Friday, April 29, 2005

Congratulations!

Eric, the publisher of this blog, is now the father of twin girls.

posted at 3:51 PM 1 comments   

Program Trading

Reader Writes In:

Subj: Thoughts on Commodities Bubble Awhile back Technical Analysis of Stocks and Commodities (last year sometime) ran a story about the increasing percentage of stock trades being executed by automated systems and found that the point in time where the automated trades began to exceed the number of ordinary trades the market broke from some sort of traditional volume/value/price ratios (I'm no expert). This supposedly happened some time in 2002.

The jist of the article was contrarian-contrarian finding that external forces have been artificially driving stocks up but, not as the result of an intentional act. The article claimed it is the result of the disparate trading systems in play that now dominate the market.

Anyway, if your familiar with the article, I would love to hear your thoughts on it as it applies to the present commodities market. Keep up the good work.

Thanks for writing. This is an excellent question. I am not familiar with the specific article to which you are referring. S&C does archive their articles online, but I was unable to ascertain the correct article. So if you recollect the title I’d love to give it a read.

Anyway here’s my take on the subject. It might be somewhat off topic given that I’ve not read the article.

Program trading isn’t something the average investor or trader should be too concerned with. The main purpose of program trading is to make it easier for large mutual and hedge funds to manage cash inflows and outflows and rebalance portfolios.

The process really isn’t all that complex or mysterious. As a large fund has an inflow of say $10 million one day then it needs to buy more of all the stocks in its portfolio. It can execute a program trade that will place buy orders for all the stocks in the portfolio simultaneously saving it time and money.

Of course there are many other more speculative reasons money management firms use program trading and there has been problems in the past with front running anticipated program trades.

The primary speculative program trade involves an arbitrage trade triggered by differences between futures and option prices and the underlying security. This is just one way that markets are forced back into parity. This isn’t something that will grow in magnitude over time because with a number of outfits executing similar trades they are triggered at an ever-smaller profit point and more frequently. In other words firms will compete for these arbitrage dollars to the point that there isn’t any arbitrage left.

This was nearly free money for technologically advanced firms a long time ago. You might care to read this article about the relationship between program trading and Black Monday 1987. Maybe you recall or maybe not Reagan put together The Brady Commission to investigate the crash and one of the main findings aside from brokers not answering their phones was a breakdown in the system that kept firms from arbitraging futures against stocks. It is implied correctly that this arbitrage is a necessary function of the market, which can and does help prevent events like Black Monday.

So program trading actually serves to reduce volatility by competing for this arbitrage opportunity, not increase it.

This is similar to how the more a seasonal market anomaly becomes known, the more speculators try to take advantage of it, and eventually there isn’t any profit left in the trade. The markets are smoothed at least with regard to that particular anomaly.

This is also related to the inherent flaw with the way most people approach technical analysis. Wannabe traders pay a lot of money for data management systems that come boxed with dozens of supposed trading indicators. You can back test these and see that they made money in the past. That doesn’t mean they make money now or will ever again in the future.

To many speculators leap frog each other after these profits to the point that know one profits from them. The more common and widely known the indicator the more likely it has become useless.

My friend Victor Niederhoffer refers regularly to a concept called ever-changing-cycles, which was coined and explained by the author of a very rare out of print book on pari-mutuel betting, that is horse racing. Vic goes into this concept in his first and my favorite book on the markets Education of a Speculator. Quite coincidentally it was one of the first books on the markets I ever bought when it first came out.

I also bought a whole lot of crap books back then and got lucky with that one, wanting to read about the life of a professional. I now own and have read hundreds of books and can say in my opinion it is the very best ever written, while I have found many of the most popular books are actually some of the most useless.

The most important thing I have learned as a student of the markets, something yet to be explained well or hardly at all in any book, is how to apply statistics, probability theory, and forecasting techniques to market data.

I’m not sure any book will or can ever be written that broaching this subject well. It’s a learning process that involves the use of so many different tools.

The point being that you’ve got to find your own opportunities in the markets, research them well, and hold onto them fairly tightly. Though it’s a misnomer that a trader will never publish such things if they are worthwhile. I for one will gladly accept payment to share research and diligence because first off I don’t have a large enough readership to dilute my own results nor a tremendous amount of capital on the line.

Back to the subject at hand, the thing average investors and traders hear most about program trading is that it causes volatility. But, take a look at the VIX (volatility index) and you’ll see that since 2002 when program trading surpassed regular trading, volatility has actually declined steadily.

I think much of the increase in program trading is simply technology driven, meaning that more funds are investing in the technology to manage program trading than in the past. In 1987 all the program trades came from a handful of firms. This is similar to the way you can’t look at increases in online job ads alone and say that more companies are hiring when it could just be that more people are choosing to do their advertising online or that jobs that would have previously went unadvertised are now online due to lower advertising costs.

In the context of the markets you have to look at overall volume. Assuming the volume has not changed substantially then there has just been a shift from manual trading to program trading. The impact to the markets would therefore be the same.

In fact volume on the NYSE hasn’t increased much recently. For all of 2004 there were 367 billion shares traded compared to 363 billion in 2002.

So I don’t think that program trading is playing a big role in the commodities bubble. Rather it’s simply that people are chasing returns wherever they can find them and ironically they are leery of equities since that bubble burst. Also, a heck of lot more money went into hedge funds after the mutual fund scandal erupted mid 2003. Most hedge funds can and will invest wherever they please.

My suspicion is that these days a large portion of hedge funds are run by ex day traders managing money using shoddily researched, improperly tested or even completely untested technical analysis in momentum driven portfolios.

posted at 3:42 PM 0 comments   

Everything You Need To Know About GDP

Everything you need to know about the GDP is summed up in this chart going back to the 1940s. It illustrates uninterrupted compounded growth. You can’t play the market on a quarterly GDP release. Besides the fact that its already outdated data, it’s seldom even accurate, as it will be subjected to numerous revisions over the next five years.

posted at 12:02 PM 1 comments   

Thursday, April 28, 2005

Market Cons Come in All Shapes and Sizes

A big part of making money in the market as an individual is not getting duped. Not everyone is out to get you, but the people that are take advantage of the fact that most people don’t take time and effort to research what is being said. They rely on people to spread misinformation for them. It’s only a few rare and exceptionally and darkly brilliant people that understand what is going on. The rest are just part of the flock.

I know this sounds incredibly conspiratorial and that’s because it is. There are some people out there who have little compassion or remorse. They’re in the game to make money, period. They are completely callous about where the money comes from. The funny thing is they don't even see it as doing anything wrong because its so much the norm. Generally, it seems innocuous, harmless, but the collective impact certainly isn’t. It's what creates bubbles like what we're seeing in oil and other commodities now.

I can assure you that I’m not the first person to crunch the oil supply and demand numbers. The very best hedge funds make it their business to know the truth of every situation. As soon as they see a trend developing they’ve literally got a team of scientists questioning every aspect of it, crunching data. When they find as I did that a trend is based upon misinformation they set about debunking and profiting. Now I’m talking about the top of the global macro funds here, not just any fund.

But the point is that there are many very shrewd and calculating people on Wall Street. The contrarians set the record straight. The short sellers try to make things look worse than they are. The trend followers and momentum boys perpetuate myths wanting to inflate prices as much as possible.

It’s generally pretty subtle. The big brokerage houses are incentivized to talk up oil when they see trading volumes soaring and money pouring into funds they're affiliated with. The name of the game is to keep the money coming in the door. They don’t mind so much if you move money out of an equity fund into a commodity account, just as long as you keep the money with them and keep sending them more money. They want to keep you excited and in the game, whatever the game of the day may be.

