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Monday, February 28, 2005

Biotech ETF Action Exaggerated

I’m not going to pretend to know anything about what makes biotech stocks tick. I don’t know whether the 68% drop in Elan (ELN) or the 44% drop in Biogen Idec (BIIB), after the news that an MS drug killed a patient, is an overreaction?

As a general rule, markets tend to overreact to shocks. But this is not always true. It would be a good point of research to look back at the stock price action for other companies having drugs pulled. I posit that the stock price is higher a month later.

I do know that the Nasdaq Biotechnology ETF (IBB), trading down 5%, has overreacted to the news. Biogen accounts for 5% of the ETFs assets. So the ETF has taken a sizable hit. However, the hit from Biogen only accounts for about 2% of that. The rest is sympathy trading.

posted at 3:01 PM 0 comments

What Wagon?

I see your have also jumped on the Stop Social Security Reform Wagon. Your arguments are selectively confined to the "what ifs” that support your contentions. Yes there has been some long needed corrections taking place in the equities markets---but that doesn't mean THAT ALL OF THE GAINS FOR THE PAST 20 YEARS HAVE BEEN LOST!!!!

YOURS IS A BLUEPRINT FOR MORE AND HIGHER TAXES. MORE AND HIGHER INTEREST RATES AS THE GOVERNMENT GOES INTO THE MARKETPLACE TO BORROW AND DRIVE UP THE COST OF MONEY.

I have written frequently that I am in favor of social security reform, which is certainly a preferable alternative to raising payroll deductions or decreasing payouts.

How much the markets may or may not gain over a 20-year period is going to be irrelevant to the person who suddenly experiences a significant drop in portfolio value just before they are set to retire and annuitize their account.

This really isn’t very ‘what if’ or hypothetical at all. It’s exactly what would have happened under such a system to anyone set to retire in the fall of 1987 or around 2001. In fact this is precisely what did happen to many people counting on 401k accounts during the latter period.

This WSJ article says that says that according to the AARP 25% of people aged 50 to 70 who suffered stock market losses have postponed retirement. There have been countless stories out over the past several years that have told of similar circumstances. And I’d bet there are readers of this blog that have had a similar experience or are very concerned that they won’t meet financial goals. Write in, please.

What I am advocating is quite simple. We know our choices are higher payroll deductions, reduced payouts, or more interest. I think pretty much everyone can agree that the latter is the preferable choice.

But there are two ways to generate more interest. One is get a higher rate of return. The other is to let the money compound for a longer period of time.

Now please do tell me if I am wrong about this, and I will certainly submit if am. As I understand it, in the current system only the surplus social security taxes (the difference between money coming in and going out) is used to purchase bonds and generate some average rate of return. The rest effectively comes in and goes right back out again as a wash.

If this is true then it is not comparable to putting money in a private account, which is immediately used to purchase some sort of return generating investment for the rest of your working life, and compounded via reinvestment of interest payments.

I think we can all also agree that no matter what reforms are made we will be limited in either or both how much or where we can invest our ‘contributions’.

What I do feel strongly about is that we shouldn’t be allowed to invest the money in equities. Equities do not provide guarantees, either that they will pay dividends or increase in value. U.S. Government bonds are the securest of all investments due to the governments right to tax.

Another thing that just rubs me the wrong way, is the thought that people would be allowed to invest the money in foreign companies. There’s something that just seems a little too un-American about that.

Though I don’t know this for a mathematical fact, I believe that private accounts holding government bonds compounded over the entirety of our work lives would provide a sufficient return to solve the problem with the current system and I suspect could provide larger payouts.

That does however, leave the issue of how to deal with the disabled and such that contribute little and therefore have little to withdraw. I am inclined to think that this should be a separate issue. I think this because it seems to me that since social security was created in 1935 financial products have evolved and improved greatly. Private accounts weren’t reasonable or possible back then. They are today.

posted at 2:21 PM 0 comments

Amazing Facts About Microsoft

Thanks to the $3 per share dividend Microsoft (MSFT) paid in December personal income for the entire country dropped 2.3% in January, the largest drop in 11 years. How is that so? If it weren’t for the dividend would have only risen 0.6% percent in December instead of 3.7% and it would have increased 0.5% in January instead of falling.

Microsoft shares are worth $42 for every person in the world, or $900 for every person in the U.S.

If Microsoft were a country its $36 billion in revenues would give it the 58th largest GDP in the world, ahead of Kuwait and Slovak Republic, behind Vietnam and Morocco.

posted at 12:33 PM 0 comments

Workers Toil, Relations Boil

This WSJ article Tech Workers File Complaints Over Pay is worthwhile reading. It was interesting to me because prior to succumbing to the writing bug I had a series of bad jobs and bad bosses. Oh, I had what some would consider great jobs before the bubble burst.

One aspect of the loose labor market that I’ve not seen discussed anywhere is a statistical bias toward bad bosses. In other words, companies and people looking for employees are doing so for reasons that are not always good. People won't stay working for them, so they have higher than average turnover. I had one boss that ruined what would have otherwise been very interesting work, because he had such a nasty temperament.

But I try to stay on point here and see how this might relate in someway to investors. A year ago all the media could talk about was jobs going overseas. Funny though, that we hear almost nothing about it since Kerry lost the election.

The article talks about a lawsuit against Electronic Arts (EA) related to the working conditions, long hours, and lack of overtime pay. It’s interesting that the executive VP of human resources response was first to admit that the work had grown more difficult, but then to say that due to burdensome California labor laws it was seriously considering sending more new jobs to development centers in British Columbia, Montreal, and elsewhere.

That sounds like a threat to me. In other words, you better not complain or we will send your job out of the country. It also sounded more vengeful than business oriented to me. In other words, if U.S. workers want to complain, then fine I’ll show them, because I’m a callous SOB.

My thinking is that EA will move jobs out of Silicon Valley, and the company will issue a press release saying how much money they will save, and the stock price will go up.

posted at 11:55 AM 1 comments

Thursday, February 24, 2005

What Really Moves the Markets

Wall Street Journal Headline:
Lowe's reported a 27% climb in fourth-quarter profit on an 18% increase in sales, an indication that many Americans are continuing to pour money into their homes.

This doesn’t jive with the Remodeling Activity Indicator (RAI) from Harvard’s Joint Center for Housing Studies, which shows spending on home improvement dropped in 4Q to $126.7 billion from $129.4 billion and climbed only 5.7% for all of 2004.

Lowe’s offered up a less than rosy outlook for 2005. It’s a similar story for Home Depot, which announced an 11% sales increase for 4Q, but only forecasted sales growth of 9 - 12% for all of 2005.

