Friday, March 31, 2006

The Really Big Picture

The feeling I've had all week about the markets has been one of uncertainty. I don't mind admitting that the Fed statement was a disappointment, mostly because it conflicted with the things Bernanke said in recent speeches and testimony, and previous experience with the Fed. The minutes will be interesting to read to say the least, but I would have liked to have been a fly on the wall of that Fed meeting. You see based on what Bernanke has said in the past the Fed should have paused here, or at least gave further indication that a pause was likely coming, instead of the more work ahead we got. It said to me one of several things.

He may have wanted to counter dovish criticisms, which would be a political reaction not necessarily in the best interest of the economy. That would be a disappointment to that he would put politics ahead of doing the right thing. He may have been overridden by other Fed members. That's not so bad, as it would be bad to have the Fed run as a one man band. I think Bernanke is right that low long-term treasury rates are mostly due to international demand, rather than as Greenspan has suggested excessive risk taking by American speculators. But as near as I can tell the other Fed members, having kissed up to Greenspan for so long probably in hopes of taking his place, have been influenced by the Greenspan theory for too long to change paths. What that means for Fed policy is that the majority of Fed members, not Bernanke, are prone to overshooting. And negatively, Bernanke will frustratingly be at odds with his entire board. The chairman will be outvoted. I suspect that at the most recent meeting Bernanke would have subtly tried to win the other members over to his way of thinking, unsuccessfully. He'll have to work them over to his side, over time, if he can.

Again politics getting in the way of doing the right thing. But then again, I might be reading more into the event than there is. Either way I was left wanting, as were most investors and hence the seesawing we got this week. We were all looking to the Fed for some guidance and we didn't get it. What we got was a picture of a market full of mixed information. It's a very confusing and murky picture.

We've got this overriding economic growth that may be slowing or may be too strong, we don't know which. We've got a multitude of experts saying that a slowing housing market will slow down the consumer. But how on the other hand we've got experts, including the Fed saying that incomes are going to rise, and if that happens then I don't see how the housing market, or consumer spending, or both slows as much as the other experts expect because income is everything. Income counters all the other negatives, high energy costs, expensive healthcare, etc…

I'm not so concerned about healthcare as the bears are. Why? Because when healthcare gets too expensive consumers will demand less of it. They will get sick and die and go without healthcare they might have otherwise received at a lower price. That's a social problem more than an economic one. Healthcare costs won't spiral upwardly out of control, people will just choose not to get treated for many of the things they would have in the past if prices keep rising. They will ride out a cold instead of knocking off work early and running to the doctor for every little ache and pain, which is just what people do and why healthcare is so expensive when people go to doctors for hardly any reason at all at copays of just $10 to $20, less than they pay for a gym membership they never use.

The high cost of energy prices is disturbing, but we've proven able to weather it at the current levels. Commodities are less of problem than they would have been in the past because the Chinese communist government is eating so much of the higher costs subsidizing the businesses that make so many of the physical goods we consume. I'm more concerned about the inevitable race among various countries to gain control of the world's commodities. China is already embarking on increasing its stockpiling commodities and that's part of the reason for the high prices, but only part. Speculation is the biggest part.

The really big picture is that there's a lot of money in the world chasing every investment opportunity out there. When you think about it there isn't a significant asset class that's doing really badly anywhere in the world. Some would point to printing too much money, but that's not the answer, because inflation is stable all over the world right now. I believe this is the product of globalization and the Internet's been a major catalyst. People are rapidly becoming less agrarian. In an agrarian society nearly all of a persons available effort is put towards subsistence and leisure. Reduce the amount of time people must apply to subsistence and people will either invest that time in more leisure, being more productive, or both. What we're seeing now is previously unproductive people becoming somewhat more productive and the result is that the world is experiencing more people seeking ways to be productive.

It's not always positive, but consider the famous Nigerian email scam. I'm sure you all know what that is. People sitting in Internet cafes all around the world, mostly in third world countries are sending out emails trying to con you out of your money. But there's an upside. What would those people have otherwise been doing, petty crime to support drug and alcohol addictions perhaps. Now they are leaning how to use computers, albeit for illicit purposes, but people see that computers can make them money, period. Some of them will become adept computer users and they will make money however they can, good or bad. The bad amounts to wealth transfer that is a net wash, but the few that rise up and do real work, perhaps bidding on small coding projects needed by people in the U.S., that's in part productive. So there's a net economic gain for which there's no offsetting real loss. A certain percentage of everything that's created goes towards making everyone's lives easier and less agrarian. There's a net gain. Computers and the Internet have stimulated this change to the point that it has taken on a life of its own.

So even though this week I felt a little less upbeat about the markets, when I look at the greater truths I want to avoid the bubbles and hype and stay positive on the markets.

posted at 2:57 PM 0 comments   

Fund Flows

A CNBC discussion caught my attention this morning. It is possible to learn something from the mainstream media without getting caught up in the hoopla, but it takes practice and the right mindset. If you’re the person that finds yourself easily charmed by charismatic personalities, then you'll probably be better off with the TV turned off.

"You start with looking at some of the assets that have been pouring into the ETFs and the foreign funds this month and it's kind of an interesting scenario. Why do you think that money has been going in there?"

Editor's note: The mainstream media is just now realizing what's been going on for two years. A month ago CNBC made a big stink over some data showing average investor interest in equities had increased. They completely misinterpreted the information, or rather spun the obvious information into the story they wanted to tell, which was a correlation between increased average investor interest and hitting new highs on the major indices. What they conveniently chose to ignore was the fact that most of the money average investors have been putting into the markets was going into international equities, not the U.S. major indices.

The average Joe hasn't participated in the S&P 500 rally that started two weeks into last October and has taken the S&P 500 up more than 9% in six months time, but they have continued to make gains in international equities, which are up 10% to 20% over the last six months. I was two weeks early getting bullish in The Market Spectator letter at the beginning of October, but those two weeks make a big difference. From Oct 1 the S&P is up less than 6%. That just goes to show you how dangerous market timing can be. If you can't get it right, don't do it, you'll be worse off for it.

