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Monday, January 31, 2005

Spitzer on the Prowl

The New York Attorney General’s office settled with Marsh & McLennan Companies for $850 million dollars. The fines are to be paid out over a period of four years and placed in a fund for the customers it wronged by taking bribes to funnel business to particular insurance companies.

Eliot Spitzer had this to say almost verbatim on CNBC regarding the ousting of Jeffrey Greenberg:

Over many months of investigation we had been met with deception and misinformation from the highest reaches of the company. And I was not going to settle with a company that did not have leadership that I believed would be honest to the principles of reform that we knew were necessary. That leadership did not understand that principal and I saw that based upon their behavior over the number of months we were investigating. And so I was simply not willing to enter into a settlement with the leadership of Marsh as it then existed. They have no right to a settlement with my office. We had every right to enforce the law and we would have continued to do that. The board of directors of Marsh made a decision that a settlement was necessary to the continued vitality of their company. They knew they needed to get leadership that understood and embraced the principles of reform. They have done that. There’s a new Marsh out there today and I wish them well as they move forward.

Readers should be aware that Marsh (MMC) also owns Putnam Investments, which was at the forefront of the mutual fund scandals. Of the dozens of news stories about Marsh hitting the wires today not a single reporter bothered to mention this fact.

Last spring Putnam agreed to a $110 million settlement for market timing. This was another example of excepting bribes for business. It also turned out to be a fairly common business practice with numerous companies including Janus and Invesco getting pulled into the investigations and charges. It’s surely no coincidence that both the parent and sibling companies were found guilty of taking bribes for business. It’s a product of the mentality of the companies upper management that has resulted in $26.8 billion in withdrawals last year from Putnam funds.

In a press conference Spitzer basically said that the Marsh settlement is only the tip of the iceberg with regards to the magnitude of corruption within the insurance industry and the way they conduct business. Could the over idolized Buffett, with his numerous insurance holdings, be drug into this new fiasco?

Spitzer isn’t the only one going after insurance corruption. The LA Times reports that California’s largest auto insurance broker Auto Insurance Specialists has been charged with taking money for funneling millions in business to Mercury General Corp.

Why Investors Should Care

You should care a whole lot about this and other charges of corporate corruption being brought to light over the past several years and going forward, because removing corruption makes markets less risky and therefore paves the way for the markets to move higher.

We hear a lot of ballyhoo over today’s high P/E ratios, that they are too high, and higher than historic norms. But it’s perfectly logical that they would be higher than they would be historically. Remember that around the turn of the last century the booms and busts were more frequent and more severe than in recent times. And although there is still too much corruption going on, there is far less than in the past.

Unfortunate Side Effect

An unfortunate side effect to holding companies accountable for their actions is that they tend to run away from the threat of being forced to conduct business appropriately. A year ago all anyone could talk about was jobs going overseas. It’s something that’s been going on for a long time, but it’s also true that there has been a recent increase over the past several years. This is in part due to improvements in technology making it easier for companies to conduct business across long distances.

Unfortunately, operating from overseas, sending jobs overseas, etc… makes it hard to investigate corporate corruption, especially when the other country is not cooperative in such matters. How would Spitzer ever find out if a company were conducting business inappropriately from inside the iron curtain of China and how far do you suppose he would get investigating such a company?

posted at 3:53 PM 0 comments

Oil News

OPEC agrees not to make production cuts. Oil prices are down and Iraqi election came through almost sans terrorism. There are reports coming in now of a British plane being downed in Iraq, killing ten soldiers, and three American soldiers being killed in fighting last night. Equities are reflecting this positive news. Ironically if this optimism continues for long, investors will start worrying more about inflation and interest rate increases.

OPEC did also warn that oil prices would remain high through the spring.

And the International Energy Agency warned that prices could surge again this year.

Exxon Mobil Earns Record $8.42B in 4Q

posted at 1:14 PM 0 comments

Corporate Chaos

Metlife (MET) has agreed to purchase the Travelers Life & Annuity unit of Citigroup (C) for $11.5 billion. The history of Travelers is quite convoluted.

1986 - Sandy Weill takes Commercial Credit public.
1988 - Weill and company acquires Primerica, gets Smith Barney in the deal.
1988 - Weill buys Shearson from American Express for $1 billion.
1993 - Weill buys Travelers for $5 billion.
1997 - Travelers acquired Salomon Brothers for $9 billion, creates Salomon Smith Barney.
1998 - Travelers acquired Citibank for an incredible $70 billion, creates Citigroup.
2000 - While ousts John Reed to take the helm of Citigroup.
2002 - New York Attorney General Eliot Spitzer an all too common deal in which analyst Jack Grubman agreed to hype a stock in return for Weill’s helping get his kids into a prestigious school.
2002 - Travelers Property Casualty splits from Citigroup.
2005 - Citigroup sells off Travelers Life & Annuity to Metlife.

posted at 11:52 AM 0 comments

Friday, January 28, 2005

Don’t Fret GDP Miss

The Gross Domestic Product increased at an annual rate of 3.1% in December. Economists were expecting 3.5% growth. However, the Commerce Department did revise its figures for July through September to 4% from 3.7%, so its possible the December number could be revised similarly.

The wider trader gap was the primary factor in holding back the GDP. The equities markets should like this because it will likely reduce the Feds bias towards higher interest rates. But it does shine further light on the trade gap issue, which bears have used to put investors on a path of paranoia.

How is it that even with the relatively weak dollar we are exporting less and importing more? That’s because being the world’s leading economy, such as the U.S. is, it’s the first to recover from a recession, while the rest of the world and my city Denver are still floundering. So other countries can’t by more of our goods at any price until their economies follow suit and improve as well. The trade gap free-fall should slow as the world economy improves.

Global economics outweigh the influence of exchange rates, interest rates, etc… You can think of it as global hibernation. It’s akin to the way the stocks of even good money making companies can be drug down when there is mass selling.

In time as global economies improve, demand for our goods and services will improve even if it is at a higher price than foreigners can currently get. And they will pay more, because higher interest rates will attract more foreign capital, which will strengthen the dollar.

The bears like to point out the short-term implications and ignore the larger uncontrollable economic forces at work.

posted at 1:33 PM 0 comments

Numbers don’t Lie, CEOs do.