If you’ve been reading for awhile, you may recall a couple of months ago when I first started bad mouthing commodities speculation and nobody was putting those two words together yet, I was told by a condescending anonymous reader to back off and leave commodities to the professionals, professional anglers that is, angling for our money. How ironic that we’re to leave all discussion of commodities to the professionals, but they expect us to willingly hand our money over to them.

As you can imagine having my name and e-mail addresses all over the Internet in the context of the markets, I get absolutely inundated with investment scam spam. I see the worst of it and I see it all. But those are easy to avoid because they’re obvious to all but the absolutely clueless. Anyone getting taken by one of these scams was apt to forget to look both ways when crossing the street anyway.

Let me tell you whose really getting scammed by investment spam. It’s the people sending it out. This is the kind of person whose your worst nightmare of a neighbor constantly trying to sell you the latest in multi-level marketing wares, throwing weekly jewelry and candle parties, falling for the work from home adds. They work so hard at being lazy and never mind humiliating them selves.

These are the kinds of people that get sucked into phony job opportunities promising huge commissions from the comfort of their home. These are the people that do all the work for the spam scammers and never make a dime. Behind the legion of morons is a shrewd con artist ever on the run, packing his bags and dreaming up the next scam.

It’s the subtle and legal kind of investment scams that most investors have to worry about. It’s the uncaring person who knows what I know about the truth of oil supply and demand, yet still goes on TV publicizing his fund by telling the masses that the fundamentals justify the prices and their going to go higher yet. He offers no evidence whatsoever, merely his opinion. He might give you long string of credentials, though.

We’re not supposed to question the experts. When we do they rely on an ironic combination of credentials and charisma to distract people from the real issues.

When it comes to the markets you have to always be questioning what you hear, even when nearly everyone is saying it. There are very few people with an incentive to tell you the truth about anything about the markets because there are so few people that want to hear the truth and so few ways to make a living providing it.

That’s what I love about writing this blog. I get paid the same no matter what I say. So why not tell it like it is. It’s fun taking away the ammunition of highfalutin, egotistical, immoral people out to strip us of our money.

posted at 2:10 PM 0 comments   

Oil Economy Put in Perspective

I found little evidence in the data to support the tight supply and demand justification for high oil prices that is so often repeated.

The data I had for 2004 was preliminary so I used data through 2003, but the data I looked at for 2004 was in line with previous changes.

From 2001 through 2003 petroleum consumption increased 1.96 in the U.S. and 2.19% for the World, while production increased at a significantly greater pace of 2.51%. Note that encompasses the period within which reputedly demand has outstripped supply justifying the price increases that started in late 2003. Again the preliminary data I looked at for 2004 showed nothing out of line with these findings.

A big part of the misunderstanding about oil prices is that people have been so ready to believe in sudden changes in the supply and demand equation over the past few years. The data I obtained from the EIA shows that in fact there hasn’t been any substantial change over the period where we would expect to see it.

Stepping back a bit further to 1998 when prices bottomed out at about $12 a barrel we see that petroleum consumption increased 5.9% in the U.S. and 7.95% worldwide while worldwide production increased a smaller 5.38%.

Given the small increases and production that surpassed consumption from 2001 it’s plain to see that consumption outstripped production from 1998 to 2001 a period of very low prices and a mostly strong economy as the recession was just getting under way at the end of that period.

Since 1984 consumption has increased 27.39% for the U.S. and 33.42% for the World, with production moving up 33.31%. And going all the way back to 1973 demand has increased only 15.75% in the U.S.

That’s right; U.S. petroleum consumption has increased less than 16% in more than 30 years. The high prices of the 70s actually did stave off demand. People and particularly industry found ways to consume less petroleum products. We built nuclear plants, burned more coal, and buried natural gas lines all across the country. I remember the house I grew up in had a fuel oil burning furnace, and I remember when the gas company came through burying lines and tapping into houses that wanted to convert away from petroleum burning furnaces. Many homes built in the early part of the last century have coal chutes for feeding coal down into the basements where the coal furnaces were. Before that people just had fireplaces and wood stoves.

Though we’re incredibly dependent on oil, especially for transportation purposes, we can and will change our habits over a surprisingly short period of time if there are money saving alternatives available.

Furthermore, while it is true that World oil demand has increased at a faster rate than in the U.S., this has always been the case. Again looking back to 1973, before the Alaskan Pipeline was built and we were much more dependent on local oil sources, World demand has increased almost 40% compared to the paltry 16% in the U.S.

It’s clear that World demand has long outstripped demand growth in the U.S. so there’s nothing new about this and most certainly not in just the past few years to justify the incredible quadrupling of prices we’ve seen.

Don’t buy into the nonsense about demand from China. Where’s the data? You’ll never see it because it doesn’t exist. The truth is nobody, probably not even the Chinese, know what their demand is and I wouldn’t trust any data from them. Remember we’re not hearing this rhetoric from the oil companies, rather from people selling investment portfolios and making money off trading volume.

posted at 1:07 PM 0 comments   

The Statistical Perspective

I always read the comments sent in from readers and appreciated getting this one yesterday in response to a comment I made regarding excessive speculation in the oil markets.

While I am sure there are speculators in the oil market, the underlying fundamentals are very tight. Refineries are operating at over 90% capacity and Asian demand is still strong.

I’ve heard this so many times. Nearly every money manager on CNBC asked about oil regurgitates this thing. I’ve never believed it, myself. But then again I’ve never proved otherwise. I’ve pointed out on this blog various things like how does the price of oil more than quadruple in just seven years, tripling in just two years?

When I put this up against the comments about tight supplies and look at the still fairly stagnant economy and look at economic news around the world it just doesn’t add up. It sounds like total lunacy to me.


So I’ve never fully bought into this short supply and growing demand argument. I just have refused to believe that this equation has changed so greatly so quickly when at the height of an incredible bull market a barrel of oil was only $12.

The truth is that the $12 price was the price of oil with very little long side speculation because at that point in time few speculators were interested in the oil markets with equity prices advancing at nearly three times the rate of earnings.

But with U.S. equity prices seemingly stagnant all the speculation has been directed at alternative investments such as foreign securities, currency markets, and commodities including oil. So it’s naïve to deny the impact on markets that speculation can have, especially when the money moves from large markets to small ones.

I don’t think that most people realize that there are nearly as many hedge funds now as there are exchanged traded companies in the U.S. The thing about hedge funds is they can invest money anywhere they want. There’s no accountability whatsoever. So if I were running a biotech related hedge fund and I were taking a beating do you think I might dip a toe into some momentum stream outside my niche to deliver returns?

Well, I wouldn’t because if I said I was running a biotech fund, I’d do what I said. But lots of people out there wouldn’t do what they said. Take my word for this. This is true even with mutual funds with prospectuses.

I’ve long believed this is where the real and greatest problem lies with mutual funds, being invested in assets they are not supposed to be. How do we know where our money is being invested? We don’t except twice a year when the fund families have to report its holdings via annual and semiannual reports. That’s precisely why tech has taken off before midpoint and end of the year ever since prices began collapsing in 2000 and 2001.

What investors don’t know won’t hurt them right? Wrong. This is was a significant contributor to the collapse, in my opinion. The funds sold you out. They’re marketing departments were preaching buy and hold, buy and hold. You gave them your money expecting to be invested in a certain class of assets and you got charged fees to be in money markets and a whole lot of stuff you will never know about.