Anyway, the response by Christine Benz of Morningstar was, "Well, foreign stock funds performance has continued to be really high and for the most part what I see is assets going to some pretty good quality funds…, the one thing that gets me worried is the rate of flows into emerging markets funds. They've been really quite robust and I worry that investors there are chasing the very hot performance in emerging markets, might not be aware of the risks involved in emerging markets. I'm also concerned that fund companies themselves might not be managing flows as well as they could be because there are liquidity issues associated with emerging markets investing. Will they be prepared to meet redemptions if assets flow out as quickly as they've been coming in?"

Those are excellent points. You think people might not be aware of the risks? They aren't. Just listen to the people calling in to Mad Money for one show and you've got a pretty good cross section of the kinds of people that are going heavy into international and emerging markets right now. They know no more than what CNBC tells them, which was so very wrong. They have no idea that their returns are being driven entirely by their next-door neighbor shifting a higher percentage of his monthly 401k deposit to international equity funds, and have nothing to do with the earnings of the companies involved or quality research on the part of the fund managers. That is by definition a bubble. I've known too many family and friends now that are into international in a big way that don't know the slightest thing about the markets. They're there because their dangerously clueless small town financial advisors that get their market information from CNBC tell them that's where they should be. They're going to get bit, it's only a matter of time.

You think funds will have redemption problems? The answer to this is also yes. The problem is that you can always find a seller when you want to buy at any price, but you can't always find a buyer when everyone wants to sell at the same time. That's why markets climb and crash, climb and crash, climb and crash. Emerging markets are particularly susceptible to this reaction. When things start going badly, people will go online and change their allocations. The fund companies will be in a heap of trouble as the bubble bursts.
It's been suggested here that a down move in international equities has run it's course, but the data courtesy of AMG Data shows that it hasn't even yet begun:



It appears from the data that interest in international and emerging market equities is just starting to slow down a bit. It could pick up again. But for the phony negatives for the U.S. economy that the perma-bears like to tout so much investment money going overseas is one they've missed. And it's really the biggest and worst problem. It's money not being invested in U.S. companies, not being used for R&D that keeps U.S. companies more competitive, and producing the highest profit margins in the world. The grass is greener. All over the world people want to invest in U.S. companies, and indeed pump billions of dollars into the U.S. this way, but it's a bitter irony that we're simultaneously sending billions every where else, and some of that money is making right back into the U.S. markets again.

Confused? Head spinning? That's the right reaction. If you think you understand, if you think this is clear, then you probably don't know as much as you think you do. This stuff is extremely confusing. The supposed best minds in the business come to completely opposite conclusions about trade, globalization, and where to invest.

posted at 2:09 PM 2 comments   

Thursday, March 30, 2006

Exchanges Are Big Business

The CME has had Google sized gains over the past year, but has been relatively unmentioned. Here's an article about the popularity of exchanges with investors: Stock exchange fever's contagious

posted at 3:02 PM 0 comments   

Big Woops; Lesson in Statistics

What a Drag: The great Powerade ad you won't find on TV.

posted at 2:51 PM 0 comments   

Can't Win

Today the mainstream media (MSM) is reporting that a jump in long-term treasuries is bad for stocks and a negative for the economy because of increased borrowing costs. A few months ago all the MSM could talk about, except sick birds and president polls, was the negative implications of an inverted yield curve, caused, of course, by low long-term yields.

If you listen to the MSM's take on the markets every economic combination is bad for the stock markets. We can't get the Fed off our backs, inflation is continued concern, interest rates are too low, then a quarter point higher they are too high. We can't win. Might as well throw in the towel now.

posted at 2:09 PM 0 comments   

Business Runs Business News

I disagree with this MarketWatch article:

CNBC is playing a dangerous game
Commentary: It's putting gimmicks alongside journalism

But I contend that CNBC is playing a dangerous game by messing with its image as a serious news channel.

CNBC has distinguished itself from the likes of Bloomberg TV and the defunct CNNfn over the years because it's far more ambitious than its competitors, based on its distinctive daytime programs and thought-provoking documentaries.

Maybe it boils down to a question of style and tone.

CNBC's business-news coverage is generally solid and sober (except, as I've noted in past columns, for its proclivity for annoying happy talk on Squawk Box and other programs).

From a journalistic perspective, in my opinion, CNBC sucks. I don't keep CNBC on in the background instead of the competition because they out scoop and out report the competition. They are Johnny on the spot when big news hits the wires and that's great, but I keep CNBC on because it humors me, about half the time intentionally and the other half unintentionally. And I do need a dose of humor, working from home often in isolation for extended periods of time. It's also sometimes a source of inspiration in my own work.

But from a journalistic standpoint, again in my opinion, I don't think they are very objective. They frequently blow stories all out of proportion and pick an angle or side of a story to stick with, even when it's not true, accurate, or objective.

In part, however, it speaks to a larger problem in the industry, which is the way companies drive business news. A reporter that writes a negative article about a company will from then on have to write, "calls to the company went unreturned" or "the company declined to comment". Large companies operate much like communist China, filtering controlling the flow of information in and out of their organizations. That makes it difficult for reporters to get at the truth. And over time those frustrations have influenced the way business reporting is conducted. CNBC can't put all their corporate guests on the spot, asking hard hitting questions, questioning motives, etc… or their sources will clam up.

That's where bloggers come in. Independent bloggers can say what they really think. They can say things like, "I think that guy was lying through his teeth" or "that story didn't add up". Really the blogs are quite complimentary to the mainstream media in this way, though I'm not sure the MSM understands this yet. For this reason they won't be able to forge close relationships with the blogs as they'd like. It's similar to the problem of brokerage research vs. independent research.

posted at 1:58 PM 2 comments   

Wednesday, March 29, 2006

All right, all you savestors...