Expenses can fall conveniently into gray areas, as is the case with Tyco’s former CEO Dennis Kozlowski and CFO Mark Swartz. Their defense is that they did not steal from the company because every expense has been booked. On the other hand there are vague rules about mixing personal expenses. It’s one thing for a salesman to book a dinner with an old friend as a business expense, but quite another to write down a mansion for which the primary purpose is carousing and whoremongering, unless your listing pimp as your occupation.

But when an accountant neglects to book expenses, as several have pleaded guilty to in the WorldCom fiasco, the numbers don’t lie. After all, they are the ones putting pencil to ledger paper. So the accountants make convenient scapegoats for CEOs and other muckety-mucks.

It’s a safe bet, however, that the accountants are being coerced. An accountant generally has no incentive -- other than to stay employed -- to defraud investors. It would be clear-cut if an accountant were taking bribes, abnormal bonuses, or trips, which is certainly not the norm. Senior executives, including CFOs, are seldom willing to share their grandiose wealth with mid level employees they aren’t sleeping with.

Though that doesn’t make the accountant completely innocent, either. The relationship is similar to that of a drug cartel to a dope peddler, with the peddler serving as a minion making the drug cartel’s blight on society possible.

That’s why I am inclined to believe former WorldCom controller David Meyer’s testimony that former CEO Bernie Ebbers told him he was “sorry you were asked to do what you asked to do” and that falsely reporting expenses was “something you should not have been put in that position to do.”

posted at 10:03 AM 0 comments

Thursday, January 27, 2005

Reading Assignment

WSJ: Fed Meeting to Pose Question Of Setting Clear Inflation Rate

Greenspan the missing link on Fed risk-taking issue: Since the Federal Open Market Committee fretted about risk-taking in financial markets in its December meeting minutes, many wonder where Fed Chairman Alan Greenspan stands on the issue and what comes next.

Perhaps you would find better odds betting on the Oscars.

U.S. Census Bureau: Durable Goods OrdersDemand was much lower than expected in December, but much greater last year than in the previous several years.

posted at 1:10 PM 2 comments

Reader Response

In response to the feedback:

I read your blog on SS and agree with most of your concerns, but you seem to be ignoring the mismanagement of the SS funds by the government. There are no real funds, just IOUs by the government. It is just a different set of vultures that have our funds.

This is very true. I may have been vague or overly concise, but this is the source of my agreement with the concept of private / personal accounts. It's just how these funds should be invested that I disagree with.

I think probably the best solution is for the funds to be invested in some sort of money market or government bond investment. There is no such thing as a risk free solution.

But, if the choice is between getting rid of the system altogether and turning over the management to individuals, I'd vote for getting rid of the system. Either way we'd end up paying for people’s retirement through a welfare system. I'd just as soon have my money in my paycheck then.

The New York Times has a good article today on problems with Chile's system, which Bush has praised.

posted at 11:19 AM 0 comments

Reinsurance, Risk, Ramble, and Rant

Reinsurance companies faced a record year for natural and manmade disasters in 2004, according to the WSJ. These companies have been triple whammied over the past several years by natural disasters, terrorism, and the financial markets for which many such companies became far too reliant upon for profits.

If you’re invested in insurance or reinsurance companies I advise that you be well diversified. These companies aren’t prepared for the worst-case scenario. They can’t be because they would price themselves out of the market. They have to except some level of unlikely but devastating risk.

The terrorism of 9/11 and the recent tsunami have shown that worst-case scenarios aren’t quite so unlikely. Imagine if a similar sized tsunami wreaked havoc on a major modern city? The loss of life and destruction of property may be far less, but the amount of percentage of damaged property that was insured would be much higher than in the recent event and the replacement costs would be astronomical. It could bring the insurers to their knees.

While this may be a highly unlikely event, so was the collapse of Enron that in some cases erased the entire retirement savings of long-time loyal and dedicated employees. Given that so many insurance companies have histories dating back into the 1800’s and that many have their home offices in smaller mid-western cities, there are many people who have the majority of their retirement savings wrapped up in their companies.

When I worked for IBM (IBM) on an IT contract with Lincoln Financial Group (LNC) in Fort Wayne, many of the people I worked with or for had been transferred from Lincoln to IBM leaving behind an average seniority of 17 years. Many of them were heavily invested in Lincoln and there were constant rumors and concerns that Lincoln would be sold or bought.

We got out of one of the fattest and dumbest cities in America because it was dying a slow death. When Lincoln started taking back IT responsibilities they couldn’t hire back the IBM employees because of the contract. As Lincoln hired outside, IBM let employees go with 17 years Lincoln tenure, 3 years with IBM under a contract that wouldn’t allow them to go back to Lincoln, and little prospects for employment elsewhere in the city.

A year after we moved to Denver, Swiss Re took over Lincoln Re where my wife had worked in the marketing department. Of course Swiss Re had its own marketing and no need for the Lincoln marketing team.

After just two years in Denver we were both laid-off. ING (ING), where I worked in corporate finance, cut its Denver presence in half eliminating some jobs and shipping some to other locations. The main skill I picked up there was working with the PeopleSoft (PSFT) systems! As you can imagine, the demand for those skills aren’t too with the Oracle (ORCL) hostile takeover.

My wife’s job was eliminated after Janus Capital Group (JNS) took over its parent Stillwell and absorbed its little sister Berger Financial. Well, it absorbed the assets anyway. It fired all the people.

After a year of lousy contract jobs and getting more and more jaded towards the corporate world I started taking my writing more seriously. My wife spent the last two years working for a spin-off / startup that I am convinced was conceived to preserve and conceal the extravagant Roman holiday lifestyles of its senior management. The indiscretions and bribery that went on there were legendary and from another time. I could really burn a lot of bad people, but best I wait until my wife’s severance period runs out.

Hence the source of my cynicism, dry wit, ample fodder, skepticism, and rambling. But it also leads me into my next topic, which is researching a hypothesis that the economy and jobs recovery is highly isolated. Both still really bite out here where we have been doubly hit by the combination of collapsing dot coms and telecommunications companies, even as people continue to migrate here and home prices continue to skyrocket.

posted at 11:01 AM 0 comments

Wednesday, January 26, 2005

More on the Trade Deficit

Here’s an interesting article in yesterday’s NY Times on what the U.N. had to say about our trade deficit. You need to go through the free subscription process to access.