I posit stores like Lowe’s (LOW) and Home Depot (HD) are increasingly becoming Christmas shopping venues. There also doing gift card business. So 1Q results could beat expectations. Companies don’t book revenues from gift cards until they are cashed in.

I looked at numerous articles on these two companies and none of them talked about these companies having a holiday cycle. When you see this kind of misunderstanding about what’s making a company move, it’s often an opportunity for the truth seeking investor.

posted at 9:45 AM 0 comments

Wednesday, February 23, 2005

Beware the Long Bond Shortage

This is a good article in BusinessWeek about what’s going on with long bonds and the yield curve. Reuters also has a take on this.

The article suggests that as much as $650 billion could come out of equities and go into long bonds if certain pension regulation comes to fruition. Anticipation of this move is blamed for an increased demand for long bonds. In other words, the move is already priced in.

Surprisingly, I’ve not seen or read any evidence that speculators are short equities for this reason, though it’s the equivalent of 12 days trading on the NYSE. If you consider that pension assets are biased toward blue chips and index investing, it doesn’t bode well for the Dow index.

Another reason not to like indices based on a small number of companies.

posted at 2:44 PM 2 comments

Is Social Security Welfare?

Social Security is not a welfare system. Welfare is when you give needy people something and they have contributed nothing. Social Security is an INSURANCE system. The recipients have contributed to the system. You can own your life insurance for a few months and die and your heirs will receive benefits. Same idea.

The social security system is its own animal. It's partly both a ‘social’ welfare program and an insurance program, and partly neither. Dictionary.com defines welfare as financial or other aid provided, especially by the government, to people in need.

The systems purpose it to assure the ‘welfare’ of the elderly and other unemployable persons. We pay into the system via a tax, not specifically a contribution to a retirement plan, annuity, or insurance policy. So the system has aspects of both a welfare program and an insurance policy. We contribute to other welfare programs too, just not as directly, through income taxes allocated to the welfare systems.

posted at 1:28 PM 0 comments

Reader says...

You are missing the point with the surplus social security payments, as there is no surplus. The surplus is used to buy bonds and then spent. When these bonds are to be redeemed, there is no money in the treasury to redeem them as it has been spent and the government is at a deficit. Therefore, the only way the bonds can be redeemed is by raising taxes, borrowing money or by printing it. Each of which is very problematic. As for the idea of taxing amounts over $90k, what's to be done with that money, buy more worthless bonds?

There is no surplus, but the surplus is used to buy bonds? Whether or not social security can redeem the bonds it holds is not the issue at hand. The issue with social security is that in the future the amount paid out will be more than the amount paid in. Therefore, the social security system will have to use the interest payments from its bonds to fund its obligations. Once all the interest is tapped the system will be bankrupt. Possible solutions include; increasing payroll deductions, lowering payouts, and increasing interest earned.

Whether or not the U.S. government will be able to redeem the bonds held in the social security trust is a separate issue, which questions the ‘good faith’ of the U.S. government to meet its debt obligations.

I don’t think this is something we need to be concerned about at this point. First off, any bonds the social security system redeems will be offset by new purchases. Secondly, the government would raise taxes or sell more bonds before it would default on its payments.

Neither of these are very palatable solutions, but this precisely what the government does, and has been doing for as long as it has been issuing debt. It’s not something that directly impacts the social security system other than the much larger picture ‘what if’ of a budget deficit too great to overcome.

posted at 12:47 PM 0 comments

Civility

Let’s try to be civil on this blog to all readers, except stock analysts, fund managers, pompous academics, and iPod users subjected to subliminal messages ordering them to buy Macs.

posted at 12:28 PM 0 comments

CPI Prone to Speculation

The CPI released this morning showed a mundane increase in consumer prices. That was a relief given the jump in the PPI last week. However, the January CPI data was a good example of why economists like to strip out food and energy to look at ‘core’ prices. Fruit and vegetable prices fell a whopping 12%, the largest swing in a dozen years. Don’t expect to notice the price drop at your supermarket.

posted at 12:26 PM 0 comments

Tuesday, February 22, 2005

Contrarian or Fool?

Using the misunderstanding of the consumer confidence index explained in my last post to your advantage is what being contrarian is all about. Of course contrarians are only called contrarians when they are right. When they are wrong they are just fools.

posted at 1:56 PM 0 comments

Can't Count on Consumer Confidence

Consumer confidence came in at 104.0 for February, compared to an upwardly revised 105.1 in January. This is worthless information without knowing what January was revised up from. After clicking on at least half a dozen major media articles, none of which offered this pertinent information, I resorted to using the advanced search of Google News to provide a date constraint that covered the last release of the Conference Board”s consumer confidence index. Only then was I able to determine that the index was revised up from 103.4 in January.

The mass media would have you believe that consumer confidence is fallen, but they are comparing the current unrevised number to the revised number. If February is off in the same direction by a similar amount then consumer confidence has actually risen.

Don’t pay too much attention to the various consumer confidence polls.

According to this article out today, consumer confidence data is worthless as a predictor of future consumer spending. This is not new news at all to top traders and hedge funds.

posted at 1:51 PM 0 comments

History of Retirement

This is worthwhile reading regarding the history retirement in the U.S. The paper points out that pensions became popular as the labor market tightened during WWII.

posted at 1:26 PM 0 comments

Reader comments...

I think the point about changing social security is to save the money for the person retiring instead of putting it into the general budget and spending it now. I would agree that too much investment in equities could be a bad idea. The point is to invest it in something--real estate, gold or ideally some diversified mix of assets besides just equities and have it available when the person retires.

This could all be done with low management fees and by giving minimal if any choices to the individual. The money could be automatically rebalanced based on their age to reduce equity and more volatile asset classes. The amount in someone’s retirement account should have some bearing to the amount they worked.

Buying government bonds with it is essentially what we do now and it just means my kids and grand kids will have to pay more or pass more debt on to their offspring. Putting the money aside now forces the government to quit using the surplus for current needs. Putting the money aside now is like beginning to pay the principal on a credit card debt instead of just paying the minimum and adding more debt to it.

Please tell me if you find fault in this analysis.

These are good points. I will clarify that the government buys Treasury bonds with surplus contributions and interest earned on the bonds it holds. The root of the problem is that there isn’t expected to be any surplus once payments to baby boomers kicks in.

The surplus is difference between payroll-deducted contributions and what is paid out to retirees. The problem with the system is that at some point in the future it is expected that social security will shift from a surplus to a deficit.

Under the current system what you put in isn’t allowed to accrue over time as it might in say a mutual fund. Retirees are paid out of the general pool according to a formula.