I can't vouch at this point for the research discussed in this article Is our low savings rate a good thing?, but it discusses points I've made here on numerous occasions. The article discusses research showing that after savings rates move higher equity returns are lower. This is intuitive because investing and saving are not mutually exclusive, or independent of one another. They are alternatives. If saving is rising, it might be that people are uncomfortable with alternative places to put their money. They may want their money close as close to the chest as possible.

But you know the government defines savings as being liquid assets and the reality is that many brokerage accounts have become just a liquid if not more than a typical saving account. You can sell stock via your cell phone, sweeping the money into the money market account and write checks against the money. Alternatively, if you put your money in a savings account with an independent bank without online or phone banking services getting to your money might require a physical visit to your branch to transfer funds from a savings to your checking account.

From the government's counting perspective the rules of what constitutes savings are black and white, but from the savers and investors' perspective what's saving and what's investing is quite gray. Perhaps we need a term to clarify the issue. We could call these people savestors. Yeah, I like that a lot. Combining saving and investing data would produce a much more relevant and telling economic series.

posted at 3:27 PM 1 comments   

Growth Stocks Get Pop

What's noteworthy about today's rally back from the post Fed statement sell off is how much the Nasdaq has risen. It's now trading substantially higher than it was just before the statement was released. Why? Because the Fed said growth in the economy was strong and when the economy is growing so are companies and the ones that are growing the most are high growth stocks, particularly companies that trade on the Nasdaq. Investors want to be wherever they're going to get the best returns. That's why they've been so willing to send money overseas.

And all that overseas money sitting in internationally invested mutual funds, by the way, is money available to come back to the U.S. in short order whenever investors believe they can get the returns here in U.S. growth stocks. They will, however, I believe be more cautious and stay more diversified than back you know when. But, I think that growth stocks might have more pop left in them.

posted at 2:55 PM 0 comments   

Tuesday, March 28, 2006

Fed Raises Rates Quarter Point

Fed hikes interest rates by the predicted 25 basis points to 4.75%, citing resource utilization and commodity prices as having "the potential to add to inflation pressures." There was no change to the part of the statement about possible further policy firming.

posted at 2:26 PM 0 comments   

What does Joe know?

With regard to international stocks I believe it could get a bit ugly for average Joe. We didn't get the kind of capitulation in the U.S. stocks a few years ago that the old school guys were expecting, because of globalization and the floor on the market that I've written about. And the same thing could be true of the emerging markets and international stocks in general, but I believe that investors will be much more apt to bail on them when things don’t look so rosy. There wouldn't have to be a fundamental economic catalyst to get people out of international and back in U.S. equities, just the perception that people will be unwilling to buy their shares for more than they paid for them would be enough to spook people out of that highly speculative business.

That said there are some international stocks that are less likely to take a hit. If you run a screen on stocks by market capitalization so that it pulls up 100 largest companies trading on the U.S. exchanges you'll see that nearly half of them are ADRs. And most are well-known, well-run brands nearly comparable to the U.S. Though they do have lower profit margins, due, in my opinion, to less efficient business climates and political systems, generally higher taxes, government involvement, etc… In general, though, those are solid companies benefiting from globalization along side the largest U.S. companies.

The best advice I can give for anyone wanting to diversify internationally is to stick mostly to the big well-known companies and shift your weighting from time to time. I'd weight more to the U.S. right now because of the past two-years of run up in international stocks, then shift more to international if / when they come down. That way you'll be taking profits on U.S. stocks, hopefully, and getting in international on the cheap. In the past the cycle of interest in international stocks, similar to that of small caps versus large caps, has been a slow one, but I suspect the duration of that cycle will be shortened and people will be more willing to buy dips in international stocks than in the past. Arbitrage, or pairs trading, between the ADRs and the overseas shares would also make cycle shallower.

posted at 12:56 PM 0 comments   

Say bye to buy, buy, buy!

I wouldn't knock Cramer at all for just talking stocks. I can see peoples point that the show is informative in the sense that you can hear about companies you might not have otherwise thought about. I have no problem with someone talking about the merits and demerits of various companies. That's informative. It's the buy, buy, buy and sell, sell, sell that I have a problem. You'd have done better to buy, buy, buying his sell, sell, sells, and sell, sell, selling his buy, buy, buys.

I don't believe Cramer when he says he wants to help people. I don't believe he is the slightest bit sincere. If he was, then he wouldn't do that. He wouldn't say a lot of the things he says. All you have to do is listen to the callers for one show to realize how gullible they are on the whole. Last nights show had back to back beginners. The first starts off, post booyah, saying that he's new to stocks and the first thing he did was rush out to buy Cramer's book. The next guy sounding quite desperate says he's in the new IPO Tim Hortons (THI), not to be confused with D.R. Horton (DHI) and he's already in the "house of pain" and needs to know what to do. The stock started trading at last Friday at $32 and change and has fallen back to $27. This guy was in an even bigger house of pain when he woke up this morning.

I've watched the show the past few days, curious if all the flack was filtering up, and indeed last Friday he acknowledged taking media heat over his returns, and then last night he had this to say, "Alright now, can we just stipulate because boy are people dumping on me lately in the blogs, in the blogosphere and all that stuff. Hey they're slittin' my throat and I don't even have to (something completely unintelligible). It's a carotid explosion!" The usual nonsensical ranting. But he did do something different on the show both last Friday and last night. He spent time explaining some of the ways people could screw up and get screwed buying and selling the calls.