The St. Louis Fed has a nice series of historical charts on the trade deficit. You can view 5yr, 10yr, and Max intervals for the Current Account and numerous sub categories. The deficit has been on a near freefall since 1997. Looking at the chart it’s easy to see why people find the deficit so ominous. It’s also noteworthy, however, that we’ve been running a substantial deficit for more than 30 years and that the trade and budget deficits mirror growth in the GDP. The reason we are buying so many more goods from overseas is because we are so much more successful as a country.

It is also because so many goods that we import have incurred relative deflation over the past 30-years. Consider that a Nintendo Gamecube costs about the same as an Atari 8600 did, or that a standard bike still costs about the same today as it did 20-years ago. And on April 1 Nike's Air Jordan will celebrate its 20th anniversary. They debuted for $65, but I recall basketball shoes going for $80 - $120 a pair soon after. Shoes of much better quality are going for about the same price today.

posted at 1:39 PM 1 comments

What S.S. Privatization Means to Investors

I am very much in favor of private Social Security accounts. However, I am very much against individuals being able to control how that money is invested or handing the money over to the Wall Street vultures. And vultures they are indeed, having been circling over the Social Security Administration since privatization was first seriously discussed.

The problem with Social Security now is that the government pools our contributions and returns the money to us via a formula that is the equivalent of a negative return or at least is expected to be in the future. It has also given the government a way to tap into this vast pool of money.

I think nearly everyone can agree that the money taken out of our paycheck to support us in the future should be guaranteed to be there for us. That it should be our money going in and our money going out.

However, I don’t think that the direction and management of those assets should be left to individuals. The Social Security system was created to get the elderly out of the disgusting and decrepit poor houses and off the governments back. It was intended to replace a welfare system and improve the lives of the elderly. It was also intended to protect the elderly from themselves, their lack of savings, and poor money management.

No Rest for the Wicked

Putting the management of Social Security assets into the hands of individuals strips away most of the initial relevant intents of the system.

The Wall Street vultures shouldn’t be allowed to touch the Social Security funds. They will find ways to fleece the public of their funds, even if that means doing so illegally. Recent history has shown that corrupt companies generally get caught when their greed catches up to them. When things go wrong and people want to know why. People don’t ask a lot of questions when things are going in their favor.

When things go wrong it will be too late. Companies will be bankrupt and the funds will be gone. Will these funds be guaranteed? Even if they are it’s no less of a problem. We can’t give the Wall Street vultures the opportunity. It’s just too tempting.

The Idiocy of Indexing

If Social Security assets are invested in equities via mutual funds and other financial products, there will be a massive overvaluation of the companies in the indices. This is already a problem, and was a major contributor to the recession. You haven’t likely heard this pointed out anywhere else.

Something like 38% of all the money invested in the markets is done so via retirement plans. A large portion of that goes into passively and actively managed index funds or funds in which the managers effectiveness is measured by his performance compared to the S&P 500. What better way to approximate the S&P 500 than to invest in the stocks in the index?

This creates overvaluation of those companies. It gives those companies an unfair advantage via easy access to capital, because a high stock valuation makes it possible for the company to issue new shares successfully. It also increases volatility, reduces diversification, and reduces capital available to smaller more innovative companies. In fact it makes it possible for the big indexed companies to buy up the smaller innovative companies and get even bigger. It promotes empire building.

posted at 11:03 AM 1 comments

Tuesday, January 25, 2005

A Few Links Worth Following

Article says OPEC will probably leave oil supplies alone when it meets Sunday.

White House Forecasts Record $427 Bln Budget Deficit
The federal deficit will top $400 billion in fiscal 2005, the White House and congressional budget watchers predicted Tuesday.
Snow says U.S. 'deeply committed' to deficit cuts

January Consumer Confidence Index Rises to 103.4

Existing-Home Sales Set Annual Record While December Pace Eases, Says NAR

posted at 4:25 PM 0 comments

Healthy Dose of Skepticism

You won’t very often hear me toot my horn, you’ll seldom hear me give specific trading and investing recommendations, and you’ll never hear me touting stocks or hokey trading strategies. I’ve tried and tested more than my fair share of trading strategies - I took up day trading in 97 - and have found myself faced with one losing strategy after another to the point that I’ve grown incredibly skeptical of any trading strategy.

Over the years I’ve met many many traders and nearly all them were still trying to figure out how to make money from trading. The few that make really good money manage other peoples money or sell services such as newsletters, and of the few that eek out a living from trading most are backed or employed in some way by hedge funds. Of those very few that make their living trading most were mentored by hedge funds and have gained proprietary knowledge. Note that I’m just talking about active trading, not long-term investing.

I’ve only found three strategies that work well and only one that works for me or any other average investor for that matter. Many of the most successful hedge fund managers that actively trade do so by being extremely educated and informed in areas of geopolitics, global economics, currency and interest rate fluctuations, etc… Another smaller group employs scientists and computer scientists to build complex computer systems. They run hundreds or thousands of statistical scenarios against market data simultaneously to identify the highest probability - yet marginally profitable - opportunities.

The average trader can’t compete in either of these arenas.

Recognizing points when people are collectively ignoring reality, such as has been the case with the positive earnings reports until today, is the only trading strategy that has worked consistently for me.

I’m not saying it’s a road to riches. Honestly, over the years I’ve lost most of my winnings from trading back through experimentation and overtrading. So you’ll never hear me say I’m qualified to talk about trading because of my excellent returns. What makes me qualified to talk about trading is that I’ve been fortunate to get to know many professional traders and I’ve tried and failed at enough bogus trading strategies to know how incredibly hard it is to make consistent money trading stocks and to know that its harder work than most people are willing put in to it.

I’m not talking about how many hours you sit at a computer or how many chart patterns you analyze. I’m talking about learning advanced statistics beyond what even most grad schools would require, learning how to write mathematically complex programs in C++ or some other root programming language, and knowing how to manipulate large data feeds and create reports.

So why should you listen to me? Well, let me tell you why you shouldn’t listen to anyone touting their returns as a reason you should listen to them. The hucksters set up multiple accounts, each using different strategies. Whichever one by chance and random luck happens to do well is the one they market. They then tout the strategy and will even show you the trading confirms to prove their success. Also keep in mind, it’s difficult, with desktop publishing technology, to create bogus trade confirms.