That is why I have been advocating private accounts. This is a separate issue from how the assets are invested. With a private account the assets could be invested in something allowed to grow over your working life until they are annuitized or withdrawn. This is not what happens now.

As for how the assets are invested I think that government securities would be adequate if the assets are allowed to accrue and compound over the entirety of your working life.

The President’s plan does nothing more than allow you to invest a small percentage of your assets in a private account invested in bonds and securities, while the majority of your contributions will go into the same old system.

One reason for keeping the old system intact is that social security is a welfare program. For example someone who is disabled can tap into this before retirement age. That person will collect far more from the system than someone who has had a similar income level during their working years, but works to retirement age. There certainly remains a need for this sort of program.

My feeling, however, is that it’s time we separate the welfare program from the retirement program.

posted at 1:18 PM 0 comments

Reader Responds

I may not know much about the market but I know that there needs to be a change. It doesn't work. It hasn't worked. How do I know? My mother worked until she could no more and was physically retired at about 50 years old. Never bothered anyone (maybe took some ink pens home from work but who hasn't?) point is that she has to live with my sister because she hasn't the income to support herself. This is partially her fault because our people are not educated on the importance of financial freedom.

Alan Greenspan said it himself. If this system has worked tell me why 95% of people have 5% of the country’s wealth and 5% 95% of the wealth? Why are there so many on this glorious system eating cat food for dinner? Having to decide to buy medicine or food.

So what if the president is being influenced by others. Name one who hasn't name one person who hasn't made a mistake (assuming that any of us haven't) and then let us consider casting stones. Until our people can stop seeking status and learn to make sound and responsible decision with our money we can move on.

The market is not the only way to generate money. Sure it and all its derivatives are good ways to hold cash for periods of time but money sitting in one place is like a sitting duck. Dollars are supposed to be our employees out begetting more dollars.

But Americans we! We want to sit back and allow someone to make our decisions and not get educated and involved in our own FUTURES!

Just like we want to sit in front of the TV and Internet and allow other to live the live we really desire but have been duped into believing we cannot have. We want to be entertained and turn our brains off. The only reading some do is the TV guide and that is out now with on screen programming guides. We are content with sitting on the sidelines with our popcorn and hotdog. Armchair quarterbacks criticizing those who make things happen.

We are intimidated by the market. I know because I have been. Go ahead and say "that's just stupid idiots like you". I am not trying to prove any point. I am just stating the truth. America is financially illiterate. That is why people are worried. Liberals will lose some near socialist programs (probably some of the same that provide help to my mother) and conservatives may make some money and exploit some laws and rules to get ahead. We are like babes waiting for mama to bring our milk.

I and many others are poised to take matters into our own hands and many, including myself, already have. Many may ask why is your mother living that way and why aren’t you helping? Things are ok now but what is better: giving her a few bucks now or taking what I have and being able to help out when she needs it most when she can no longer clean herself and get around)? We get to a good point in our financial life given us by our funds but 1 of 3 things could happen: Market takes a dump, mom gets sick or kids (who should have found scholarship $) go to college “to find themselves” on your dime.

I doubt many people ‘actually’ eat cat food. We had a cat until a coyote ate it. Cat food isn’t all that cheap. I think you can find alternative human foods for less, unless you’ve a hankering for trout.

posted at 12:46 PM 1 comments

A reader asks...

Wasn't Social security designed to supplement corporate pensions? Pensions (defined benefits) that no longer existand were snatched away from our people because those placed in charge decided to finance his tryst with his secretary.

I feel like I should change the subject to more immediate market concerns, but then I think that this is a very important issue as saving for retirement is pretty much what investing is about for most people.

I don’t think that pensions were very common before The Great Depression. Pensions and social security were solutions that came out of it. American Express set up the first private pension plan in 1875 with some utilities and manufacturers following suit. But pension insurance didn’t exist before 1975, long after Studebaker cancelled 4,000 pensions in 1963.

According to this site in the late 1800s 75 - 80% of men alive past the age of 65 still worked. In other words there was no such thing as retirement. From 1900 to 1930 the labor participation rate past the age of 65 was still between 58 - 65%. People generally worked until they were unable or died, as they still do in many countries today. If they have family then they would have been taken in, otherwise it would have meant the poor house if they had no savings, which would have been the norm. The participation rate past 65 has really fallen off after the depression, with less than 17.5% of men 65 or older working in 2000.

When you consider how much longer people are living today than they were when social security was initiated, it’s no wonder the system can’t keep up.

So I would say that social security was intended to supplement some form of retirement savings, but the popularity of pensions couldn’t have been known at the time. As for the disappearance of pensions, while they’re nowhere near as common as they once were, they still play a huge role and make up a considerable portion of the assets invested in the markets. For example, the California Public Employees’ Retirement System (CalPERS) manages $180 billion in retirement assets for 1.4 million people. CalPERS was established in 1931 by the way.

While pensions are losing popularity, many large companies still have them. I don’t know just how many companies still have pensions today, but there are a lot. Here’s a list of 387 companies that have converted or announced their intention to convert a traditional pension plan to a cash-balance pension plan. It gives some idea just how many companies out there still have pensions.

So it’s not so much that old companies are doing away with pensions, it’s more that new companies aren’t starting them. They are opting for 401k plans instead and there are many companies that do make matching contributions to these retirement plans.

As for corporate shenanigans, corrupt executives certainly have found ways to tap this vast pool of money to their advantage. Cash-balance conversions have generally not been beneficial to employees, and companies have overstated pension growth expectations as an underhanded backdoor way of boosting profits. This in turn boosted executive stock and bonuses. I’ll leave it to your imagination as to how they spent that hard-earned money.

posted at 12:24 PM 0 comments

Friday, February 18, 2005

History of Social Security

I’ve done some more reading about the initial intent of the social security system when it was created during the Great Depression. Here’s some of what FDR had to say in 1935 that I think everyone considering the matter should read:

PRESIDENTIAL STATEMENT SIGNING THE SOCIAL SECURITY ACT. AUGUST 14,1935

Today a hope of many years' standing is in large part fulfilled. The civilization of the past hundred years, with its startling industrial changes, has tended more and more to make life insecure. Young people have come to wonder what would be their lot when they came to old age. The man with a job has wondered how long the job would last.

This social security measure gives at least some protection to thirty millions of our citizens who will reap direct benefits through unemployment compensation, through old-age pensions and through increased services for the protection of children and the prevention of ill health.

We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.

This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions. It will act as a protection to future Administrations against the necessity of going deeply into debt to furnish relief to the needy. The law will flatten out the peaks and valleys of deflation and of inflation. It is, in short, a law that will take care of human needs and at the same time provide the United States an economic structure of vastly greater soundness.