Say bye bye to the buy, buy, buy button and so long to the sell, sell, sell, switch and this blogger will back off a bit. But it shouldn't have taken a bantering blogger to get him to do what he should have been doing all along. That's the beauty of blogging, average Joes, and Marks, are effecting changes in the media, for the better. Used to they could just say anything they wanted and get away with it. There was no feedback mechanism. They had it good while it lasted. The halcyon days are over. Oh yeah, and cut out the commie crap while you're at it, Cramer. Are you trying to see just how hypnotized and mesmerized you've got your audience? Is having your image on TheStreet.com's homepage four times at the same time (four too many) sending some sort of subliminal message?

posted at 12:36 PM 4 comments   

Crocs vs. Stocks

Stock picking isn't rocket science. Some trades are obvious. Do you want to own stock in a foam shoe company or the world's preeminent stock exchange? Look at the obvious results of the Crocs (CROX) IPO, down 15% vs. the NYSE (NYX) IPO, up 50%. Is there really any surprise here?

posted at 10:06 AM 0 comments   

Monday, March 27, 2006

Emerging Markets Extra Risky

Mideast Feels Stress of Stock Slide
Drop Threatens Oil-Fueled Gains And May Hurt Emerging Markets; Scrambling to Avoid Burst Bubble

The Persian Gulf's highflying stock markets, suffering their first serious correction after years of gains, are raising concerns that a speculative bubble may burst and hurt emerging markets more broadly.

Editor's Note: If, huge if, amidst all the debate over the dollar and speculation it will fall, emerging markets become scary, there's a lot of mutual fund money just waiting to be moved. Mutual fund investors might be as dumb as ever, but they are digital. If they get nervous they'll logon and bring the money home in a matter of minutes, and the hedge funds will bail out of the ETFs. That would be dollar bullish. This is something I've been warning about for a long time and it hasn't happened. I'm not saying it will, but I am saying that the ability to move money in and out of emerging markets so incredibly easily adds risk. There's no guarantee that investors will step in and buy ADRs and emerging markets on the cheap to prop the market up.

posted at 4:25 PM 5 comments   

If only...

Spot the next hot sector before it lifts off
Wish you’d foreseen the energy sector boom? Here’s how to catch the next big sector surge before you've missed out.

Editor's Note: If only it were this easy!

posted at 4:04 PM 0 comments   

Pick stocks, win a Maserati

Pick stocks, win a Maserati
Our friends at CNBC have thrown down the gauntlet.

They're challenging MSN Money readers to prove, once and for all, that you're the smartest stock-pickers around. It's called the "CNBC Squawk Box Fantasy Portfolio Challenge," and to prove they're serious, they've put up a 2006 Maserati GranSport as first prize.

The competition starts April 4, but you'll want to click here and register at www.sbfantasyportfolio.com. Invest a few minutes of your time, win a car that goes 180 mph. Now, that's what I call leverage!

posted at 3:59 PM 0 comments   

Globalization News

Goldman Sachs May Bid for Associated British Ports
Goldman Sachs Group Inc., the Singapore government and a Canadian pension fund said they may make an offer for Associated British Ports Holdings Plc, the largest operator of ports in the U.K.

Editor's note: This is an interesting expansion of Wall Street's definition of trade. It also says a lot about the growth potential for the big street firms.

posted at 3:21 PM 0 comments   

Probability of Rate Hike

Why is a 25bp move by the Fed to 4.75% a give? Because the media says it is. The Fed most certainly never said that. Bernanke has said that future moves would be data driven and only that further rate hikes might be necessary. I't probable, but not nearly as definate as the media has made it out to be.

posted at 3:06 PM 1 comments   

Friday, March 24, 2006

Bernanke vs. Greenspan

I've reread Bernanke's speech to the Economic Club of New York a couple of times and it's a bit of stretch to say that he's clearer and easier to understand than Greenspan was. The structure outline of the of the speech is not very well organized or consistent from start to finish. It's no wonder the media didn't get it. It's very difficult to read the top half and understand the conclusion he's drawing, which is very clear in the bottom half, only if you ignore the top half.

However, the last paragraph before the conclusion and the conclusion make his assessment quite clear.

"Given the global nature of the decline in yields, an explanation less centered on the United States might be required. About a year ago, I offered the thesis that a "global saving glut"--an excess, at historically normal real interest rates, of desired global saving over desired global investment--was contributing to the decline in interest rates. In brief, I argued that this shift reflects the confluence of several forces. On the saving side, the factors include rapid growth in high-saving countries on the Pacific Rim, export-focused economic development strategies that directly or indirectly hold back the growth of domestic demand, and the surge in revenues enjoyed by oil producers. On the investment side, notable factors restraining the global demand for capital include the legacy of the Asian financial crisis of the late 1990s, which led to continuing sluggishness in investment in some of those economies, and the slower growth of the workforce in many industrial countries. So long as these factors persist, global equilibrium interest rates (and, consequently, the neutral policy rate) will be lower than they otherwise would be."

Here he very clearly states that a global saving glut implies a lower neutral policy rate. And again in the conclusion:

"...to the extent that the recent behavior of long-term rates reflects a declining term premium, the policy rate associated with a given degree of financial stimulus will be higher than usual. But to the extent that long-term rates have been influenced by macroeconomic conditions, including such factors as trends in global saving and investment, the required policy rate will be lower."

The reason for this is because a global saving glut explanation is independent of U.S. economics. If U.S. bond investors are taking on too much risk that implies an action on the part of the Fed, if they think inflation or recession is looming, that also implies Fed action. But if the reason is external demand, if there simply isn't enough supply to meet the demand of foreign savers, then the reason does not imply anything about the U.S. economy because they are not using bonds to speculate on future economic conditions, rather they are merely trying to fill their need for a reliable source of income.

Bernanke and Greenspan differ on what the dominant reason for low long-term yields is. Greenspan has said it was declining term premiums and has warned about bond investors accepting too much risk. Bernanke's got it right. This is why people have to be put out to pasture eventually. Greenspan struggled to understand the implications of globalization. We are all struggling with this. The leading minds, in my opinion, are quite behind the curve on this. But Bernanke has a better grasp of it than Greenspan, which makes him the better man for the job going forward.