CFAs are primarily trained to read balance sheets and that’s all well and good. But they receive nothing more than freshman college level training in statistics and are not taught how to apply it to market research. The CFA program is the training ground for fund analysts, portfolio managers, and many hedge funds though with regard to the latter I know of many that build teams of physicists, psychologists, mathematicians, computer scientists, economists, etc… instead of the usual fraternity houses that most funds are.

I’m actually not knocking the CFA, as they are well-trained specialists. I’m just pointing out that they make up a large part of the money management industry, while economists and statisticians have been utilized only sparingly. Thus it’s no surprise that we would get very little exposure to quantitative scientific views of the markets.

The hedge funds that are doing this work don’t have face time and are very proprietary and downright secretive. The other group that truly understands oil dynamics are people specialists working in the industry. Of that group numerous individuals have come on TV to say that the supply demand balance is fine. But they’ve never provided any real evidence because their industry likes the high prices.

The groups we hear from the most are the fund managers trying to attract capital into their funds and analysts of the big brokerage houses making money off the increased commodity trading activity. These people have nearly unanimously told us that fundamentals justify the current high prices.

Consequently, average investors have to turn to a rogue unknown blogger to get the truth. Fortunately, I have just the background to give it to you. I majored in economics and minored in partying. I hated college and disliked nearly all my out of touch instructors. I bounced around studying math and actuarial science for a while before settling into economics and finally getting out of the system and into the real world. I never felt like I was learning anything useful in college and I was right.

Nearly everything applicable to the markets that I’ve learned I did so on my own and with the help of others in the trading and hedge fund business. I had to scrap everything I was ever taught about writing from grade school through college to make my living as a writer. I took advanced statistics courses in college, but hadn’t the slightest clue as to how to apply them to the markets. This has been the hardest thing to learn.

I’ve learned from the best and I still consider myself for the most part an amateur at it. Learning what to study and where to get data is the hard part that no one ever teaches you. Applying statistics is the easy part once you know what to apply it to. Fortunately, so few people know how to properly apply statistical analysis to the markets that even an amateurish knowledge gives you a tremendous edge.

I stayed up late last night crunching numbers on oil markets and it only took the most basic of statistical knowledge to get at the truth once I was able to locate the appropriate data. For the sake of breaking away from all the rhetoric above I’ll post my findings in a second post on the topic.

posted at 12:18 PM 0 comments   

Wednesday, April 27, 2005

Fed Stoppers

Today’s $2.59 drop in crude prices is sure to have oil speculators sweating. There’s absolutely no doubt that there’s a lot of weak hands in oil. These are momentum players looking for a boost to lackluster results from equities. They’re not going to hang on in the face of much uncertainty. They’ll skedaddle back to cash or even better yet as we saw today into equities.

Let’s hope this turns out to be the case. Combined with the weak durable goods data out today, today we saw some strong evidence that favors the Fed halting its interest rate hikes. The Fed is very leery of slowing the economy. The official policy is still “accommodative”. Additionally, if oil were to fall substantially the Fed would be less concerned with inflation, which thus far has been entirely energy and commodity driven.

posted at 3:50 PM 3 comments   

Apple Ego

This is the kind of company that Apple is. The media would have never even took notice of the Jobs bio had Apple (AAPL) not made such a big stink over it. Oh the ego.

posted at 2:50 PM 1 comments   

Climbing the Wall of Worry

You’ve heard the expression, but I bet you’ve never given it any serious thought. Well I did and had a minor epiphany in this regard. I’m listening to all the worry and all the reasons for stocks not to go higher and it rather suddenly occurred to me that we always worry even as they are rising. If we paid attention to all the worry out there, we’d miss every up move.

Consider that the S&P 500 hit recessionary lows in mid 2002 through early 2003, more than two years ago now. The index has climbed more than 40% since that point and we worried all the way up. We’ve worried a whole lot about jobs. In that period we shifted quite suddenly from worrying about deflation to inflation and stagflation. And we’ve worried about deficits since, well since Reagan was in command.

If you listened to all the noise, you missed a 40% move up. If you didn’t listen to any of it, you probably hung right through all the ups and downs. That’s the difficulty of timing markets.

We look back at the bubble and think how incredibly oblivious we were. But, were we?

No of course we weren’t. The truth is so easily forgotten. The truth is that we worried all the way up, as outrageously inflated as prices got. I found this Wall Street Journal article from 1998 indicating concerns about deflation, lackluster corporate earnings, and rising prices. That year the index shot up more than 10% in the first few months, went through several stolid months, got volatile, then climbed sharply and unexpectedly for the last three months of the year.

Maybe you’ll remember that when we started into 1998 it was on the heels of the Asian contagion, which set off a 10% market drop in just a few days tripping circuit breakers on the way down.

That’s why I look at this market and say that you have to be brave enough to overlook some of the negatives. You have to determine whether the negatives are actually debilitating. We’ve had high oil prices for more than a year now and there has been limited repercussions from it. Deficits have been an issue since the early 80s, which was also the last time we had any problems with interest rates or inflation.

Now we’ve got solid corporate earnings and what I especially like about them is for the first time ever we can believe them. These numbers are genuine. A couple of years ago we saw companies reporting abnormally low earnings, which I believe was as much related to companies cleaning up wide-spread accounting issues as to the economy.

I don’t believe the Fed is going to raise rates to debilitatingly high levels and I don’t think inflation is going to get too far out of hand. This market could remain unsteady for some time, but I strongly believe that investors putting their money elsewhere will be kicking themselves for missing a major up move at some point in the next six months or so.

posted at 11:07 AM 0 comments   

Tuesday, April 26, 2005

IBM is Cheap

IBM (IBM) plans to buy back $5 billion in stock. That’s about 4% of its market cap. The company also said it would raise its quarterly dividend 11% to 20 cents per share. The dividend increase isn’t very significant because it only takes the total dividend to a yield of just a little over 1% annually. Not much to get excited about given that shareholders are still looking at a loss of more than 30% over the past five years.

But the buyback is significant and the stock is historically cheap relative to earnings. IBM is trading at the same level it closed out 2002 at, despite more than doubling net income, on revenue growth of 20% and more than 50% growth in operating income.

posted at 3:23 PM 0 comments   

Dark Souls of the Business Underworld

Yet another investigation of AIG (AIG)! Is it starting to seem to you that this is a company that did everything wrong that it thought it could get away with? It should.

Imagine for all the cheating the company has already been caught at and accused of, all the things it may have done that it hasn’t been caught at. This is the worlds largest insurance company known for having built its business selling insurance worldwide. What do you think its business practices might be like in lesser-regulated markets?

Sure, that’s speculative. But the way I look at it is, the company and its executives have shown a willingness and propensity toward dealing unfairly to get ahead. They’ve told the public that regulators are only looking at a handful of transactions compared to the millions it does each year. This is just spin. The handful of transactions are large ones at the corporate level, while the millions of transactions applies to the individual policy level.

Let us not forget that last year the company was found to have gotten business improperly from Marsh & McLennan (MMC), a company ran by Hank Greenberg’s son. AIG executives were prosecuted with regard to selling income-smoothing products to two companies. These products were similar to what Berkshire Hathaway’s (BRK.A) General Re sold to AIG.

Ongoing we have AIGs own income-smoothing deal, an admission to pumping up shareholder equity by more than $1.5 billion, something that’s sending Bernard Ebbers and others to prison, and now this new accusation that the company improperly booked workers compensation premiums that resulted in shortchanging state agencies by tens of millions annually.

I don’t think we need any more evidence to tell us that the old boys running AIG are flat out crooks. They aided other companies in cheating their shareholders, they cheated their own shareholders to the tune of more than $1.5 billion that we know of so far, they cheated their policyholders buying the business from a crooked broker, and they cheated the government. The last of which has the power to do something about it.