As I finish writing the Dow is up 118, Nasdaq 28, and S&P 500 10. Believe that over time people will want to buy stocks if earnings reports are good and economic news is good. If they are selling this information then you should consider buying. Over time the chaos tends to settle down and the markets will often move in your favor.

But be cautious about doing this during what appear to be long declines into a recessionary business cycle. For example if many companies are laying off employees you know it’s going to be a long time before things are positive again.

posted at 11:31 AM 0 comments

Reality Rules

WSJ headline:
Stocks are likely to jump Tuesday morning, lifted by expected bargain hunting amid a deluge of earnings.

Being long ahead of this headline is what I believe it means to be contrarian. Earnings and economic news have been predominately good, yet there has been much negativity working against the markets. Now we are starting to see that trend reverse via increased equity fund inflows and this expectation of so called bargain hunting. It means that the broader market is beginning to realize they have been overly bearish and that stocks might be priced to buy.

The risk is that the market just keeps selling off in spite. Why would it do this? Collective selling on the part of institutional money managers.

Some of my favorite books to read about the markets are about the seedy side of the street. I don’t like to be naïve or gullible and enjoy reading about the many ways with which I can be or am being screwed over. I’m not just talking about hit books like Den of Thieves and When Genius Failed, but more obscure titles like Stock Swindlers and Their Methods by Charles B. Frasca, 1931.

I’ve recently added several new works to my collection to use as writing references:
· The Mind of Wall Street: A Legendary Financier on the Perils of Greed and the Mysteries of the Market by Leon Levy Founder of the Oppenheimer Funds
· Take on the Street: How to Fight for Your Financial Future by Arthur Levitt
· Confidence Games
· Dumbest Moments in Business History

In perusing Take on the Street I was comforted to see that the former Chairman of the SEC touched on one of my biggest multi-faceted - yet interrelated - gripes. In his chapter titled Seven Deadly Sins of Mutual Funds Mr. Levitt, the seventh deadly sin You can’t Judge a Fund by its Name talks about how funds aren’t always what they seem.

Unfortunately, Mr. Levitt doesn’t even scratch the surface of the real problem, which I believe will one day be yet another big industry scandal. While a funds name might not well reflect a funds activity and holdings, what a fund will invest in is supposed to be well defined in the prospectus.

I strongly believe that because funds only have to report their specific holdings to investors and regulators on an intermittent basis, there is a loophole for the funds to hold securities that do not meet the specifications stated in the prospectus. For example, selling core holdings and holding a higher percentage of cash than the prospectus dictates it will.

This was evidenced throughout the recession. I had the hypothesis that funds were selling out their investors and this was the major source of market losses. I thought this because something like 38% of all market assets are held in retirement plans. Many of those don’t allow retirement account holders to control their portfolio mix. And I knew many an Average Joe who rode out the recession without making any changes to their portfolios or retirement accounts and were unable to understand where all the selling was coming from. They were practicing what the companies that were doing all the selling had been preaching too them - BUY AND HOLD.

So it occurred to me that it was institutional money managers being held accountable for approximating the S&P 500 even when it is negative, that was the main source selling. This is verifiable by the fact that every six months throughout the recession tech stocks rallied as, I believe, the many so called tech funds had to add to their holdings at reporting times to meet the holding requirements defined in their prospectuses.

To the best of my knowledge there has never been a case of a fund company being investigated to compare its holdings at various points in time to its prospectus. And investors could never have anything to complain about because they have no way of knowing what the funds are holding. And as long as no one is complaining, the regulatory agencies aren’t likely to take it upon themselves.

Perhaps people don’t think this is a big deal, but remember that a great deal of people suddenly saw their retirement portfolios chopped in half. And not all these people were trading buying techs and dot coms as the Wall Street firms would prefer to have us believe.

Note to self: Rant about problems with indexing and artificial price inflation.

posted at 11:29 AM 0 comments

Market Update

Overseas markets are looking very strong this morning as 13 of
the 15 markets that we track are currently higher with the
cumulative average return standing at plus 0.368 percent. Strong
earnings last night and very oversold conditions are contributing
to the bounce.

As for today, earnings continue to pour in fast and furious. A
few of the major highlights before the bell are Merrill Lynch,
Johnson & Johnson and Merck . Then after the bell we have Electronic
Arts and Texas Instruments. At 10:00 a.m., there are two major
economic reports due out. First, the consumer confidence index
in January should come in at 101.3, below last period's 102.3.
Then December existing home sales should make it to 6.80 million,
below last period's 6.94 million.

Provided by InvestorsObserver

posted at 10:42 AM 0 comments

Monday, January 24, 2005

Sentiment Insanity

CNBC just confirmed my thoughts that the bear meme and biased reporting has managed to impact investor sentiment. Or at least the sentiment of money managers.

The Good:
-So far, 83% of companies have matched or beat consensus earnings estimates.
-Overall earnings growth is 16.5%.
-That’s 1.2% higher than expected at the start of the earnings season.

The Bad:
-The Vix is up about 25% this year.
-The put-call ratio is also up about 25% so far this year.
-Equity fund inflows were $1.25 billion last week, compared to $5.59 billion a year earlier. 81% of the inflows went into non-domestic funds.
-Money market funds took in $4.25 billion last week.
-The UBS Index of Investor Optimism fell 3 points to 76.

The Ugly:
-CNBC failed to mention that for the week ending January 12th, equity inflows were a paltry $145 million with $1.35 billion going to non-domestic funds and $1.20 billion leaking out of domestic funds. Significant improvement last week.
-Investor Optimism has held up relatively well, and doesn’t jive with other trade data. I attribute this to the trading activity of the professionals average investors give their money too. It’s incredibly ironic that individual investors are more disciplined and do a better job buying and holding than the pros they hand their money over too. The pros are incredibly quick to move your money over to money markets. This mentality was a significant contributor, in my opinion, to the billions investors lost in the markets over the past few years.

posted at 3:45 PM 0 comments

Economic Preview

This Economic Preview is also worth reading. The big economic news this week will be the release of the GDP data on Friday.

posted at 1:55 PM 4 comments

ETF News

Here’s a good article on what’s happening with ETF’s. I’m a huge proponent of Exchange Traded Funds. You can expect to see frequent posts from me about them.

posted at 1:44 PM 0 comments

Just One Crayon is all it Takes

I like IHOP (IHP), but they only give kids two crayons! Must have been someone’s big money saving idea. Too many crayons going out the door? This Marketwatch story applauding the pancake house’s head hostess prompted me to post on this seemingly inconsequential point.