I congratulate all of you ladies and gentlemen, all of you in the Congress, in the executive departments and all of you who come from private life, and I thank you for your splendid efforts in behalf of this sound, needed and patriotic legislation.

If the Senate and the House of Representatives in this long and arduous session had done nothing more than pass this Bill, the session would be regarded as historic for all time.

I think FDR had a lot to say that is lost on the younger generations, to which I am included. Most of us younger and in my case medium-younger folk know people, our fathers or grandfathers, who can’t understand our job hopping ways. They can’t understand we don’t hold a job for life and collect our pensions. Of course few companies even have pensions any longer.

Furthermore, a serious flaw with the traditional pension has been its lack of adjustment for inflation so that people with fixed pensions find that after many years of retirement their income doesn’t go as far. Here’s a bit of history on how the Hudson Bay Company long ago would check in on its pensioners and if necessary raise its payments. It’s interesting how we’ve become far more compassionate yet so much more inflexible.

The social security system was devised at a time when there was virtually no retirement system in place and the elderly often wound up in decrepit poor houses.

The system was put into place with the intent of solving several problems. For one it got people out of the poor houses. It got the people off the governments backs being funded through payroll deductions. And it was intended to smooth out economic gyrations and reduce the likelihood of future depressions.

The system certainly has been a success from the standpoint of meeting its intended goals. People aren’t dying destitute and hungry to nearly the extent they once were. And there hasn’t been another depression in more than 80 years despite the many books that have been written telling us another is on the way. Prior to the Great Depression economic busts were common.

Times have changed, and so have our needs, but in revamping the system I think its important that original goals be considered and any changes don’t make us more vulnerable to the problems the system fixed.

posted at 3:22 PM 4 comments

Readers Respond on Social Security

Social security is an issue that people have strong and widely differing opinions about. The most common argument I’ve received against my own opinions on what should be done is that people should be allowed to manage the money themselves. They say they are perfectly capable of managing their retirement savings themselves and certainly better than the government.

This is, however, an egocentric viewpoint. It is one that says because I am capable of managing my money I should be allowed to. It’s a viewpoint that disregards the ability of other. It also disregards the whole point of the system.

Social Security is called ‘social’ ‘security’ for a reason. It is a social program with intended purpose of providing economic security to individuals and the entirety of our country.

If we were allowed to manage our retirement savings ourselves then it shouldn’t be called social security. Other than the mandatory contribution there wouldn’t anything social or secure about it.

Now if you want to argue about doing away with social security altogether, that is a different topic altogether. It’s also a ridiculous one because that’s not going to happen.

The relevant discussion is how to fix the current system. I’ve also heard the argument that the system isn’t broken or at least not yet. This is a short-sighted argument. It is a broken system because it is not designed properly to satisfy future needs self sufficiently. Being self sufficient into the future is one of most important features and was part of the initial intent of the system.

Just because there isn’t a problem making payments today, doesn’t mean it isn’t broken today. Whether it’s a crises or not is, as Greenspan has said, a matter of how define the term crises.

This morning I through some stale bread out for the critters and now as I write and ponder I am watching this little squirrel gather up all the bread crumbs one at a time taking them up into the trees and hiding them in tufts of powder sticking to the pine bows. I am thinking what will happen to when the sun comes out and melts the snow? His cache will be lost. Certainly not a long-term savings plan.

Post to be continued…

posted at 1:24 PM 2 comments

Investing vs. Speculating

It irritates me to hear the mass media talk about commodities and commodity companies as if they are the same as any other investment vehicle. They are not.

If you buy stock in companies that generate the majority of revenues from heavily speculated upon commodities, then you are speculating not investing. Most commodities are highly speculative and subject to wide price swings. They have been particularly volatile over the past year, tempting average investors in over their heads. You can pore over the financials of a gold company all you want, but it will be a waste of time if gold prices take a sudden plunge.

More power to you if you want to be a speculator, but at least understand the difference.

posted at 12:25 PM 0 comments

Inflation Angst

The Producer Price Index (PPI) released this morning showed a 0.8% rise in core prices. It was the largest jump since a 1% move in 1998. Economists were expecting a increase of only 0.2% in core prices.

Core prices are the whole prices manufacturers pay for finished goods not counting food or energy.

The overall PPI rose a lesser 0.3% due to the stabilization of energy prices in January.

I often hear people question what good it is to look at just core prices when certainly energy and food costs are relevant. The answer is that yes they are very relevant, and that is why the information is reported both ways. But, food and energy are core commodities that are subjected to a great deal of speculation in the commodities markets. This causes them to be highly volatile from month to month.

Short-term volatility of food and energy is generally absorbed by manufacturers, with the exception of things like gasoline and milk, which delivered to consumers in a nearly raw commodity form. But finished goods like plastic containers or laundry detergent tend to have stickier prices.

My take is that the larger than expected jump is probably due to suppliers taking advantage of the turn of the new year to adjust prices. A lot of the goods manufacturers buy are catalog parts oriented. And catalog suppliers tend to price annually. So after a year of high prices for energy and other commodities it’s to be expected that suppliers would want to shift their prices up to pass on some of those costs.

This is an aspect of the market for goods that polled economists are likely to overlook. On average I don’t think there’s a lot of research that goes into the numbers economists provide for the media polls. And I don’t think the media gives a hoot how they come up with the numbers either. They are anonymous to the public anyway, so they aren’t very reliable.

If this is a correct assumption then I would expect Februaries numbers to increase as well, but not by as much.

I suppose there’s an opportunity there for the discerning and highly analytical speculator.

posted at 11:51 AM 0 comments

Thursday, February 17, 2005

Scrap Steel Market

This is a good article on the scrap steel market. Schnitzer Steel (SCHN) wasn't mentioned, but I would include it with those listed in the story.

posted at 12:42 PM 1 comments

Greenberg & Sons

Go out of your way to pick up the 2/21 issue of Fortune and read the lengthy article Greenberg & Sons on an old school, last of his kind, real deal robber baron.

posted at 12:34 PM 0 comments

U.S. in Decline? By What Measure?

An interesting article in the 2/21 issue of Fortune is:
The U.S. is in decline - and that's a good thing

The author says that the U.S. has been hovering at a 31% share of the world’s Gross Domestic Product (GDP) and according to some economists it is likely to have peaked and begin declining soon.

It’s a misleading headline. The U.S. is not in decline by any important and relevant measure. The measure to which the article is referring is the United State’s percentage of the world GDP. But even by that measure the U.S. is not in decline. The article in fact states, “The U.S. economy’s share of world GDP has been increasing for decades.”