What's interesting to think about is that Bernanke's and Greenspan's differing views imply quite a difference in interest rate policy, probably as much as 2% difference. If Greenspan were going to stay in charge I have a feeling he would have taken rates to 6%. Bernanke is more apt to take rates back down to 4% than to take them up to 6%. The Fed is less effective than it once was, but it will still slow or speed up an economy.

posted at 4:37 PM 10 comments   

Evolution of Capitalism

There seems to be a capitalist function being performed by the so-called patriotic protectionism that's not being recognized by the anything goes, chaos capitalists.

The deals people have been against involve companies with government affiliations. In a sense the capitalist system is punishing, penalizing, and disincenting this anti-free market and inefficient business structure. We're saying that we want to do business with free countries and free companies acting independently from their governments.

Accepting such deals promotes the inefficiency. In the long run, penalizing such affiliations incentivizes governments to get out of the way. And that's a good thing, though Cramer apparently would disagree. Balance in business, balance in the markets, balance in life. Sometimes when the majority is shouting no, we don't understand why, but that doesn't mean it's without reason.

posted at 12:03 PM 0 comments   

Thursday, March 23, 2006

Got the Bernanke Quote

Bernanke says "saving glut" still valid hypothesis

It came out of a letter to a politician in response to his testimony on monetary policy. The letter was dated March 17. But, put the contents of the letter together with last Monday's speech and you have the answer that Bernanke believes a lower neutral rate is necessary.

But a question that remains unanswered is how did this letter make it's way into the media. Is it just coincidence or did Bernanke want it to curtail the mainstream media's misconceptions and misinterpretations of his speech.

That has to be frustrating for Bernanke, to be the clearest spoken Fed leader in history, and still be completely taken wrong and out of context. Is it enough cause him to clam up?

posted at 5:07 PM 4 comments   

Bernanke said what?

About an hour ago CNBC had an alert that Bernanke came out and said the global savings glut factors were still present. They didn't cite a source and didn't say to whom or where Bernanke was speaking. I haven't yet been able to find this info anywhere on the web, in the usual media sources or on the Fed's site.

I believe CNBC has downplayed this because it implies their take on his speech, the one the markets have keyed in on, suggesting that the speech implied further rate hikes to come, was wrong.

If Bernanke did say this, there's only one reason to do so, which is to get the media to stop misinterpreting his very clear speech.

I wrote that the mainstream media was widely misinterpreting the speech, which said that if the reason for low long-term interest rates was a global savings glut, then that implied a lower neutral rate. If Bernanke did come out and say this, then he's clearly stressing that that he believes a global savings glut is the dominant reason for low long-term interest rates, which is exactly what I told you because Bernanke wrote a paper on it so obviously that was what he believed. Somehow the mainstream media managed to get it exactly backwards. Covering up for all the nonsense they've been putting out for the past few weeks about how the Fed was going to raise rates more than we thought before.

This may be an indication that Bernanke wants to pause at the next meeting. If anyone finds news on this, please post a link in the comments or email it to me at mark@blogginwallstreet.com. This is market moving information.

posted at 4:28 PM 0 comments   

ETFs

A reader points to trends in ETFs as playing a big role in the markets and the economy, saying that he believes ETFs held the market up in 2002-2003. I agree with everything in those comments about ETFs except that they were the primary reason for the markets not going lower. I'm a proponent of ETFs, the access, and the diversification they provide. And I believe they are contributing to new shifts in assets that we've not seen before, such as to gold, a commodity not conveniently invested in by the general public in the past.

It's also true that the mutual and hedge funds are big buyers of ETFs. AMG Data started reporting their weekly and otherly fund inflow data differently after I called them up asking questions their rep couldn’t answer about how ETF data was being tracked. I probably wasn't the only one.

I wanted to know if ETF inflow data might be being double tracked buy combining fund and ETF inflow data, first as money went into a mutual fund and then again as it went from the fund into ETFs. So they've got that separated out now, and though they exclude fund of funds, though I'm still not sure if you can add the two together to get total fund inflows without getting a skewed picture due to this fund-of-fund activity going on in non fund-of-funds.

Now I am quibbling a bit, but I believe the growth in the self-directed 401k plan has more to do with putting a floor on the markets than the ETFs. Investors moved their money around, many to money markets, but for the most part that money stayed invested. And the funds that held that money had an obligation via their prospectuses to not hold more than a certain percentage of cash. So their selling capability was limited. What they did do, I believe, was move out the sectors they should have been in. That was seen in a pattern that lasted for a while in the tech stocks. They were rallying before the semi-annual and annual reporting periods and then falling back after. Fund managers didn’t want to be in tech, but they had to window dress.

ETFs on the other hand are speculative in nature, you can sell out of them instantaneously going to cash, and even short them. So there's potential to add volatility. That said, the hedge funds have been big buyers of ETFs and as you know there has been a large increase in the number of hedge funds in the past five years, which probably helped.

But much of the growth in hedge funds came after the mutual fund scandals hit. The mutual funds lost assets, and managers were either fired or jumped ship moving to or starting their own hedge funds. My wife was working in marketing for the Denver funds at that time and new a number of managers in the area that did this.

That's also exactly when oil and commodities took off, just as a bunch of money managers were turned loose after years of being confined to being long only and stocks only. I believe much of the oversized rallies in commodities, foreign stocks, and even real estate was the result of these new managers and their being overzealous about being able to invest in just about anything they wanted too. Naturally, this group has a tendency to long buyers of assets, rather than long and short traders. It's not an easy thing to prove any of these things mathematically, but there is quite a bit of anecdotal evidence to suggest the truth of them. The timing of these things all line up perfectly.

One deductive piece of evidence is the fact that nothing really significant changed in the economy except for the gradual to rapid growth in globalization. Growth in China was the commonly used excuse for higher oil prices, but China's growth rate has actually been less than it was in the mid to late 90s when oil prices were testing $10 a barrel. The data doesn't explain a 600% increase in prices. And there's no data to support any of the many other fundamental arguments made over the past couple of years that got oil to where it's at now. With oil hanging in at $60 and no fundamental excuses left, oil bulls had to come up with some new excuses for staying long, namely geopolitics, which really haven't worsened significantly, neither is the hurricane risk something new.