But it’s a relevant Peter Lynch like observation. The last time I visited the restaurant my son was given a package containing two crayons with which to color his paper menu. Had there been just three crayons I might not have noticed much. But there being just two was a disappointment to my son, and few enough to have me cracking jokes about how incredibly cheap they were.

Now you might find it hard to buy into the idea that one crayon can make a difference, but yesterday we stopped off at Village Inn (think Denny’s and Bob Evans) after skiing and I couldn’t help but be sarcastic in noting that this place presented us with sufficient crayonage. If the IHOP and Village Inn were in close proximity of one another, I think I’d end up at the latter. And given the choice my son would likely concur.

More importantly it’s just this sort of small thing multiplied many times over that can put a company at a competitive disadvantage. We’ve seen so many cases recently of brand dilution leading to the eventual collapse of a company. FAO Schwartz comes to mind.

posted at 1:33 PM 1 comments

Oil Prices and Profits

Occidental Petroleum (OXY) reported a 74% profit increase for 4Q thanks to higher prices. Fundamental laws of economics dictate that these kinds of profits can’t continue indefinitely. While oil is a commodity in limited supply, oil companies will inevitably reinvest some of these profits in discovery and more efficient extraction and refining processes. The high profits also reduce barriers to entry for smaller companies and international competition. And while it’s hard to say how much higher prices might go, such tremendous profits indicate that there is plenty of room for them to fall.

BP chief economist Peter Davies has said that the “World oil supply is becoming more diverse and world oil production capacity comfortably exceeds world oil demand.”

Don’t be sucked in by oil alarmism. There are a whole lot of hucksters putting out bad statistics to make a buck off people’s fear of rising oil prices. Here’s a rational article regarding long-term world oil supply.

posted at 1:03 PM 0 comments

Spurious Correlation and Small Samples

The WSJ reported today:
The Dow Jones Industrial Average has fallen for four straight weeks -- the poorest start to a new year since 1982…

This is a good lead-in to talk about the January Barometer, ‘as January goes, so goes the year’.

A book that I regularly recommend to investors and traders is The Stock Trader’s Almanac. It’s a great resource and handy reference full of fun tidbits. One such tidbit that is commonly referred to by stock market journalists is the adage ‘as January goes, so goes the year’. The Almanac’s ‘January Barometer’ says that a positive or negative result in January indicates that the year will be positive or negative. The barometer has only been wrong 11 times since 1950, and as the Almanac states it has only had 5 significant errors.

But is this a statistically significant result? There is probably some correlation in that whatever the reason that the market does well or bad in January is also in effect for the year. When you consider the length of a business cycle with recessions lasting several years or more and booms lasting a decade, it’s not surprising that there would be a correlation between January and the results for the year.

However, I caution investors to be on the lookout for spurious correlations and small samplings. You may have also heard of The Super Bowl Indicator. I don’t think anyone takes this indicator seriously - though I’ve known individuals who really believe astrology can predict markets - so there are probably some nut jobs out there contributing to others profits. The indicator says that if the AFC wins the Super Bowl the market will be down for the year and vice versa for the NFC. According to Snopes the indicator has been right 29 of 36 times, or 80% of the time.

That kind of result makes it tempting to believe that there is some real correlation. But common sense certainly dictates otherwise. For one thing, the result could be nothing more than the bias of a small sample. And while it might be a seemingly unlikely result, keep in mind that there is data mining at work here. That is, people have sought out these unlikely results. People are always searching for market predictors and either tongue-in-cheek or seriously they search out publicize these coincidences, while ignoring those that don’t pan out such as hypothetically whether the ground hog sees his shadow.

Though, even if there is some correlation, it is likely to be a spurious one, meaning that it is just a coincidence. For example, I don’t know the stats but perhaps there has for whatever reason been a bias towards NFC victory. It is certainly true that there is a bias towards the market being positive for the year due to the United States generally being a robust and growing economy.

posted at 11:55 AM 0 comments

Morning Update - InvestorsObserver

Overseas markets are mostly lower in trading this morning with only three out of the 15 indices we track currently in positive territory. In Europe, the London FTSE and the Frankfurt DAX are down 0.37 percent and 0.93 percent, respectively. The Hong Kong Hang Seng dropped 0.70 percent in overnight trading.Earnings will be at the forefront once again as no major economic indicators are scheduled to be reported. The February future contract on gold rose $4.30 an ounce and the March future contract on the 30-year bond was up 7/32 in Friday's trading. The yields on the 2-year and 10-year notes stood at 3.150 percent and 4.142 percent respectively, falling as the notes rose. The 2-30 year yield spread stood 150 basis points.

posted at 10:02 AM 0 comments

Snow Job

What a weekend of snow. Out in the suburbs of NYC we got about 15-20 inches the softest, fluffiest powder you ever see in the norheast. Too bad my only activity for the weekend was walking my pug around the block, seeing if I could get him stuck in the snowdrifts. Would have been prime boarding weather. Hope whoever was lucky enough to be on the mountain enjoyed themselves.

posted at 9:30 AM 0 comments

Friday, January 21, 2005

What does it mean to be contrarian?

I’ve read many books by self-titled contrarian investors and the one thing that is clear is that it’s impossible to clearly define what being contrarian is.

Being contrary to the crowd doesn’t mean you’ll make money. What would have happened if you were to have shorted the QQQQs through all of 1999, for example? You’d have gone nearly broke.

It’s not enough to just be contrarian. It’s really a matter of being right when the majority is misinformed and anticipating that the majority will later become informed.

I think right now is a very good time to be contrary, in other words to be long the equities. We’ve had whole lot of negative press skewing the opinions of the public. This has been counter to most economic indicators, the Fed, and leading corporate giants like GE. As I’ve said, much of the negative information has been put out by biased liberal media sources that have sought out the bear story. They are probably still sore over the democratic loss and in many cases probably really believe Bush will flush the economy down the commode.