The decline to which the headline is referring is based on forecasts made by economists showing a likely decline. So the headline isn’t just misleading, it’s a lie. From my experience this is probably the work of an overzealous editor not understanding the article and addicted to punchy headlines.

Most importantly it’s simply not important or relevant whether the U.S. maintains its percentage of the world’s GDP. We’re still talking about economic growth, just less of it relative to that of other countries. In the text submitted to congress Greenspan said, “In the United States, only five quarters in the past twenty years exhibited declines in GDP, and those declines were small.” And Economist magazine said, “Since 1995 almost 60% of the cumulative growth in world output has come from America…”

The reality is that increases in globalization due to technological improvements are making it possible for small countries to produce more and take part in world market more than ever before. As they increase their productivity, they increase their share of the world’s GDP, and in turn decrease the share of other larger countries. While those smaller countries may do work previously done in the U.S. overall what we are seeing is continued growth in the world’s GDP at an average rate of about 3.5% over the past several decades.

The overall growth in GDP can be seen as improving the lives of people worldwide. It in no way can be interpreted as an economic decline in the U.S.

posted at 12:32 PM 0 comments

Where DID the Bears Go?

CNBC did a humorous bit asking where the bears went and showed a picture of kodiaks fishing for salmon in Alaska. Where did they really go?

They’re still there and just as bearish. It’s the popular media that has shifted attention. The media no longer wants the bear story and has been seeking out the bull story as markets rise. Don’t underestimate the role the media plays in prices, amplifying booms and busts.

posted at 11:48 AM 2 comments

What Social Security Reform Means to Investors

In his testimony to congress the chairman of the Federal Reserve Alan Greenspan cautiously endorsed private accounts as a means to fixing the social security system.

However, a WSJ/NBC poll showed that constituents by a margin of 51% - 40% think fixing the system with private accounts is “a bad idea”. I think what the people are really saying is that the Bush plan is a bad idea, not that private accounts in general are a bad idea. Late last year polls showed people favored such a reform.

It seems to me that people are smart enough to know they are too stupid to manage their own retirement savings. Or at least they think everyone else but themselves will be to stupid, and therefore they will end up paying for their own retirement and paying into a welfare system for those who lost their retirement savings in the markets.

Under the President’s plan you would voluntarily only be allowed to put a small portion of your savings into a personal account. The rest would remain in the traditional system. So the only thing that does to fix the current system is reduce the amount being put into the traditional system and therefore reduces the amount the government has to pay out.

But, this would only reduce the problem as contributions are removed at retirement age. So as a solution it’s a very long-term one. Probably to long term to keep the current system from going bust.

So we would then be reliant upon the relatively small portion placed into private accounts and hope that the markets have treated us well.

I’ve said that I’m in favor of private accounts, but not private management. I don’t want to see individuals in charge of this money and I don’t want to see Wall Street vultures in charge of the money either.

The money should be put into private accounts, instead of being pooled together, so that precisely what you contribute remains your money from the moment it is put in until the moment it is taken out. However, for several reasons, we should not be allowed to invest it in equities.

First off, just look at a five-year chart of the Nasdaq. Look at a five-year chart of the Dow while you’re at it. Not very impressive. I know, social security accounts would be held for the very long term. But consider the real possibility that after years of savings and growth, just before retirement there’s a major economic disruption that cuts the major indices in half. Suddenly, your retirement savings is cut in half as well.

What could cause that to happen? Well any number of unexpected events. After all, we are talking about the very long-term.

Say for example, if China got into a war with another country and supply lines were cut off for a significant period of time. Think about the disruption of goods we could experience and the amount of inflation we would immediately experience in common necessary household goods. We’ve become so dependent on Chinese goods that a serious disruption in the supply line could conceivably trigger an economic depression.

But a more likely scenario could be that the private accounts themselves cause a major drop in equity prices. One of the causes of the last bubble bursting was in fact an overvaluation of stocks held in index funds. Index funds are a bad idea unless they are very broad. Even the S&P 500 is not broad enough.

As the economy roared along through the late nineties, jobs were plentiful and incomes were rising. Combined with the advent of investing via the Internet and cheap commissions people were throwing a lot of discretionary income into the markets.

Much of that money was put into retirement accounts. Many financially unsophisticated investors automatically had money taken from their paychecks and shoved into index funds where the money was then invested in the stocks held in the S&P 500 index.

There was no due diligence on the part of the investor or the investment managers. If the stock was in the index, you got shares of it whether you liked it or not. In doing so even undeserving companies got easy access to capital. That meant that they could readily issue new shares, pay out huge undeserved bonuses to executives, and squander your aimlessly.

This is exactly what happened. All that squandering caught up with us and many average Joes saw their accounts cut in half before they ever had any significant appreciation.

If we put social security savings into equities this WILL happen again. It’s only a matter of time. And anyone retiring would suddenly find the income from a mandatory annuity to be much less than expected.

The only safe place to put social security savings is into U.S. Government bonds, which are backed by the government’s ability to tax its citizens. In that case, almost no matter what happens the money will be guaranteed to be there even if the young have to help kick in to support the old. And what’s wrong with that? After all, people have been doing it that way for as long as there have been people.

The President’s plan to fix the social security system is an idiotic one that maintains the relevance of the current government bureaucracy charged with maintaining it, continues to allow the government to tap into our contributions for its budgetary needs, and continues to pool the majority of our contributions in such away that the government controls the formulas for distribution keeping anything left over upon our death.

The President’s system will do more harm than good by further burdening and increasing the management costs of a system that is already overly bureaucratic. It’s a system pupeteered by the investment, banking, and insurance industries who all stand to benefit enormously. That is why the majority of Americans are no longer in favor of changing the system.

posted at 7:57 AM 0 comments

Wednesday, February 16, 2005

Data Mining

Here’s a great example of how data mining can be used to persuade investors. I received this Personal Timing Service Newsletter from Forbes in my inbox. I’m not knocking the service at all. It may provide valuable and worthwhile information. I’m simply using it to illustrate a point. Here’s a bit of the text.

THE MOST IMPORTANT ADVICEWE HAVE GIVEN IN 20 YEARS

There are four major opportunities concerning crude oil, gold, stocks, and bonds that will make and break millionaires during the next 24 months. First: Buy oil? A ridiculous idea?

Dear Investor:
A couple of years ago when oil was trading at $16.00 to $20.00 a barrel, we mailed a flyer like this one, pointing out that there was a ground floor investment opportunity developing in oil. We openly recommended Enerplus Resources (ERF-NYSE) in that flyer. It was trading at $17.00 or less then and was paying a dividend of about 1.25% - MONTHLY. That amounted to 15% a year. This August, oil hit $44.00 a barrel, and Enerplus is trading over $30.00.