I want my readers to see the situation for what it really is, not through rose-colored glasses. This is one heck of a corrupt company. It’s a company run by people so self absorbed and so out of touch with the people they cheat that they feel no remorse or guilt, resentment yes, but not remorse. They are cold, calculating, and callous people. Some will continue to be a part of this company. Some will remain nameless slinking off silently dragging their golden parachute off to their Bahaman and Aspen lairs only to later resurface into the upper ranks of another company.

posted at 1:23 PM 0 comments   

Monday, April 25, 2005

We Need More Dividends

Non-growth companies need to pay dividends. CNBC reported an interesting statistic on dividends. In 1980 60% of companies paid dividends, while only 20% of companies do so today. I had long suspected this trend toward not paying dividends, but had never seen the data.

I think this trend corresponds with the growth in mutual funds. One would think that mutual funds being managed by professionals and highly educated analysts trained in fundamental analysis would avoid low-growth companies not paying dividends. But the reality is that so much money has been thrown at the largest funds that they hold a broad spectrum of companies for reasons that aren’t always very rational and then you have value investors who often base their decisions more on how cheap a stock is rather than the potential for growth.

Consequently, companies have been able to attract investors without having to provide earnings growth or dividends. Quite irrational, don’t you agree?

There’s absolutely nothing wrong with a company not growing. The growth emphasis is a myth perpetuated through the late 90s that has stuck. But there are lots of great successful companies that don’t grow a whole lot, but maintain healthy profit margins. These companies should also be paying out healthy dividends. If they are not, then don’t buy them.

Think of it this way: Say you’re a dentist in a relatively small town. Are you going to reinvest all your profits into growing your practice? No, of course not. Lots of dentists keep all their profits and enjoy long financially healthy careers with little or no growth.

The same is true for companies. Most of these are private. But there are many such companies whose shares do trade publicly. And there’s nothing at all wrong with that. Things go seriously wrong when companies misallocate profits trying to impress investors who have come to expect continuous growth.

It’s almost gotten to the point that earnings growth potential is the differentiator between private and public companies. And that’s quite a ridiculous notion driven by our growth greed and the greed of corporate executives. So many more companies should be paying big dividends than do. Instead what should be paid out in dividends gets paid out in bonuses to top executives.

Low- or no-growth companies should be paying dividends whenever possible such that the overall return to investors exceeds long bond rates.

posted at 1:16 PM 0 comments   

Let's Be Real

Two things I will never do: Call readers “my friends”, as in “Listen up, my friends” or “I’m here to tell you, my friends”. Go on TV wearing a bow tie.

I’m not that sure of myself. I’m a student of the markets, not a dictator or professor. And I’m not an actor. I just call it like I see it. I figure that’s a pretty wide-open niche since almost nobody seems to be able to do this. Plus it’s fun making fun of the over-zealous finger-wagging Suze Orman telling the masses something completely obvious. I couldn’t do that if I were one of them.

So I’m watching this market zig and zag all over the place and listening to the many explanations as to why it’s doing what it’s doing. It’s quite humorous to look at it from an outside perspective. As the Dow drops many hundreds of points over the just a couple of weeks we were getting all sorts of negative explanations and I was getting quite sick of repeatedly hearing the term ‘soft patch’.

Guess what, the indices show some resilience and we never hear soft patch again, all in just a couple of weeks. That compression highlights just how much B.S. market pundits are feeding us.

The simple fact is investors don’t like unpredictable risks, so they lightened up on stocks just ahead of earnings season and summer doldrums. Now, as I posted here on several occasions, earnings are surprising to the upside and people are buying equities in moderation.

The truth is there’s a lot of uncertainty with regard to how economic conditions will play out. Probably the best guess is to expect more of the same.

Equities will probably rise before the next earnings season as people will wise up and see the trend they’ve created in underestimating earnings for two straight quarters. There’s apt to be a bit of a summer doldrum now through June. Tech stocks are likely to rise around the end of June as all the tech mutual funds heavy on cash and stocks they shouldn’t even be owning will have to bulk up on tech before they have to report they’re holdings in semi-annual reports. And a rise in tech stocks will be widely misinterpreted as a vote of confidence, setting us up for a second half rally back.

posted at 12:44 PM 0 comments   

Potential for Equities

I have to concur with most of the viewpoints conveyed in this Street.com article. Additionally, over all my years of observing the markets and in my historical research I’ve noticed a cycle that has never really been well defined or analyzed. That is the ebb and flow in interest in equities.

Average investors bought the top of the market in 2000 and got burned selling near the bottom. They’re still quite jaded over stocks and don’t want to make the same mistake twice so will be slow to move back into the markets.

In the meantime they’ve turned to bonds, REITs, flipping properties, commodities, etc… But these are weak skittish players. When things start to go bad this group will be quick to jump ship and they will scurry back to equities thinking the indices don’t seem so bad after all.

And this is how it goes. Investors get rocked in equities, move money elsewhere for a time then find their way back. What I’m most interested in is the fact that people do have money to invest. All the money we’re seeing going into real estate and other alternative investments is indicative of the potential for equity investment.

posted at 12:00 PM 0 comments   

Friday, April 22, 2005

Is Google a Buy?

Should you invest in Google (GOOG)?

Well, I have to admit right up front that I can’t answer that question. The stock isn’t for everybody. That’s the only thing that is certain where Google is concerned.

What I can do, however, is put things in better perspective for you by stepping back and looking at the history for stocks like Google.

Google has already risen more than 100% from the closing price of its first day of trading publicly. The best stocks to compare the search engine to are those that have similar stature as Internet businesses and have been around since the early days of the Net.

You know that during the period from 2000 to 2002 took out quite a few Internet players. In hindsight the big names some of the big players that have managed to stay in the game have performed phenomenally well, and that’s putting it mildly.

For example, if you had purchased Yahoo (YHOO) on it’s first day of trading and you were insane enough to still be holding it, which I think you would have had to drop out of society for half a decade and forgot you had it for that to have happened, well despite everything that has happened to most Internet stocks you’d still be up about 2,500%! So if you had put ten grand in it, you’d now have a decent retirement nest egg.

Similarly, Amazon (AMZN) has gained 1,800%, despite the fact that a few years ago the pros were debating whether the company would go bankrupt or not. For eBay (EBAY) it’s been a sharp 1,500% climb.

But let’s get back to reality now. Maybe somebody did that, though the few who did are outliers to be sure. And chances are if you’ve held any of these names for this long then you’re just prone to holding onto stocks no matter what happens. That being the truth of the matter you probably were also invested in several dotcom names that went completely belly up, losing 100% of your investment, or in Internet Capital Group (ICGE), which brought many of the dotcoms to market and is still down 98% from its first day of trading.

If you did what all investment advisors tell you to do and were diversified within Internet stocks then you may still have a decent gain. The Amex Interactive Week Internet index has gained 115% since its 1995 inception. But even this is a managed index benefiting from survivorship bias. You’d have had to follow along with its changes to gain a similar amount.

The vast majority people with a diversified portfolio of Internet stocks bailed out near the bottom. I can say that with certainty because a bottom is the point at which people are willing to pay the least.

Looking at a couple of other stocks that have stuck around Ameritrade (AMTD) has gained 560% and E* Trade Financial (ET) is up about 290%, which is less than Caterpillar (CAT), which I wrote about yesterday.

I think most people would consider Google to be on the same caliber or even above Yahoo, Amazon, and eBay. But that doesn’t mean I think it can or will generate the kinds of returns of these Internet big dogs. Here’s the kicker: we had the benefit of hindsight in valuing Google when it went public. That means that Google hit the market priced comparably to the three major comparable players as of the time of issue, not as of their IPO date.

