Yet, the omnipresent liquidity poured into the global financial system not only served to assuage the massive global despair, but provided the springboard by which the S&P 500 might, according to some analysts, reach 3,330 before this bull ends. That's five times the market low.
"But, we're five years in? Ain't this thing getting' a bit long in the tooth?"
While the average bull market lasts five years and three months, there are three primary reasons as to why this cycle will differ.
First, the post-2008 recovery has been much slower than most. Credit-driven recession recoveries usually are. We expect the typical three percent GDP growth following such periods. This recovery took longer to heat up. Spent a protracted amount of time stuck between one and two percent GDP growth. Now, however, it appears that the expansion is finally getting some legs.
Second, there remains too much money on the sidelines. Or in bond funds. Largely a by-product of the post-traumatic stress harbored by a community of investors badly burnt twice in 13 years (2000-2002 and 2008). They will again be late to the party. When they arrive, however, it will extend the duration of the soiree.
Finally, the S&P 500 traipsed a 14-year consolidation period. Up, down, sideways. Ending up at in exactly the same position in March of 2000, October of 2007, and Q4 2013. Today, the index has pushed through that ceiling. Traditionally, when stocks or indexes break through a ceiling that had contained them in a trading range, they propel much higher before coming to a halt.
While there will inevitably be pullbacks, some large and scary, participating investors have grit their teeth and pushed through every dilemma these last five years.
Without the participation of many Main Street investors. Devoid of the assistance of many on Wall Street. Investors, believing in the resilience of the market, have reaped the rewards.
Nor did the American worker ever fly the white flag. Throughout the harsh economic circumstances of the last half decade, Americans remained resolute. Woke early. Worked hard. Day in, day out. Catalyzing a domestic manufacturing renaissance. An energy boom. And the rebirth of our technology, healthcare and banking sectors, just to name a few.
Due to the resilience of our economic system and workforce, our domestic economic landscape now appears to be back in a position of strength. Despite the faults and foibles of our political system and those operating therein. Despite the harsh vituperations of critics. Despite the inevitable environmental and geopolitical trauma with which we will always contend.
"The human animal will keep behaving the way it has in the past," Warren Buffett has said. "We will have periodic recessions and occasional panic but the good news is in the 20th century, we had two world wars, the flu epidemic, the Cold War, atom bomb, you name it. And the Dow Jones went from 66 to 11,497. All these terrible things happened, but America works."
The future of this nation? Shame on those who doubted it. Do not let the occasional clumsiness of her leadership cast any doubt on one crystalline, cast-iron fact:
Five years after rock bottom, though unfinished the journey remains, we're back, baby.

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