But overall I'd say that it's the retirement plan that is the biggest change. Prior to the 2000-2003 downturn stocks you have to go all the way back to since 1987 to find the next one. Back then it seemed to market participants that there was no floor, no low point, that stocks could fall by Great Depression magnitudes. There was a lot of discussion then and for more than a decade afterward about how to put a floor on the market. Circuit breakers were the mechanical solution, which basically duct tape stock prices to the ceiling of the exchange to keep them from hitting the floor. That's a fairly accurate analogy because circuit breakers essentially suspend prices. When they switch the circuit breakers back on it's like in the movies when an elevator stops and then suddenly lurches like it's going to fall umpteen floors and smash into the bottom of the shaft. That always makes the audience jump. Investors are on pins and needles when they flip the breakers back on. But what's done far more than circuit breakers to prop the market up has been the growth in retirement plans tied to the stock markets since that time.

What happened was that in the late 90s just about everyone in a cubicle started putting everything they could into the 401k plans. What people were doing in their retirement accounts overtook sports as the water cooler topic of choice. People increased the dollars per month coming out of their paychecks, and instead of stopping that when the market went down, they just shuffled their allocations around, upping the percentage going to bonds and international funds. The fund families have responded with a lot of new international offerings and corporate sponsors by adding the new choices to the approved list. Retirement plan data shows this to be true, and I've written about those trends here before in response to the negative saving complaint of the perma-bear.

On negative saving, what has happened is that people have changed the way they save. They put more in their retirement plans and more in Etrade and Ameritrade accounts, and save less for down payments on homes. These are saving vehicles that are off the government's radar, but from the perspective of the individual they are no less saving a form of saving than the old-fashioned bank account. From the individuals perspective they are direct alternatives to savings accounts. And that's not really a bad thing. It's a good thing that people don't have to put as much money down to get in a house. It's a good thing that banks and financial institutions are more competitive. It's a good thing that people are able to borrow at lower interest rates. Sure there are negatives, but the positives far outweigh them, in my opinion. And I think we will look back ten years from now and see that this is true, though people like Mr. Rogers and Dr. Doom will still be singing the same old tune.

As an aside on ETFs I expect that very soon we'll see baskets of ETFs and / or fund of funds of ETFs offered in retirement plans, if someone isn't already doing it. The problem now with using ETFs in retirement accounts is that there's not a good way to handle the buying and selling, which is why mutual funds are used instead of individual stocks. If you put $100 a month in a retirement account you'd generate a commission every month to buy just a single share of an $80 ETF, with change leftover. Unit values and pooled assets work better for retirement accounts. If a few thousand people are all putting $100 a month in on average then the money managers can buy blocks of shares based on incoming assets. But ETFs offer the advantage of removing almost all of the human risk. Even index funds contain human risks because there are lots of ways a money manager can buy and sell assets to the stocks in the index. If, however, all a fund did was buy shares of the S&P 500 ETF (SPY) that's far simpler than managing a passive index. It's almost entirely administrative, and therefore fund companies should be able to charge even less than for a typical index fund getting the combined fee structure down low enough to make ETFs a viable option in retirement accounts.

posted at 1:27 PM 1 comments   

Morally Relative

Prison terms in chip scheme
Samsung officials admit to conspiring in price-fixing case
Three Samsung Electronics executives will serve up to eight months in federal prison for their roles in a worldwide memory chip price-fixing conspiracy, the Justice Department said Wednesday.

Editor's Note: Nanny nanny boo boo, the rest of the world's corrupt too.

posted at 12:24 PM 0 comments   

Why was this info on a laptop?

Fidelity Laptop With Customer Info. Stolen
A laptop computer belonging to Fidelity Investments and containing sensitive data on about 196,000 retirement-account customers was stolen last week, the company said.

Editor's note: Online auction ad found – Moderately used notebook, comes with database of 200k retirement accounts. Minimum bid $1,000,000. Serious hackers and criminal types only.

posted at 12:09 PM 0 comments   

Most Pathetic Forecasting Award Goes To...

Existing Home Sales Post Unexpected Gains
The National Association of Realtors reported Thursday that that sales of existing single-family homes and condomiums rose by 5.2 percent in February to a seasonally adjusted annual rate of 6.91 million units.

The Realtors have been forecasting that sales of previously owned homes would fall by about 5 percent this year compared to last year's record pace. But Lereah said he may have to revise that forecast given the unexpected strength in February.

Editor's note: These forecasters couldn't hit the broadside of a McMansion.

posted at 11:57 AM 0 comments   

Wednesday, March 22, 2006

Globalization Nothing to Quibble Over

The WSJ's Markbeat says that my comments on whether or not the Fed or globalization is responsible for getting inflation under control is trivial. This is a butterfly flapping it's wings. It seems trivial at first glance, but upon further inspection it turns out to be quite fundamental.

The influential old school market philosophers believed smack dab at the bottom of the market that stocks had not capitulated and had much farther to go down. They said that the Fed should raise rates quickly to slow down the economy and avoid a run away inflation problem. They didn't just want to slow down the economy; they wanted to purge and cleanse the system. Following that advice had you out of stocks, just when you should have been buying, or worse yet short the market.

The Fed held off on hiking interest rates for another year and a half, as Bernanke explained in his recent speech, "…to protect against a remote risk that the fall in inflation observed during 2003 might culminate in outright deflation--an outcome that could have had potentially serious consequences for the economy and for the efficacy of monetary policy." So to some extent the Fed recognizes this, otherwise they would have followed the old school beliefs on how to handle the economy. But it's important that the person running the Fed realize the full extent of this unstoppable economic trend.

If you believed that the Fed had the same amount of influence over the economy they once had and that the economy was a volatile as it once was, then it would be reasonable to take the old school view and adjust your investments accordingly. Indeed many investors have taken that view, sending their money overseas, opening up commodities accounts, etc…

But stocks have done very well precisely from that point on. And the key is this globalization trend. Stocks didn’t capitulate the way the old school market philosophers expected them too because globalization, not the Fed, put a bottom on the markets and insulated the economy from the kinds of damage similar events would have caused in past years.