Being contrary and being right in this case would occur if the sentiment becomes more optimistic and the jaded journalists gradually begin to get over it and move on. That could be enough to take the markets significantly higher.

Another reason to be bullish is that, putting things in perspective, the economy doesn’t look worse than it did a year ago. Therefore, if you assume the markets have been fairly priced over the past year, then there’s no reason for them to go down.

posted at 12:36 PM 1 comments

This was a WSJ headline this AM:

Wall Street welcomed better-than-expected profit reports from Dow components GE and United Tech as the market limps through a ho-hum earnings season. High oil prices kept a lid on gains.

I would hardly characterize this earnings season as ‘ho-hum’ compared to what we’ve had to put up with the past few years. The only thing ho-hum has been the restrained outlooks from some companies. The majority of companies have reported significant increases in earnings. Even the venerated WSJ isn’t immune to the bear meme.

BTW, the outlook GE gave this A.M. is consistent with what we’ve been hearing from various Fed members. Is this the more educated perspective, or the views of a bunch of biased liberal economists and self-idolizing pundits?

Still think the earnings have been ho-hum? Of the approximately 125 companies that reported earnings yesterday, they reported increased net income at a ratio of 3:1!

posted at 12:08 PM 0 comments

GE’s Glimmer of Hope

Upon announcing an earnings increase of 18% and a 15% increase in orders General Electric’s (GE) Jeff Immelt characterized its business environment as “an excellent global economy.” Immelt also said the company is “very confident about achieving 10% to 15% earnings growth with strong cash flow growth, and sustaining this growth into 2006 as well.” This would put GE soundly back to its historic norm of at least 10% growth per year.

Wow! That’s quite a contrast to what the prognosticators and popular pundits had been saying going into the earnings season. My opinion is that some of the less optimistic viewpoints we’ve been hearing, coming from less global and less economically educated corporate leaders, have been swayed into hesitancy by the bear meme and biased media.
Remember, corporations are led by people, who read the news just like everyone else. And they are susceptible to swings in sentiment, just like everyone else.

posted at 11:42 AM 0 comments

Consumer Sentiment Slightly Lower

It’s really no surprise that the University of Michigan’s Survey of Consumers index would fall given the negativity of the bear meme and biased press still jaded over the loss of their beloved Kerry. They want us to believe that all things bad will now happen with Bush in charge and when it does it will be the republicans’ fault. This noise, and that’s all it is, is amplified as the President was signed in this week. I’d love to put politics aside, but to the extent it impacts markets it’s a relevant topic.

The index fell to 95.8 from 97.1, while analysts were projecting 98.0. This is good example of market information that is hyped negatively in the headlines. It sounds worse than it is. The reader who digs a little deeper will find that the index was a much lower 92.8 in November and 92.6 in September.

Also, this is a volatile index for which I’ve yet to read a single piece of research applying proper testing procedures indicating any significant correlation with market movements.

(Note that if you follow the link you won’t find the latest press release.)

posted at 10:59 AM 0 comments

Powell Resigns - Over and Out

WSJ is reporting that Michael Powell, Chairman of the FCC, and son of Colin Powell, will resign his post today. The article is must read for anyone that thinks of Powell as simply a thorn in Howard Stern's ass or the reason Stern is leaving earth based radio for the censor-free world of Sirius(SIRI).

posted at 10:12 AM 0 comments

Thursday, January 20, 2005

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posted at 4:52 PM 0 comments

I Hate Clichés!

So many of the clichés, witticisms, quips, truisms, maxims, axioms, etc… mean absolutely nothing. They just sound good to the ear.

What does “Expect the unexpected.” mean? If you expect something then it can’t really be unexpected can it?

How ‘bout “Pay yourself first”? Not a good motto where your credit report is concerned.

Here’s some more:

“The easiest way to go broke is to be right to soon.” If you’re right to soon then you’re wrong, am I right?

“Buy low, sell high.” And how do you do this?

“The trend is your friend.” You know, I’ve never really been able to discern what, precisely, constitutes a trend. Because once you identify a trend, likely you aren’t the only one, and it’s sure to be ending soon. In which case, it was a trend. Not, is a trend.

“Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market.” -Warren Buffett

I’m pretty sure it would take a whole lot less than a 50% decline in Berkshire shares to get the Oracle of Omaha flustered. And isn’t Oracle of Omaha sorta oxymoronic? Hey, I think I can say that, being a Hoosier. I don’t ever recall anyone being referred to as the Oracle of Indiana. That would be funny, wouldn’t it? Not as funny as the Clairvoyant Kentuckian.

Now, here are some true words of wisdom:

“There are two times in a man’s life when he should not speculate -- when he can’t afford it, and when he can.” -Mark Twain

“You have put your head inside a wolf's mouth and taken it out again in safety. That ought to be reward enough for you.” -Aesop 550 B.C.

“Any man who is a bear on the future of this country will go broke.” -J.P. Morgan

posted at 12:04 PM 2 comments

If you don’t like the market news wait five minutes

The Conference Board released its Index of Leading Indicators, which rose 0.2% to 115.4 in December. November was also revised to a gain. The largest positive contributions to the index came from consumer expectations, stock prices, the real money supply, and initial jobless claims. The largest negative contributions came from vendor performance, building permits, manufacturers’ new orders for consumer goods and materials.

I think this plays right into what I just wrote in the last post about how peoples perceptions can and often are negatively skewed by hysteria and over-hyped economic concerns propagated and perpetuated throughout the popular media. The largest positive was consumer expectations, while the largest negative was vendor performance.
That, to me, indicates that suppliers of goods and services are too hesitant to take risks, invest capital, hire, and increase production and inventories of consumer goods. Why are they unwilling to do this when the consumer demand is there? Because they’re afraid of getting caught with excess inventory if something goes wrong. We also saw recently how low the inventory to sales ratio has been. And I said this was due to increasing efficiency, and that is true, but not entirely.

posted at 11:29 AM 0 comments

Earnings, Earnings, Earnings

Writing about earnings reports can get quite mundane. It seems so endless and repetitive. I feel the same way about reading them as well. But this is a blog about what moves the markets, and the earnings and the outlooks supplied with them are driving the Dow and every other index.

We’ve now seen some big names report surprising results both the up and downside.