Apparently the newsletter put its readers onto a stock that has performed well over the past couple of years. That’s great. But what we don’t know is what happened to other stocks the letter recommended. It might be that they all performed well. It’s safe to assume that Enerplus Resources was one of the letters better performers.

It could also be that the letters other recommendations were dogs, though I’m not suggesting they were. Hyping past good picks while ignoring dogs is, however, a tactic that many newsletter services use to fish for new subscribers. Take the information with a grain of salt.

posted at 7:00 PM 0 comments

Long-term Yield Conundrum

Here’s a link to text submitted to congress prior to Mr. Greenspan’s testimony.

One of the important points expressed was a concern about falling long-term rates and a lack of an economic explanation for it. Greenspan says of this, “For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum.”

Greenspan noted that long-term bond yields have fallen too quickly over the past nine months to explained entirely by globalization and other economic forces that move at a ‘glacial’ pace. I think it’s safe to assume that in not providing any economic explanation for the phenomena, that he’s pointing the finger at speculation as the culprit.

If the fall in long-term yields had an economic explanation then it is unlikely that there would be any cause for concern, as it would simply mean that there is a healthy demand for our long-term debt.

By not providing explanation I think Greenspan is saying there’s an unhealthy level of speculation for our debt that could reverse course in the future sending long-term rates higher rapidly.

Ok, so what is this speculation? It’s foreign investors, traders, and governments getting taking advantage of the weak dollar not to buy our cheaper goods, but to buy our cheaper debt. It takes less foreign currency to buy a weak dollar, so foreigners can buy more dollars and therefore more debt.

If the dollar strengthens, and it will, it will make our debt less attractive to foreigners and the yield will inevitably rise.

Speculation doesn’t fit well into theoretical economics. In economic speak we often here the assumption “all things being equal”. Changes in prices, interest rates, and currencies due to speculation makes economic equations makes all things not equal because speculation doesn’t follow otherwise sensible fundamental economic rules. It’s what makes economists wrong so much of the time.

posted at 2:08 PM 0 comments

Greenspan Bio

Greenspan’s testimony to congress prompts me to pass on a bit of history on the Chairman of the Federal Reserve. It’s a very interesting and colorful one that will leave you wondering about what personal agendas Mr. Greenspan might have. I have long listened and read what the Fed chairman has had to say about the economy and markets and haven’t been able to detect or read of any evidence that he’s maintained his early Randian leanings.

posted at 12:55 PM 0 comments

The DVR as an Investment Tool

Humorous mishap during Greenspan’s testimony to congress today:

Sen. Jim Bunning referring to a letter the Fed, FDIC, and OCC wrote to the SEC opposing a particular proposed regulation, asked Mr. Greenspan how it would impact bankers.

Greenspan: I’m sorry, I don’t remember what the specific nature of the regulation was.

Bunning: You don’t remember what you wrote?

Greenspan: I write a lot of things. One of my staff will know exactly what I wrote. They’ll tell me.

Bunning: Ok, so will my staff sir.

It was a humorous dialogue because Bunning had a critical and condescending tone towards Greenspan not being able to answer the question directly. But when Greenspan turned the question back Bunning to be more specific as to the question he was asking, it became obvious that Bunning knew absolutely nothing about what he was asking and was merely reading a prepared question. It showed just how much of what we witness is figure headed.

I was able to get down what was said by using my Digital Video Recorder (DVR) to replay the video. The DVR is an excellent investment tool. As I am working I generally do keep CNBC on a low volume and if something sparks my interest or catches my attention I will rewind and replay. Sometimes, I will replay something numerous times to grasp fully what is being said.

Sure CNBC is a barrage of talking heads. And much of what they have to say is oversimplified and cut down to the point of losing all meaning. But everyday they have guests on their and some of them attempt to cram something meaningful in the few minutes they are given to speak.

In doing so, they have no time to explain what are often complex topics. I find it extremely helpful to back up the video, listen to a specific sentence, and think through what is being said.

At full speed I find that all I can recall is the conclusion. I am being influenced by the presentation and apt to buy into what is being said. In backing up the video and more thoroughly analyzing what has been said I get a more clearly picture of the thought process leading to the conclusion.

posted at 11:59 AM 0 comments

Tuesday, February 15, 2005

Circuit City Bid Suggests Stock is Steal

An investment firm has made an unsolicited $3.25 billion bid to take Circuit City private, which I think is probably the best thing for the struggling company. Most companies simply have finite growth potential and some more finite than others. Many good companies have gone bad chasing growth. The privatization issue aside, I think the bid tells us something broader about the markets.

If you think stocks are overvalued, think again. The growing M&A activity and the willingness of equity firms to step and buy companies is an indication that experts in corporate valuation are finding companies that they believe are trading at significant discounts.

If there’s such a thing as the Smart Money, it doesn’t get much smarter. I’m not suggesting you buy the stock of companies receiving takeover bids, and especially I’m not suggesting you gamble on what company might be the next to be taken over. What I am suggesting is that all the activity bodes well for stock prices overall going forward into the year.

posted at 1:04 PM 0 comments

Pass on Pennies

I think one of the reasons that Edwin LeFevre’s Reminiscences of a Stock Operator is an all time favorite book on the markets is because it gives the reader such a colorful picture of the way the markets once were and what investors had to put up with. Getting ripped off was the norm. If you had money in the markets at the turn of the last century you had to accept that it would go whatever direction the strongest stock syndicate took it. Stock prices had far less to do with fundamental valuations then, than they do to today.

The first major securities regulation of the markets was enacted in 1933 during the Great Depression. Not coincidentally, the first edition of Graham and Dodd’s stock valuation bible Security Analysis was published in 1934. Prior to the securities laws of 1933, other than to value a company for reasonable purchase price, there wasn’t much point to fundamental valuation.

Technical analysis was the predominant stock valuation method prior to the Great Depression and securities regulation. Books of the period included Studies in Tape Reading and Tape Reading and Market Tactics. Dow Theory is good example of how people looked at the markets back then. And Card Sharps and Bucket Shops: Gambling in Nineteenth-Century America is a book that delves into that world. Here’s a more humorous take. I pick up old books on the markets whenever I come across them and was happened on a great copy in an antique store of Stock Swindlers and Their Methods, 1931.

We are fortunate today, that the major companies are far less effected by such stock price manipulation. Notice that I say far less, because it still goes on to the degree that people are willing to accept the risks of criminal activity as in the case of WorldCom’s CEO Bernie Ebbers. But this is no longer the norm, at least not among our major companies.