And this is key to your future market view. What will happen is that no matter what the Fed does, aside from raising rates to say an extreme early 80's 20% level, globalization is going to smooth out the bumps. So when the old school market philosophers are screaming that the Fed is overshooting or overstimulating the economy, you'll know to take the other side of the panic. You'll know that they will be wrong, again, because you'll know the truth, that globalization is in charge of the economy now.

posted at 2:19 PM 6 comments   

Google Finance Blog Feature Needs Filter

I'm definitely going to be looking closer at Google Finance. Though I already see problems with it's feature picking up blog posts by company name. I'm looking at Caterpillar and there are three blogs listed.

The first is a spam log hoping to suck in anyone searching the web on Caterpillar.

The second is from a legitimate investment site.

The third takes you to a really bad German blog with posts about a Caterpillar dozers being used to run over an Israeli peace activist and another post about how the Church of England owns shares of the same company that sells equipment to militaries who in turn used one to run over said peace activist. "The Church of England, therefore, in spite of the wishes of many of its members, stands complicit in the murder of Rachel Corrie and many others, in the continuing destruction of Palestinian homes and land, and in the violation of international law." The post comes complete with a current mood stamp of angry.

Not surprisingly the blog gets more comments than mine, the first one being simply, "Bastards". Now I'm just a country boy. I don't know jack about Palestinian / Israeli relations. So don't read anything into that. The point is that while that's not very statistically significant, at initial glance 1 for 3 is not good. Google Finance's nifty blog feature desperately needs filtering. Why should I have to be the one to do it? That's an inconvenience. Clearly if I'm coming to Google Finance, then I am seeking content related to investing in Caterpillar, not some extremist peace activist blog accusing Caterpillar of being an accessory to murder. If they can fix this problem, then they've got something, but they should have fixed it before they rolled it out.

posted at 1:46 PM 0 comments   

Giving Google Finance a Second Chance

I read this article Google Struggles to Find Its Edge quoting David Jackson's Internet Stock Blog as saying, "Google does well, not great, but well…". Incidentally, the article link takes you to the wrong blog, another review of Google Finance. The link above gets you to the right place, where you will see Dave has picked up on my popular Cramer comments which also made the WSJ's Market Beat Blog Roll. My initial thought was that Dave was going easy on them. At first glance there's hardly anything there, certainly nothing worth talking about. It gave me the immediate impression that it was half-assed. And indeed the Google Finance home page is to say the least scant. Perhaps they should have waited to roll it out. But then again it was probably intentional, the Google style to keep things simple.

I will, however, say that there are some nice features that aren't immediately obvious. Plugging a ticker into the Google search box at the top is how you pull up info on individual stocks. But it looks a bit too much like it's web search boxes and that was confusing at first glance. I was to myself saying, "This crummy site doesn't even have a ticker box. Maybe this is it? Oh, yes. Duh. If I'd taken the time to read the little 'e.g. Google, Cars, AAPL' thing under the search box, I'd have known that." But that's the thing about the web, we don't take the time to do that. We rely on visual clues to spot out these common things. They should make it even more obvious. But, I did only need to learn it once.

What I do really like about their ticker tool is that a company name will get you where you want to go straight away. That's something that's always been annoying about Yahoo! Finance that they should have fixed years ago. If I put Adobe in Yahoo's ticker search box I'm told it's an invalid symbol and asked if I want to look up a ticker symbol. Doing so gives me a list of choices. It takes one more click to get where I'm going. When I put Adobe into the Google Finance search box I'm taken straight to what I wanted and when I put in something random I'm taken straight to the list of possible choices. I'm two clicks away, or two pages away from where I want to go with Google versus three on Yahoo. So, Google has an improvement.

Another nifty little feature is that the individual stock listings have a section titled Blog Posts and a more link to search blogs for the company name. For better or worse, I'll forewarn you that that feature is going to influence stock market blog content. Bloggers are going to want to get on that list. I'd keep that to myself, but I figure it's something that will only take a matter of days for the masses to figure out. This is similar to what The Fool and The Street do with Yahoo!, which picks up the tickers in their articles. To be sure, I'll be posting more on individual companies than I have in the past.

Hopefully, however, they've built an algorithm into this feature to tell if an article is really about a company or pick up only really blogs with readership, because otherwise the sploggers (spam bloggers) will ruin it for everyone in no time at all. They will simply insert company names into their spam and play the numbers game.

I do have to give Google a lot of credit for opening up the page to the little guy. And I take back my negative comments yesterday after taking a second and closer look at the site, though I still question whether Google's will overspend on dead end projects to keep monetizing the user.

posted at 1:11 PM 0 comments   

Brokers Bringing In Big Bucks

Morgan Stanley was yet another big brokerage / bank / Wall Street firm to put out a strong earnings report. Of course the big brokers are doing well. Just about every thing is up. They've made money on U.S. stocks in both trades and funds, ADRs, commodities, real estate. You name it. They're raking it in.

posted at 12:21 PM 0 comments   

Tuesday, March 21, 2006

The Great Moderation

Bernanke's approach to looking at the various reasons for low long-term rates is more rational and reasonable than any I've seen in the dozens of articles and papers I've read on the yield curve. There was one point I did disagree with, however. Bernanke said, "I have argued elsewhere that improved policies, which stabilized inflation and better anchored inflation expectations, are an important reason for this positive development; no doubt, structural changes in the economy such as deregulation, improved inventory control methods, and better risk-sharing in the financial markets also contributed."

I think it should be the other way around and read like this, "Structural changes in the economy such as deregulation, improved inventory control methods, and better risk-sharing in the financial markets, which stabilized inflation and better anchored inflation expectations, are an important reason for this positive development; no doubt, improved policies also contributed.