Blue chips General Motors (GM), Ford (F), General Electric (GE), Citigroup (C), and eBay (EBAY) are the latest to report. What? EBay a blue Chip? Well, right now it’s looking a whole lot more blue chip than GM and it did manage to plow through a major recession unscathed as its peers (and even many so called blue chips) were plummeting into oblivion.

General Motors came out with a 37% drop in net income for the fourth quarter and said it expects 2005 results to be between $4 to $5 per share compared to $6.51 for all of 2004. The company is facing increased global competition, slipping market share, “North American production cuts”, and “a less-profitable mix of models.” What’s happened to GM? They’ve lost their mojo. Without the Camero / Firebird, or any really hot models to replace them with, and without Dale Earnhardt the company’s just not cool anymore compared to Ford with its new Mustang and GT-40, and Chrysler’s tire smokin’ Hemi.

GM’s weak results are also playing havoc with the companies bonds. GM is the largest issuer of corporate bonds and since the government isn’t issuing any new 30-year bonds the long-term debt of historically stable companies has been seen as a suitable substitute for obtaining the higher yields that are inherent with longer-term issues. Prices for its ten-year issues have fallen off 0.4% since the beginning of the year. And the stock hasn’t faired well either, off more than 30% in the past year.

And while a well-diversified corporate bond portfolio might be the next best thing to long-term government debt, that’s hardly true of any individual company. Including even the 108-year-old behemoth GM, which is facing a possible downgrading of some of its debt its debt to junk status by S&P. What that means for investors is higher yields. But what that means for the company is that it will be harder to market new debt and the company will have to look to itself and supplying more of its future capital needs from profits.

Maybe, though, that would be a positive catalyst for the company to get itself back into shape. It’s starting to resemble a tired, overweight Florida retiree in plaid shorts, black knit socks, and white dress shoes. Or a racehorse put out to pasture, long past its glory days. The old gray mare aint what she used to be.

Meanwhile, thanks to a profitable financing division at least, Ford managed to eek out $104 million in profit, though revenue and EPS both came in lower.

Though eBay posted a profit up by 44%, its expectations for the year aren’t anything to get excited about.

And Citigroup reported a 12% increase in net income and strong results worldwide. But, that hasn’t been enough to excite investors.

General Electric will announce before the open tomorrow and this will be widely watched by both stock and bond investors. Everyone will want to here what they have to say about business prospects as the company is seen as a proxy, not only for the U.S. economy and financial markets, but also for the world economy.

I’ve written a lot about the bear meme and all the negative forecasting and reporting going on. I’ve said that I believe most of the negative information that has been put before us, has been biased, that journalists and publishers have sought out the bear story. This doesn’t necessarily reflect the majority view, but unfortunately it can, and does, sway the majority view. It certainly did so in Kerry’s favor during the campaign. And corporate leaders aren’t immune from it, either.

Even more unfortunate as these things can be self-fulfilling. If corporate execs believe that sales will be weak because they’ve been lured into believing inflation, a weak dollar, or trade and budget deficits will through the economy back into recession, then they are hesitant to invest and hire. And ironically, it would be that lack of investment and hiring, risk taking and spending, which would throw us back into recession.

When companies are employing more people, those people are spending more and producing more. Then those economic issues have a way of quickly fading away until the next recession. All we can hope for is that the doomsayers don’t have their greedy way, needing so badly to be right.

posted at 10:59 AM 1 comments

Wednesday, January 19, 2005

Perspective

Yesterday I overheard a brief conversation where a gentleman was explaining how he never realizes just how big his St. Bernard is until he sees a picture of the two of them together. When I take pictures of my son skiing, the mountain never appears as steep or bumpy as it really is. And why is it that it’s OK for the President of the country to stick objects in his intern’s private parts, but if it were some small town minister it would be cause for exile?

It’s just as easy to lose perspective in investing. Perhaps easier. We see it all the time.

Around the first decade of the last century Samuel A. Nelson, who was responsible for compiling the writings of Charles Dow, himself wrote with regard to speculation:

The stock is bought at a cash cost of $15,000. The customer’s equity in the stock is $1,000. The stock is capable of wide fluctuations.

“What did you buy it on?” the customer is asked.
“My friend Smith told me that it is going up. He heard it’s a good thing from Jones, whose cousin is a director in the company.”

Would this man invest $15,000 (equity $1,000) in his own business (mercantile) without a careful investigations of conditions, and consequences, profits and losses, present and prospective? Would Smith influence him in such a transaction? Certainly not. And yet thousands of stock market ventures are made annually without anymore justification.

posted at 2:57 PM 0 comments

Markets in Play

The Consumer Price Index fell 0.4% in December for all three measures on a non seasonally adjusted basis and . Here's a link to a primer on these various measures. But please do ignore everything this article says about how it relates to investors, which is the work of an overzealous editor.

There are several interesting perspectives from which to view this data; comparing the change of the various measures to the previous change, noting the year-over-year change, and comparing the data to the PPI released last week.

If you recall the PPI fell 0.7% in December, so at least the data jives. We'd wouldn't expect for the full producer price reduction to be passed down to consumers as prices are sticky in the short run.

Also, worth noting was that the CPI-U declined only 0.1% on a seasonally adjusted basis, housing increased 0.2% in December, and Medical care costs rose 0.3%. A 0.9% drop in the transportation index, due to a 3.7% drop in the gasoline index, was the primary catalyst for the overall decrease in consumer prices. Lower fuel costs were behind the drop in the PPI as well. This shows the extent to which consumers are sensitive to fuel costs.

But, the modestly lower prices weren't enough to pull the markets up despite strong earnings from IBM (IBM), Yahoo (YHOO), Bank of America (BAC), Wells Fargo (WFC), and U.S. Bancorp (USB). The common speculation is that investors are focused on lackluster earnings outlooks for the rest of 2005. I recall that investors were saying the same thing a year ago, but that didn't stop stocks from rising significantly last fall.

posted at 2:48 PM 0 comments

Tuesday, January 18, 2005

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posted at 11:18 PM 0 comments

Creative Genius in the Markets

The recipe for distilling business wisdom is usually one part common sense and two parts marketing. It's a powerful potion that'll get most investors drunk with fervor.