However price manipulation in the market for small companies trading publicly off the major exchanges (penny stocks), is still rampant. Regulation and enforcement is sparse, lessening that manipulators will get caught. I receive spam almost daily asking me to check out various stocks trading over the counter, also known as pink sheets.

Behind the spam is a virtually untraceable link to someone benefiting form every purchase of the companies stock. Here’s an interesting read on the persistence of boiler rooms and bucket shops.

Do yourself and your family a favor, stay away from penny stocks. If you must gamble go to Vegas, at least you’ll get cheap meals, shows, and your kids can ride some rides. Even if a good friend says it’s moneymaker, you’d better ask yourself if this person is a wheeler-dealer. We all know people who are quick to take the short cut and drag others in with them. They’re always selling the latest faddish multi-level marketing product. Just say no thank you.

posted at 12:30 PM 0 comments

Monday, February 14, 2005

Investment Research

USA Today article says ousting CEOs often boosts stock price. This is a dangerous article for the average investor wannabe trader, because it leads them to believe they should invest in companies that have ousted their CEOs. That may or may not be the case, but the article only talks about what happens between the day before and the day of the announcement.

Unless your one of the very rare few who successfully specializes in day trading headlines, in which case what I am saying is of no use to you anyway, then there’s no opportunity for you to profit from the information provided in the article. In fact in attempting to do so you are likely to be giving your money over to the news trader.

Then there are the position traders to contend with. You can be sure that for any reason a stock shoots up there are many traders out there wanting to know why, if the same thing happens to other companies under similar circumstances, and then what usually happens to prices soon thereafter. In other words, if stocks consistently tend to rise dramatically after the CEO is ousted, then there are a multitude of traders testing to see if the stock then consistently falls back. Thus offering them a profitable opportunity to sell the stock short.

However, there still might be some opportunity for the savvy longer-term investor who thinks like a trader and is willing to do the research.

For some psychological reason people tend to like to cluster together. Most investors tend to look to fundamental investing methods and pretend they aren’t market timers even though value investing is nothing more than long-term market timing. Then there are the short-term traders and all the nuances within.

There are relatively few people that think and research like a trader, but act like an investor.

If you want find a profitable opportunity in what happens to a stock after the companies CEO is ousted. Get as long a list as you can together of companies with sufficient liquidity and test, test, test.

What happens after 10, 30, 60, or 90 days? What happens after six months, a year, two years, and even five years? Also, what happens from a certain period after the event to some period in the future, such as 10 days after to one year? What you want to know is what happens to the stock after the traders are done with it and it settles down a bit.

Then consider the market conditions for each of the stock. You might find that the results correlate to what the indices were doing at the time, and that the ousting of the CEO has little to do with long-term results. It could turn out that CEOs are mere scapegoats for larger problems, in which case the ousting might be a sign of more problems ahead for a company.

Test it and see what you come up with, then try to think this way about other events you come across. You can get the data you need for free using Yahoo! Finance’s historical prices. Here’s a link to HP’s data to get you started.

posted at 12:03 PM 0 comments

Internet Savvy Investors

Most people reading this blog are probably Internet savvy investors doing much of their investment research online. I happened on this excellent NY Times article about using the Internet as a research tool and the credibility of the information you find:
Teaching Students to Swim in the Online Sea

Think about how the contents of this article relate to your own investment research. It’s so incredibly easy to be taken advantage of because so a large portion of the information on investing is trying to do just that.

Though it’s unclear how successful Internet investment scams are. I believe many of them are in some way ripping off the scammer more than they are investors. That is there is some shady organization running a multilevel marketing campaign promising gullible people big commissions for hooking investors. The former is smart and sleazy, while the latter is dumb and sleazy.

But there are many unscrupulous investment content providers in the Net such that are very subtle and difficult to distinguish from legitimate sources, of which there are very few. They will often prey on your existing paranoia and fear such as concerns about the deficit or rising oil prices. Or they will get you excited about big price moves in oil or currencies and lead you to believe you’re on to some investment secret no one else is acting on.

Moral: don’t be duped dude, do your homework, consider sources and the motivation behind those sources.

posted at 11:37 AM 0 comments

Friday, February 11, 2005

Competitive Pressure in Oil Market

There is a direct correlation between oil prices and oil discovery. Although oil is a limited resource, that doesn’t exclude it from competitive pressures. Baker Hughes says the number of rigs exploring for oil and gas in the U.S. increased by 32 last week to 1,280. That’s compared to 1,111 a year earlier. Precisely what we would expect to happen when oil prices remain high for a reasonably long period of time.

Conversely, the number of rigs hit a record low of 488 in 1999, after dipped under $10 a barrel in 1998.

The correlation is further evidenced by the fact that the number of rigs hit a peak of 4,530 at the height of the oil boom in 1981.

Oil has always been a boom and bust commodity. And prices have much more to do with speculation, Opec, and politics than efficient market prices well correlated to supply and demand. There really is no other explanation that can explain a price increase of 500% in just six years.

World production increased from 75 million in 2000 to 83 million in 2004, while demand grew from 74 million in 1998 to about 82 million barrels in 2004. So the supply and demand relationship has in fact remained stable while prices have skyrocketed.

I’ve said before that high oil prices would drive up competition in a number of ways. And a more than two-fold increase in the number of exploration rigs is a sign that this is happening. I don’t expect oil prices to stay artificially high for much longer as non-OPEC oil companies increase production.

And that will be good for the economy and the deficits.

posted at 2:28 PM 0 comments

InvestorIntelligence Tool

I’ve been sharing with you some of the lessons I’ve learned from the markets and observations I make along the way. What do they call an eccentric person without money? A kook? I am a bit kooky, just kooky enough to look at things from a different perspective than most.

I can’t say I’m giving you unbiased information. I’m very biased against the kind of excessive greed that drives conscious less people beyond capitalism to abuse of power. But, you won’t get the all too common stock hype from me. Nor will you get five buy recommendations a day pulled out of my you know what, because anybody giving them to you is doing just that. You can bet on that. You might as well because you’ll be gambling anyway if you take the tips and touts you get from most market information providers.

I’m writing from the finished attic of my modest new accommodations near Keystone, CO, with an incredible view, albeit through a small window, of 14ers Grays Peak and Torreys Peak.

I can sit here and write my rants because the folks at oneFN.net are paying me to do so. And they pay me from advertising revenue generated by your visiting this blog and using their InvestorIntelligence tool. It’s a free download, that pushes market content, stock prices, and alerts to your desktop.

I use it, it’s convenient, and I haven’t found it to be obtrusive in any way.

posted at 1:26 PM 0 comments

Who are we to Believe?