However, that doesn’t account for future gains in these issues, which is completely unpredictable and might very well continue to be highly profitable.

posted at 4:09 PM 2 comments   

The Reality of Investing in China

I’ve been prattling on about the hazards of investing in China since a spurt of Chinese IPOs started hitting our markets in 2003. Yesterday the WSJ ran a front-page article giving readers a glimpse into what the Chinese markets are really like. Thank you WSJ!

This was the first article I’d ever seen to date that has had anything remotely negative to say about investing in this misunderstood last bastion of old world politics. The article was a big relief of frustration for me since I’ve written so much about it here and elsewhere, including how I quit writing for a newsletter service that wanted to me to tout Chinese stocks. All along I’ve felt like I was banging my head against the wall and nobody was listening.

Or when they are listening they aren’t agreeing. A year ago when I wrote about investing in China in this light for the Motley Fool I got blasted with responses telling me what a total moron I was and how little I understood about the fastest growing economy in the world.

I’ve never been to China. Knowing how the government operates there, I probably never would be allowed to even if I wanted to. The communists would probably Google me up and label me a dissident, spy, and risk to their system for all the negative things I’ve written about their markets and country.

Having never been there and not having the resources that the WSJ has at its disposal I’ve never been able to compile the kinds of facts that author of yesterday’s article did. All I’ve been able to do is spout off about communist government ownership, corruption etc… But people just don’t get what this means.

It’s kinda like watching extreme skiing on TV. It’s incredible to watch and you know it’s risky and they even use camera angles to make it appear more extreme than it is. But until your climb out of a helicopter or snowcat and are bracing yourself with your poles so as not to get blown off the top of the mountain where your looking over the edge of a steep thousand foot drop as you snap into your bindings, then you really don’t understand the risks your facing. Until your standing at the top you never really feel the sheer intimidation and respect for the situation you’re in.

The problem with investing in a country like China is that it’s like paying someone else to stand on top of the mountain and take the plunge for you. You never really ever understand just how much risk is involved. It’s there all the time, but you never see it. It’s removed from the investment process and made to be an intangible thing. Your hiding in a mutual fund or ADR.

Chinese stocks are at six year lows, the Chinese are protesting their own markets for the rampant corruption that is the norm there, and all the while the ADRs trading here in the U.S. are for the most part rising. The divergence can’t and won’t continue.

The Chinese have done everything in their power not to let U.S. investors know about the way their markets are really being run. And you know what, American brokerage firms don’t want you to know either. Why? Because they’ve purchased massive blocks of Chinese securities to back up the ADRs they’re trying to sell you. And they certainly never bothered to tell investors that the communist government owns 2/3 of all shares of public Chinese companies or how these companies were selected to be listed on the exchanges.

Ok so you’re saying, “Why do I care about all this?” “I’m not invested in China and never will be.” Well I want readers to understand that the big brokerage firms are now using the same tactics of limited information about the risks involved to sell investors into various commodities and to generally create fervor in whatever the latest hot faddish sector or stocks are.

They do this all the time. Always be selling. Get people excited about anything and they hand over their money. It doesn’t really matter what it is. If people get excited about investing in something the brokerages will find a way to get it to you and tell the world what a great investment it is. It’s nothing more than a legal pyramid scam. They know bubbles when they see them because they’ve been creating them for a hundred years, but they’ll never tell you that.

They would say this is conspiratorial because it's such a normal part of the business that they don't even see it as being wrong. No more so than the CFOs saw doctoring books as wrong before Enron imploded.

posted at 1:14 PM 0 comments   

Thursday, April 21, 2005

ECNs Forcing Change

The most incredible thing to me in the NYSE / Archipelago deal is that Archipelago Holdings (AX), the little upstart ECN so typical of so many organizations coming out of the late 90s dotcoms, is going to own 30% of the venerable 200 year old exchange. Deceased members of the good ole boys club are rolling over in their graves if they can see how a bunch of snot nosed punk programmers have elicited such massive and rapid change since ECNs first arose on the scene less than ten years ago.

posted at 1:24 PM 0 comments   

This Bud's for You, Buffett!

So I guess Buffett thinks when we’re all sharecroppers, we’ll be wallowing in our sorrows as we realize the error of our ways, Buffett buys stake in Bud (Bud). He probably thinks Bud will get bought out and we’ll be buying all our beer from foreigners too.

posted at 1:06 PM 0 comments   

What is a Cyclical Stock Really?

Last night I was watching a money show hosted by a popular boisterous commentator and money manager. You can probably guess the person I’m talking about. Someone very knowledgeable, but that does more talking than listening and often lets arrogance get in the way of logic. It wasn’t the first time that the topics on that show closely resembled the outline for my blog posts and it wasn’t the first time that the show countered my posts.

This time viewers were told not to buy Caterpillar (CAT) because it was a cyclical stock. It was the second time yesterday that I heard this said.

This REALLY bothered me for numerous reasons. These supposedly smart stock market experts were just regurgitating information with know evidence whatsoever to support the conclusion don’t buy the stock because it is cyclical.

If you’re going to say don’t buy a stock because it is cyclical than you better be able to define the business cycle and how the stock relates to it. At this point I’m seeing divergence of opinion as to where the economy and markets are headed from the top-level gurus on down. So what part of the cycle are we in?

The data is completely inconclusive. The 70’s were spent almost entirely in an economic funk. The 80’s were mostly prosperous but somewhat volatile and a whole lot less fun thanks to the emergence of the aids virus. We had a mild recession in the early 90’s then a boom. So far this decade we’ve had a fairly severe recession that we’re still working our way out of. It’s been a mixed recovery because the Fed is raising rates to slow the economy down, but people are still struggling to find work and recover lost wages.

What’s clear is that there isn’t any clear cycle. The economy doesn’t ebb and flow according to any specific interval as many people would have you believe. There isn’t an iota of historical data that predicts our future economic path. There’s a nearly equal possibility that better times are on the horizon or that we’ll stay in a funk and live with uncertainty the rest of this decade. Though the probability leans somewhat towards prosperity because that has been the norm for our economy.

Also, I greatly dislike hearing so many phoney baloney commentators and analysts telling people you’ve got to be a stock picker in this environment because they always say this in every environment. In the late 90s, a time when the S&P 500 was rising nearly three times faster than earnings, they told us you had to know which Internet stocks to buy and had to know which stocks within the S&P 500 to buy to maximize your return.

They sell this information, so naturally this is what they always say. Remember though that in the late 90s all the mutual fund companies were very vocally telling us to buy and hold. But there’s some serious irony here. First it was the mutual fund portfolio managers going to cash that was the tipping point for the markets. They bailed out of tech. They sold us out, pure and simple. Secondly, our own fast triggered trading contributed to the collapse yet now I’m not hearing anyone telling us to buy and hold and everyone telling us to be traders.

These commentators seldom tell us for how long we should hold a stock. Yesterday I gave you some very good valid reasons to want to buy Caterpillar. Stocks have been through rough times in recent years. They have ebbed and flowed not so much according to the cyclical nature of the business cycle, but more according to the sector rotation and whims of sheep like money managers. In the face of all the uncertainty and volatility we’ve seen, really over the past ten years because you have to count the boom side of the markets in measuring volatility, it makes a hell of a lot of sense to look at stocks that have performed well through both good and bad times.