Unlike like with music it's hard to decipher good business wisdom from the bad. If a songs bad pretty much everyone knows it. But people fall for all kinds of crud that's pawned off as business and investing wisdom. Bob Seger, Bruce Springsteen, and John Mellencamp will likely never put out another tune rivaling their incredible, mind blowing classics! These guys put out tunes that were true works of art that will likely be seen that way even more so far into the future. I appreciate what they have contributed. They experienced bursts of God given creative genius. And I believe it's easy to tell the stuff that was forced from the early stuff that just came to them.

I think you can say the same thing about many authors too. For some, their work only gets better, but for most they have their time and the spark, energy, and vibrancy conveyed fades away. Why is it so hard to see this in the investment world? Where's the creative genius?

It's there, but I'm quite certain you're never going to find it on the book shelves of Wal-Mart and Target! It IS the shelves of Wal-Mart and many of the products on the shelves. It's in the bios of the great business men, and there are so many. If you want to learn about the markets read about the lives of the people that keep it going behind the scenes. Don't read Peter Drucker's stale business wisdom or Suze Orman's over-hyped investment advice. She'll go the way of the Beardstown Ladies, soon enough as the next self-proclaimed guru steps up to take her place.

posted at 1:48 PM 0 comments

Internet Capital Group

Here's a press release from Internet Capital Group (ICGE) about taking on an ex IBM exec. If you recall Internet Capital Group epitomized dot com mania and the bull market of the late 90's. My feeling is this company is now worth taking a closer look at as any company that can survive what this one went through, must have something going for it. Like the fact that the Internet was never really dead and never really even slowed down. While companies were dropping like flies, new ones were popping up under the radar of the IPO market, and Internet sales were grew continuously throughout the recession. Only old fogies like Peter Drucker wanted us to believe the Internet was dead.

posted at 1:39 PM 0 comments

What we're facing

Hello Bloggin' Wall Street readers!

As to be expected, strong earnings reports are setting an optimistic tone that's overriding the doomsayers, trade gap issues, etc... 3M (MMM), Bank of America (BAC), and Wells Fargo (WFC) all reported strong earnings. IBM (IBM), AOL (TWX), and Advanced Micro Devices (AMD) all report after the close.

Oil is trading down slightly as I write. A cold snap in the Northeast had crude higher early in the day, but this was anticipated by traders.

Krispy Kreme (KKD) CEO ousted into retirement. Just another rat jumping ship.

The judge in the Bernie Ebbers / Worldcom trial ruled that Scott Sullivan's marital infidelities are admissible as relevant to his character and honesty as he takes the stand against Ebbers. I don't see how it could make much difference though? As if it's a big shock that a greedy corporate executive guilty of deceiving investors would be unfaithful too!

It's also an interesting legal and moral inconsistency, that marital infidelity can be used to judge a persons honesty and character in a case of bilking investors, but it doesn't count if you're the President of the United States! The key difference, of course, is that there is peoples money directly involved. Money has a way of putting things in perspective. It's ok to be weasely, just not money grubbing and weasely.

The CPI will be released tomorrow at 8:30. This will set the tone for the day. And it might not be too good. After the PPI last week investors may be hoping for a positive surprise from the CPI. And that could be part of today's optimism in the markets as well. Don't expect it to be as subdued as the PPI was last week. Consumer prices are stickier than producer prices. So including energy costs the CPI will likely be lower, but ex energy I don't expect much change from the last release.

posted at 1:34 PM 0 comments

Friday, January 14, 2005

Investor Resources

Investor Resources

Here's a few good places to get a quick glance at what's going on with futures and commodities:
Moore Research Center
PCQuote.com
CBOT - The Chicago Board of Trade had added a convenient list of quotes on the contracts they trade to the home page.

A couple of books I highly recommend:
Stock Trader's Almanac - I make the disclaimer that the author Yale Hirsch is a friend of mine.
The Secrets of Economic Indicators - Don't let the title fool you. This isn't a book about how to make money off of trading indicators. It's a very handy reference/encyclopedia of economic indicators.

posted at 5:41 PM 0 comments

Inventories/Sales Ratio

Here's a chart of this statistic back to 1995. Note how it has dropped significantly. This is pure efficiency. Remember all that talk about B2B commerce before the bust? Well, in less than a decade it has become such a normal part of big business operations that we don't even here much about it anymore.

This is also why you shouldn't listen to anything the old stodgy anti-progress self-described business experts say. Peter Drucker is probably the best example. He and others like him claim that computers haven't added any value for companies and have actually cost them money!

Accenture has a nice and convenient list of the top 50 business gurus you shouldn't listen to.

posted at 4:51 PM 0 comments

Economics Rules the Day

I don't mean for this blog to be all about economic indicators. There's certainly much more to the markets than that. But for the past year the markets have been hypersensitive to the various economic reports. A couple years ago it was all doom and gloom. Positive surprises were suspect and largely ignored.

Now though there is hope. Positive surprises are being taken seriously. We're taking it one step at a time, with jobs improving very gradually. On the other hand, alarmists have us on pins and needles over inflation, the dollar, and rising budget and trade deficits. But there are legitimate concerns that we could slip back into recession. So traders and investors are super sensitive to otherwise mundane economic data. Economic data is what's moving markets.

Today's news on the economy was good as several key sets of data were released:

The Producer Price Index indicated wholesale price drop of 0.7% in December thanks to a corresponding drop in energy prices. The markets have been trading higher all day on the idea that it could mean inflation has peaked and the Fed won't have to keep boosting interest rates.

Additionally, the Industrial Production and Capacity Utilization report issued by the Federal Reserve showed a production increase of 0.8% in December and 4.4% for the year.

And business sales rose 0.4% in November with an inventories/sales ratio of 1.31 compared to 1.34 a year earlier.

posted at 4:48 PM 0 comments

Thursday, January 13, 2005

What Really Moves the Markets?

Sometimes a whole lot of little things, other times just a few key events, or even a single event. Here are some of the key things weighing on the market at the moment:

On the negative side

There are a plethora of antagonists belting out the bear mantra.
The much larger than expected increase in the trade gap was a shocker, but the potential impact is not very immediate.
Oil is rising again.
Initial jobless claims for last week were higher than expected.There's been significant inflation over the past year, including in real estate.

On the positive side

Apple (AAPL) and Intel (INTC) have reported strong results.