Just in case you’ve ever thought about taking the advice of Wall Street analysts, think again. After Dell reported (DELL) earnings, Standard & Poor’s Equity Research reiterated a strong buy rating, Prudential stuck to its overweight rating, while Smith Barney cut its rating from buy to hold.

Who are we to believe? S&P, which “has been aiding the creation of market transparency since its inception in 1860”, Prudential with its 1875 New Jersey basement roots, or Smith Barney with a history dating back to 1873 and ties to the ‘great’ Salomon and Lehman brothers?

If you read my post yesterday, you know what I think of hold ratings. Second verse same as the first, a company is either worth buying or it isn’t. If it isn’t worth buying then you shouldn’t want to hold it either.

Yahoo! Finance provides its handy dandy star analyst rating system, which reports on the accuracy of analyst’s earnings estimates. But there is no correlation between buy/sell ratings and an analyst’s ability to predict earnings. Ironically, handyy-dandy is the name for the game of guess which hand it’s in.

Take advantage of all the free information the Wall Street firms throw at us, but decide for yourself. If you ever want to a rundown of a particular firms recent rating changes, I found the data on newratings.com.

posted at 10:28 AM 0 comments

Thursday, February 10, 2005

Response to Reader

If there is a topic that you would like us to tackle, please send us an email

I would like to know why LNCR has not fallen further after an article in the St. Pete, FL paper revealed that the FBI crawled around their offices and confiscated some papers. The DJN had a blurb, but the company never uttered a sound. The news appeared somewhat hidden in their F/Stmts yesterday.

Of interest to me is the fact that LNCR is 95% held by institutions ... might someone sweep this FBI thing under the rug?

Thanks,
Anna
Virginia Beach, VA

Sounds like it’s already been swept under the rug to me. Lincare Holdings (LNCR) isn’t the kind of company that attracts the attention of reporters because it’s not an exciting company to read about. In fact it’s a downright depressing company to read about, supplying oxygen to the elderly. Individual investors tend to flock to fashionable companies. That probably explains the not so unusually high percentage of institutional investment.

Many fund managers might consider it a value play with a PE of 15. Value managers are look for low PEs in hopes of finding overlooked stocks that will in the future have high PEs. Alas most companies with low PEs have them for a reason, which is why value investing strategies don’t perform significantly better than other popular strategies. It’s not enough that a company a low PE to be a value, and a company with a high PE is a value if its PE is about to go higher yet.

Moreover, institutional money managers are sheep. They pile into and bale out of stocks collectively. And all too often they invest in particular companies for reasons they wouldn’t care for investors to know about.

But most importantly from the article you referenced it doesn’t sound like this is something that could significantly hurt Lincare. It sounds like it is isolated to Bane Medical Services, which Lincare recently acquired and may have the right to unacquire.

A fellow Fool writer Stephen D. Simpson, CFA recently suggested that current shareholders hold onto the stock, but doesn’t recommend others to buy it until we know more about what Medicare is going to do.

This doesn’t make a bit of sense to me. Either a stock is one you’d want to own or it isn’t. You do want to control the extent of your diversification and hedge risks, but if a stock is good enough to own, it’s good enough to buy! Period.

CFAs spend on average more than three years studying balance sheets and corporate actions. They don’t spend one minute learning common sense or critical thinking. In fact, quite the opposite, they are trained not to think critically via the highly regimented and structured curriculum. Very generally speaking they tend to be number crunchers, and damn good at it. They aren’t known for being creative or critical thinkers.

I can’t tell you whether this stock is a good one to buy or hold. I can tell you I’d just as soon not own any stock being stormed by the FBI.

I once did some contract work with Aurora Loan Services, which is now owned by Lehman Brothers Holdings (LEH). Almost weekly I watched the police parade past my front and center desk. The mortgage company was a paperwork-processing factory. I worked in a quality control department and I was surprised to see loan documents stacked from pillar to post. The staff was mostly low paid processors. And generally the rumors were that someone was being arrested for some sort of theft. So as I don’t get threatening letters from the Lehman brothers I should add that ALS wasn’t part of Lehman at the time and I’m sure the brothers have done a marvelous job of cleaning it up.

The point is though, that with few exceptions I wouldn’t want to invest in any company getting regular visits from the police.

posted at 4:02 PM 0 comments

In Cahoots

The WSJ reports: PNC Financial to Buy Riggs For $652 Million, Reviving Deal

The article doesn’t mention that this is the same PNC Financial (PNC) that settled with the SEC and Justice Department for $120 million for being in cahoots with Maurice Greenberg’s AIG (AIG), which helped the PNC move more than $700 million in bad debts to an off-balance-sheet venture. AIG is paying for the transgression as well, having settled for $126 million. Maurice likes to point out that this was isolated to a subsidiary, but given its similarly nefarious relationship with Marsh (MMC) we’re probably talking about a pervasively corrupt company.

posted at 1:59 PM 0 comments

Thinking Critically

When I turned on the local news this A.M. the reporter was telling me in a shocked tone that according to the NY Times, the F.A.A. received 52 reports of Al Qaeda terrorism threats prior to 9/11.

Being the skeptic that I am, I’ve gotten into the practiced habit of questioning such things. Are 52 reports a lot? How do we know? Were they significant? Did they provide information that could be acted on?

To put things in better perspective, I wondered how many reports the F.A.A. might get on UFOs?

It turns out that the F.A.A. refers UFO reports to the National Institute for Scientific Discovery (NIDS) where there are forms you can fill out to report E.T. sightings, animal mutilation, and 'entities'. NIDS links to a site that tracks report data. From the data it appears -- if the information is reliable -- that there are roughly 1,400 reported sightings per month worldwide.

I don’t know what constitutes a sighting, or whether that includes mutilated animals or not. Regardless it’s a number that puts the 52 Al Qaeda reports in better perspective. But, a better comparison would be against all terrorism related reports worldwide.

I think you would find that the number of terrorism related reports worldwide was incredibly huge and that the 52 Al Qaeda reports would seem insignificantly small by comparison, being buried in a see of data. 52 tiny needles in a world sized haystack. This is data mining and a logical error known as the Texas-sharpshooter fallacy, which you will learn from the link relates to the story of a Texas sharpshooter who shot holes in the side of a barn and then drew a bullseye around them. If you follow no other links in my posts, please do follow the two above.

The 'media' loves to do this. It's not at all objective. It's stereotypical liberally biased reporting.

But the greater point to be made here is that the ability to think critically is probably the most important tool an investor can have. Far more important than any kind of chart reading or back testing skills, and dare I say it even more important than being able to read a balance sheet.