We have seen some pretty big and pretty seemingly conservative companies fall to their knees in the past five years. You need some protection in your portfolio. How incredibly laughable and ludicrous is it, when you stop and think about it, that gurus are telling you to get that protection by investing in foreign securities. I’ve got news for you, if you don’t get the joke, the U.S. securities markets are by far the most secure in the world despite everything that has happened in the past five years and the illusion that has created.

So it bugs the bejeebers out of me that the market mavens are telling you not to own stocks like Cat because it’s a cyclical stock. Well I’ve looked at the numbers and there’s nothing cyclical about the stocks return. From 10 years ago yesterday through five years ago the stock rose from $21 to $33 per share. Not a spectacular climb. However, through the recession starting five years ago to today the stock has climbed to $88.

Now 1995 to 2000 was certainly a boom period in which a company like Cat should have done well yet the growth in the stock was mediocre at 57%. Why? Because at that time people were more interested in hot tech companies. Now from 2000 to today the stock has climbed 167% right through a recession and a period when the company has had trouble on the earnings side.

So this is a stock whose stock cycle and business cycle are actually inverted. Folks, markets aren’t efficient. Most people do not understand this complex relationship between business cycles and stock prices. They just regurgitate what commentators and analysts tell them without ever really stopping to question or really think about the too often bogus information being disseminated.

If you bought and hold some security tracking the S&P 500 ten years ago you’d be up 125%. Not bad considering the debacle a few years ago. But I think most people would be surprised to learn that they would be up 319% owning the ultra-conservative incredibly boring Cat. And I think you’d be nearly as surprised to learn that the Dow, of which Cat is a part, has outpaced the S&P climbing 136% over the past decade through good times and bad.

I hope if you’ve gotten this far your sensing my passion and that I am really fired up. It just burns me up that so many experts are telling you things like don’t buy a good company because we’re in such and such cycle when holding the very same company for the past ten years would have earned you more than triple the major indices.

This is the kind of thing I’m going to be going into in much greater depth in the newsletter we’re putting together, digging deep to get at the truth. This is what motivates me and makes the work worthwhile.

You should know this about me. I grew up in a small town in Indiana fishing and swimming in cricks as we called them, catching snakes, turtles, and crawdads. I’m not sure why I developed such an strong interest in the markets and economics. I guess it’s because I’ve always been argumentative having to be right and know the answers to everything. I’ve always been a curious sort and a bit of a jack-of-all-trades. This weekend, for example, I’m putting a hot cam in our ‘66 Mustang 2+2. And in a few weeks I’ll be putting a new rear end in my big ‘ole redneck Jimmy.

If this seems like an odd background for a person to be doing this kind of work and you’re wondering why you should be listening to me instead of someone with a long string of credentials then you should realize that I’m here because I want to be here. It’s my passion. I’m not here to tell you what you want to here. I didn’t go to some fancy business and learn to always be selling.

If I don’t have anything to say that will help people make money then I’d rather be hiking into the mountains, fishing, and working in some job where I don’t have to work so many hours and think so hard forcing me into a life isolation and eccentricity. That’s the honest truth. I want to make money like everybody else, but I’m not greedy.

I do work hard, however, and unlike most people I am naturally skeptical and inquisitive. So when I hear someone telling millions of people not to buy Cat because it’s a cyclical stock I automatically ask myself what really makes a company’s business cyclical, a stock cyclical, and whether Cat actually fits into that category. And as it turns out while the business may be cyclical, the stock is somewhat anti cyclical, but it’s provided incredible returns for a long period of time through every cycle, whatever they are.

I’m trying to teach people that there are situations where you want to be a trader, but that there are also good stocks and companies that you should want to own for the long haul. Cat falls into the latter category. Don’t listen to anyone telling you that you shouldn’t buy it because it’s too cyclical. You should have already owned it, anyway. But hey, ten years ago I was still far from having learned the lessons I’m passing on to you now.

posted at 11:55 AM 0 comments   

Wednesday, April 20, 2005

CPI, PPI, and Beige Book

Here’s what you need to understand about the difference between the PPI and CPI. First the PPI tracks the price sellers get for goods and services, while the CPI tracks prices that urban household and wage earning consumers pay for goods and services. At first glance it might seem that these should match up one for one, but this is not true at all as you well know from the data.

You see the PPI includes the prices of just about anything and everything at all stages of the production process down to the sale of the finished good.

So for example it tracks the price Exxon (XOM) gets for a barrel of crude sold to a refiner, then the price Valero (VLO) gets when it sells the refined product to Dow Chemical (DOW), then the price Dow gets from Mattel (MAT) for plastic pellets, and finally what Wal-Mart (WMT) pays Mattel for a finished toy.

This doesn’t include the price Wal-Mart gets from the consumer. Vice versa the CPI doesn’t include companies as consumers.

Of course this is a completely hypothetical flow of raw materials to finished good and probably way off base, but the point is that there’s an obvious gap between consumers and producer prices. There are multiple points at which cost fluctuations can and are absorbed along the path to the consumer. The end result being that there is often a significant lag and dilution of raw material price changes as they flow down to the consumer.

At the consumer level, core prices measure the purchase price of non-food and energy items. But in most cases energy is still playing a big role in prices because producers might be hit by high oil prices at several points such as raw materials, energy consumption, and transportation.

This is what we are seeing in today’s CPI data with the 0.4% climb in core prices. The CPI has ramped up from 0.2% in January and 0.3% in February, while the core PPI only increased a slight 0.1% in March and February, but it jumped 0.8% in January. So we’ve got the expected lag and trickle down as producers gradually attempt to pass on costs.

We shouldn’t have to worry too much about the CPI moving continuously higher as long as the PPI stays low, which is the concern expressed by the Federal Reserve in the Beige Book released today.

posted at 4:35 PM 0 comments   

Cats Will Be Moving Dirt For Long Time To Come

On March 29th I wrote Cat Call Creates Buying Opportunity. Caterpillar (CAT) closed that day at $89.80 that day. Thanks to the Dow tanking, it’s still only trading at $89 and change today despite climbing better than 5% on record 1Q earnings and raised earnings estimates for the year.

Cat’s a long-term company and a long-term holding. Not a trade. The strong earnings and outlook emphasizes this. It’s not an exciting play. But like I wrote yesterday, don’t be a stock snob. That kind of bias doesn’t help you make any more money in the markets.

There’s nothing wrong with slow and steady. I’ve been fortunate to get to know every kind of investor from world famous hedge fund operators to floor traders and I’d stack my grandfathers up against any of them. One retired about 25 years ago from Chicago Bell to a small town in Arkansas. He and my grandmother traveled the world on the dividends from his conservative utility holdings. You can’t really ask for more than that. My other grandparents (deceased) lived retired comfortably in their rural Kentucky town thanks to my grandfather's half a dozen rental properties and ability to do odd jobs.

Moral is, don’t be too greedy. Cat’s have been moving dirt around the world for 75 years and they’re apt to be moving even more dirt 75 years from now as civilization spreads throughout more and more developing countries. There are few companies that have been around this long and even fewer that have been good investments for as long as Cat has.

posted at 1:01 PM 0 comments   

Mass Confusion

That’s what we have with regard to the markets. I try to maintain a very broad perspective. Writing and analyzing the markets from the mountains enables me to put myself outside of the fray and get a big picture view. I listen, read, skim, crunch.

That doesn’t mean I can produce superior economic forecasts or determine any better than the next person where the markets are headed next. Certainly, I have my opinions and I don’t hesitate to share them here. At the moment I’m bullish both long and short-term. I was bullish long-term before the Dow decided to test 10k once again. Before that I was quite uncertain as to what stocks would do in the short run.

But for all that, I feel I need to tell you that my level of confidence isn’t all that great. Every day I hear professional after professional going head to head on CNBC with completely opposite viewpoints. Buffet’s got billions bet against the dollar. I look at sites like Gurufocus.com and Vinvesting.com and I see people like Bill Miller saying the S&P 500 will gain more than 10% this year, Ken Fisher says 25%, while Martin Whitman like Buffett says invest overseas.

So where are stocks going? Really, who the hell knows! If the gurus don’t agree (and they never do) then why would you even consider listening to me?

Because I’m the only person out there telling you how it really is. If there’s anything I can brag on and am proud to do so, it is that. And I can say it with confidence. Please look around. Look hard. Digest what you see. Everyone’s got an opinion, myself included, but no one is willing to go out on a limb and tell you they don’t know.

Should you be investing overseas, in small-caps, commodities, U.S. indices? Everywhere you look people are giving you contradictory advice. It really does feel like the 1970s. People just don’t know what to do with their money.

I try hard to keep an open mind about various investment choices. But I’m not totally unemotional. I’d rather people not give their money over to communist Chinese, for example. I don’t quite understand why people are so willing to do so. We don’t invest in South American drug lords, except through buying the drugs. We don’t invest in North Korea or Cuba and until relatively recently we certainly didn’t invest in our arch nemesis Russia. So it doesn’t jive well with me that people are so willing to invest in China, as the country were so different.

And if you’ve been reading this blog for very long you know I’ve posted numerous times about the massive amounts of speculation in oil and other commodities markets. It’s even remotely possible that my posts sparked some of the recent selling. I know that sounds incredibly egotistical, but here me out. I spent a week hollering and ranting about excess speculation. Several readers disagreed with me vehemently. They probably aren’t even readers anymore. Nowhere else could I find anyone saying what I was saying.

The very next week CNBC started covering commodities speculation in depth, interviewing and asking the right questions. I thought it was probably a coincidence until I started hearing some of my own unique verbiage and coined phrases. From there, a lot more people started to question and become concerned with numerous commodities falling off highs.

Now I don’t think for a second that I have an iota of clout over the markets. I’m not kidding myself. But CNBC does and they have a whole lot of analysts and interns over there surfing the Internet seeking story ideas and unique opinions. It’s Malcolm Gladwell’s Tipping Point.

I remember when I was an idiotic goofball junior high schooler a friend and I used to make up crass words just to see if we could get them to stick. We found out one did at least briefly when we heard it used in a movie. I don’t remember the word or the movie, but it was a small claim to fame for a couple of dorks from small town Indiana.

Anyway, open-minded investing using a hedging strategy is going to be the focus of the newsletter service we’re putting together. At the heart will be model portfolios enabling the subscriber to protect their investments and profit regardless of which guru gets to toot their horn. I think you’d be hard pressed to find another service that’s offering anything remotely like this.

But, I don’t mean to turn this post into an infomercial. What I want to emphasize is for readers to see the mass confusion I’m seeing.

posted at 12:25 PM 0 comments   

Tuesday, April 19, 2005

Hackers Hit DSW for 1.4 Million Cards

If you are fearful of shopping online due to concerns about identity theft you should realize that intercepting your transaction is not how hackers are getting peoples info. They’re hacking into corporate systems and grabbing entire databases. DSW recently had 1.4 million credit card numbers and names stolen. The data was entered into the company’s systems from 108 stores in 25 states.

There’s a huge catch-22 in this. Consumer lawsuits would incentivize companies to tighten up access to this info, but it would also incentivize companies to not tell consumers that their information had been stolen.

Still I think companies will end up in class action suits for not properly securing the information.

We’ve heard a lot about this recently. But, I doubt that much of this data is actually being used harmfully. I suspect that there’s a disconnect between the hackers stealing this data and the black market for the information. Hackers have always broken into systems just to see if they could do it and I think this is probably the case here being driven by seeing the hack hit headlines, not to profit from the sale of the information.

posted at 1:41 PM 0 comments   

Funds Prefer Cash To Bonds

This article about suggests that fund managers prefer cash to bonds as an alternative to equities. It’s interesting because they can’t stay there for long. They’ve got to get the money to work and if they don’t like bonds now then they aren’t likely too soon. They are more likely to get the money back out into the equity markets.

We saw yesterday that there was buying just above 10,000 on the Dow and some of that cash going into the markets today.

posted at 1:27 PM 0 comments   

Don't Be A Stock Snob

Picking good stocks makes people feel smart. It’s a challenge. But it’s also a lot of work with no guarantee of improved performance.

All but the most popular exchange traded funds get little attention from individual investors and the media. But what investors don’t generally realize is that very many funds (i.e. mutual, pension, and hedge) hold ETFs in their portfolios.

So while your trying to pick big winners the pros are putting your money to work in ETFs. Of course pros are stock pickers too, but they are the biggest buyers of various sector exchange traded funds.

Exchange Traded Funds are a great tool for the individual investor too. They are transparent, liquid, and diversified.

posted at 12:37 PM 0 comments   

Core PPI Data Subdued

The core Producer Price Index for finished goods climbed only 0.1% for March. Including food and energy data the index climbed 0.7%. Investors are most interested in the core numbers because it provides a broader measure of inflation. The sharp rise for all finished goods is attributable almost entirely to energy prices, which climbed 3.3%.

Excluding food and energy prices rose 3.2% over the last twelve months. The rise for all finished goods over the last year was 4.9%. So over the last twelve months producers have experienced a reasonable level of inflation, that hasn’t been entirely due to higher energy costs.

These are not system shocking numbers. And despite one analysts projection for oil to go over $100 a barrel, prices seem to have stabilized for the time being. If oil prices remain steady to lower the overall PPI for April should be a much lower increase and possibly a decline.

posted at 12:20 PM 0 comments   

Monday, April 18, 2005

Chinese Relations

Chinese relations are something that should be far more pressing to investors than our own deficit issues. It just has the potential to spiral out of control so quickly and we’d be in the middle of it both economically and militarily.

Here’s an article with a good overview of the issues at hand. I think this quote describes the situation pretty accurately: "This is not a Japan-China dispute. China has hoodwinked you into believing it is, but in reality it is a U.S.-China conflict in which Japan has sided with Uncle Sam," said Tetsuya Kataoka, senior research fellow at Stanford University's Hoover Institution, who is now retired and lives in Tokyo.

It boils down to the simple fact that China doesn’t like the U.S. telling the country how it should act and behave, something we do incessantly. China is very childlike in this regard, prone to throwing fits to get its way. It wants to enjoy the fruits of modern trade while continuing on with its tradition of despotism, ruling its people by force and fear. It’s fascinating to me that so many Chinese would erupt into protests over Japanese occupation more that ended so many years ago.

The closest thing the U.S. has staged to protesting the Japanese attack on Peal Harbor in recent times was the “Buy American” crusade of the ‘80s, which the Japanese smartly got around by building auto plants in small towns all across America employing hundreds of thousands as our own companies moved jobs overseas. The Japanese could then say many of their cars are more American than those built by the “Big Three” (now Big Two) American automakers.

Really America has been at war fighting to gain and maintain its independence and freedom for most of its existence. I guess we’re so used to it, that if we were to hold grudges we would be hateful of most of the world and our neighbors that come from every part of the world. It’s no wonder that so much of the world dislikes Americans when our country is made up almost entirely of people who abandoned, were kicked out, or were taken by force from their own countries.

So you don’t here the U.S. complaining about the Japanese, the British, the Germans, or even native Afghanis. Most Americans don’t even know what the Boxer Rebellion is anymore, the events that led up to Japanese occupation in which hundreds of Christian missionaries including Americans and thousands of Chinese Christians were slaughtered.

I don’t think most American’s realize that prior to the 1930s and 1940s even after the rebellion China was wide open to foreign trade with all the world’s leading countries and trading companies maintaining port facilities for gathering and shipping goods.

Only now is China beginning to open back up again, but unfortunately the government is being extremely controlling in how it does so.

posted at 3:12 PM 1 comments   

Gotta Love Adobe

I love the Adobe Systems (ADBE) and Macromedia (MACR) deal. This morning investors were registering a possible premium in the fundamentals of the deal with Adobe being down more than Macromedia was up. That gap has narrowed, however, as I think the usual merger concerns are being countered by the obvious synergies these two companies share.

When I think back over comparable deals, few are as obvious a match. Oracle (ORCL) and PeopleSoft fought tooth and nail throughout the process. In the end Oracle won a company chock full of disgruntled employees that did not want to be a part the acquirer. Oracle, for the most part, bought its way into the business software arena. The deal was just ugly, ugly, ugly.

No merger can go off without a hitch. There are clearly of redundancy between Adobe and Macromedia, so there’s little doubt quite a few jobs will be shed. But give this combination a year and we’re looking at a very strong combination.

I’m looking beyond the short-term fundamentals towards what the combination has to offer customers. These are two of my favorite tech companies, which I’ve written about on numerous occasions here and elsewhere. What I really like about both of these companies is that there is nothing faddish about them. They’re both serving markets that will continue to grow dramatically, while facing little competition.

These companies’ offerings are as industry standard to graphic design and the Internet as Microsoft (MSFT) Windows is to operating systems.

posted at 1:06 PM 0 comments   

Spring Cleaning

Markets don’t always make sense. Neither do people. We all try so hard to explain events like last Friday’s large drop. During and after the fact everyone, myself included, wants to understand why such a thing occurs.

I thought about it a little bit over the weekend. Not a lot, I have to admit. Hey, it was the last weekend of the ski season. And a last hoorah for the locals up here near Keystone, where I now have been residing for a few months. The people up here are a little too friendly. In the short time I’ve been here I’ve managed to get to know some of the better-connected people.

Saturday night that meant getting a VIP badge and doing shots of Citron Tequila with one of the fabulous bands the resorts ship in here. It also, meant most of yesterday was spent in hammock-bound contemplation and remorse, with my wife reminding me frequently that I’m getting too old for such nonsense.

It was a farewell, at least for a little while, to the tourists and all the chaos that comes with it.

I got my son on the school bus on this sunny purifyingly cool morning feeling quite refreshed and when I came back to the TV, CNBC was telling me why Friday. They offered up all the usual suspects. I’m listening and I’m thinking yeah but nothing has really changed. The economics are pretty much the same as they were at the start of the year and earnings look to be inline with what we saw for the fourth quarter. I’m not really even hearing all that much static from the bear meme, who I think were even surprised though they’d never admit it.

Then it hit me the real reason. It was too obvious for anyone to see.

The markets had already had their last hoorah bumping up against 11,000 not so long ago. Now we’re less than two weeks from May and that’s when people start thinking about summer. To investors and traders alike that’s associated with the doldrums, a well-known, widely-anticipated, self-fulfilling market phenomenon.

Such a looming event causes stress among speculators. They get jumpy. They get itchy trigger fingers. At the slightest sign of selling they want out. They jump the gun.

This is the nature of the markets. For the past several years I’ve been watching the markets rally earlier and earlier into December and now around Thanksgiving in anticipation of the rally that’s supposed to come each January. Speculators are constantly trying to get a jump on one another and will do so to the point that event like the January effect no longer exist, becoming profitless.

To the speculator it only takes two data points to make a trend. It’s very possible that we’ll get the June selling out of the way now through May and rally this summer when everyone decides stocks are cheap, the summer doldrums having shifted into the spring.

posted at 11:25 AM 0 comments   

Friday, April 15, 2005

I Want To Buy This Market

Can I say it any more bluntly? Investors are selling stock again today on the excuse of weak IBM (IBM) earnings. This is quite ludicrous. IBM is not in any way a bellwether for the broader markets. And it’s really no surprise that the IT outsourcing business wasn’t what it once was. This is nothing new, whatsoever.

IT outsourcing was faddish in the late 90s when major companies could simply issue more stock to help fund major projects. But, remember that all major companies had to comb through every single line of code in their ownership searching for Y2K problems. They had to allocate significant resources and hire third parties to get the work done.

Soon after Y2K the economy started to go kaput, and the outsourcing fad came to an end. No longer are IT service companies getting the big contracts to build B2B platforms, online shopping interfaces, and e-broker businesses that they once were.

They did get a bit of a boost after 9/11 via surveillance systems. CSC (CSC) fell right into this niche, not IBM.

IBM isn’t a widely diversified company at all. In fact it’s quite narrow. General Electric (GE) is THE bellwether and it reported 25% earnings growth and double digit gains in nine of 11 units. GE is a proxy for what to expect throughout earnings season. IBM’s inability to close corporate IT service contracts does not reflect on those companies ability to profit.

Citigroup (C) and Wachovia (WB) are also good bellwethers for the economy. Both had strong quarters.

I know it’s hard to be contrarian as the Dow is tumbling 200 points. But that’s where the long-term investor needs to be.

posted at 4:04 PM 1 comments   

U.S. Reckless on Yuan Liberation

The U.S. Government is taking a lot of heat over the trade deficit and wants to China to float the yuan to help solve the ‘problem’. An artificially low yuan unfairly promotes China’s export business. Our government wants China to change its ways immediately; letting the yuan go where the market winds will take it.

Most would agree that the market should determine the price of a yuan and most would agree that this would be substantially higher than it is currently. Demand for yuan’s to buy Chinese goods would push the currency higher.

Unfortunately, I have to agree with the Chinese that it needs to be cautious in letting go of the currency. It’s akin to throwing ballast from a hot air balloon. Our government has a gross misunderstanding of the short-term economic implications.

Only in the long run would floating the yuan promote increased U.S. exports and reduce our trade deficit. In the short run we’d be at risk of significant price inflation. If the currency climbed 25% against the dollar, that is precisely how much more we’d be paying for myriad of Chinese goods.

If you don’t think the yuan could climb so drastically consider that the euro has climbed about 40% against the dollar in the past five years. And that currency has been trading freely! So it’s not impossible that an untethered yuan could climb even 50% or more.

A climb in the yuan of that magnitude would potentially be a serious shock to our economy. Consider of all the day to day items imported from China filling the shelves of discount stores like Wal-Mart (WMT), Target (TGT), and Kmart (KMRT). These companies would suffer significantly as they struggled to pass on higher import costs.

posted at 1:21 PM 0 comments   

CSC Unjustly Punished

Computer Sciences Corp (CSC) is trading down 4% in tandem with IBM (IBM), which had disappointing earnings and concerns about future contracts in the Global Services business.

The assumption is that the two company’s businesses overlap. That is only partly true. They certainly do compete in providing IT services to traditional business customers. However, this is an area that all IT service companies have struggled in for several years now. So much so in fact that CSC set out a couple of years ago to diversify itself extensively. And it has done just that.

Consequently I think that investors are overemphasizing the similarities and overly punishing the stock. Take a look at recent reports from CSC and see where their revenues are coming from and growing the most.

This may be good for a quick profit as longer-term investors who have a better understanding of CSC’s business buy into the dip.

posted at 12:47 PM 0 comments   

Thursday, April 14, 2005

Politics as Usual

It’s funny to me that as the AIG (