He's referring to the "Great Moderation" in which volatility in the GDP and inflation has declined. By improved policies he's talking about the monetary policy. So he's giving the Fed the credit for getting the economy under control. He's dead wrong on that point and I hope he comes to his senses and realizes the truth on this very important matter. The Fed, whether they realize it or not, has more so been driven by economic factors, than been a driver of economic factors.

Globalization is the "Great Moderator". That's what's changed. Monetary policy has only changed because it could, because the economy let it change, because the economy insisted on it. In the 1970s the Fed took rates extremely high, but it did so in reaction to run away inflation. They had to completely kill the economy to get inflation back under control. Why was there so much inflation? Because the Fed grew the money supply too much? Not really. It was primarily because our then isolationist, protectionist, non-free trading economy was hypersensitive for the reasons I wrote about in Keep On, Keepin' On.

Globalization has dramatically insulated the economy from the extreme gyrations we once had. And to the best of my knowledge none of the past great economists or other great thinkers really saw this coming. Thus, we're only just now beginning to understand it. Globalization is taking over for the fed and doing a much better job. The Fed is going to find increasingly that its monetary policy will have little impact on the economy and many of the old guys, the old Fed watchers, won't see this coming. They will continue to blame or credit the Fed for this, that, and the other. The Fed may be overreactive trying to control the economy, as they have in the past, to their chagrin, and the old Fed watchers will predict all sorts of bad things to come out of the Fed's overreaction, which won't come true.

The best bet on the economy is for to keep on being moderate and stable. When the consensus gets too excited either optimistically or pessimistically it will be profitable to bet on the side of moderation and more of the same. The stock market coming down the way it did between 2000 and 2003 should have put us in Great Depression II, but it didn't. Commodities prices climbing the way they have for the past two years should have caused run away inflation, but it didn't. The proof is right in front of us. The Fed didn't do anything more than it's ever done. In the 1970s the same kind of price spike in energy caused inflation to get out of control in a matter of only a few months and the Fed reacted by raising rates quickly. Where would Fed rates be now if month after month the core CPI kept rising? The Fed would have been reactive and done the same thing it did in the 70s. Do you think that the Feds teeny tiny quarter point hikes kept the core CPI down? The Fed would like to think it did. But it's not the truth.

Wal-Mart has more control over inflation than the Fed does. That sounds scary, but it's really not because Wal-Mart is a generalization for all the merchants importing relatively cheap goods. Globalization has gotten inflation under control, not the Fed. Merchants and banks have always controlled inflation. The Fed has only reacted to the actions of merchants and banks. It's just that now because of diversification through globalization, merchants and banks aren't as hypersensitive as they once were. Wal-Mart doesn't raise prices when energy costs go up because cheap Chinese labor and the Chinese communist government absorbs the cost of higher energy prices instead of Wal-Mart. Wal-Mart has contracts for the delivery of goods at certain prices. Wal-Mart doesn't take the hit it would have in the past.

Similarly, Citigroup increasingly generates banking, brokering, and lending revenues from all over the world. So it's less sensitive to interest rate fluctuations in the U.S. than it once was. If Citigroup doesn't raise rates, then other smaller regional banks can't either, or else they will lose business to Citigroup. So the small banks take the hit. If U.S. interest rates fluctuate enough small banks will start to go out of business. Only instead of causing a banking crisis, big banks absorb the customers and often buy out the little banks. The economy is forcing this globalization on us whether we want it or not. We forcing it on ourselves, because it's more efficient.

Bernanke talked about one reason for long-term interest rates being low being possibly because borrowers are now expecting lower premiums for their risk. Greenspan believed this was the dominant reason for low long-term rates and believed this was a danger to the economy.

But what Greenspan was missing is the fact that prime lending rates are normal. The current rate is 7.5%, compared to a historical average of 7.1% going back to 1949, and that's with a prime rate of 20% in the early 80s pulling the average up. Take out the extreme rates of 1980 and 81 and the average is 6.7%. It's only long-term treasuries and corporate debt that is historically low and unresponsive to changes in short-term rates.

But why shouldn't investors be willing to accept low yields on treasuries? After all, has the U.S. treasury ever defaulted on a loan? The answer is no. There basically is nearly zero risk and therefore logically there should be little to no risk premium for U.S. treasuries. High rated corporate bonds also have extremely low real default risk. So that leaves demand for debt as the primary driver of prices, not risk. Premiums aren't low because people see bonds as being less risky than before. Premiums are low because more people want to own nearly zero risk securities. This is the savings glut Bernanke is talking about.

From the consumer's perspective we're paying the same rates on loans as we always have. It's only the buyers of Treasuries and corporate debt that are paying more for a lower yield. So it's not the banks at risk. Really no one is at risk, because the buyers are pensions and foreign governments that want to hold the debt for a long period of time, rather than trade it actively. Thus again we have a situation where the economic gyrations are being dampened. Rates are going to be held stable so long as the majority buyers are locking up their bonds to collect the income and not actively trading them.

So the "Great Moderation", that has driven down GDP and inflation volatility, is also moderating interest rates and the business cycle, which will in turn moderate corporate earnings, and stock prices once investors realize this economic truth. Therefore, I expect that PE ratios will climb for stocks in general, as investors will demand less risk premium for stocks. That's a trend that started in the 90s, but got carried away for a while. I expect that trend to continue more moderately and deliberately going forward, which means stocks will likely continue to do well for the next several years. And if stocks do well, then so will incomes and the housing market and the strong incomes will circularly help stocks to do well.

posted at 12:57 PM 6 comments   

WSJ Gets it Right

As usual, the WSJ gets the story right. It's the only mainstream media outlet that does get it right consistently, in my opinion. I am often critical of the medias spin on the markets, but I can't recall every finding serious fault with the WSJ.

Bernanke Delves Into Market Puzzle
Fed Chairman Addresses What Low Long-Term Rates May Mean for Policy Moves
Bernanke said the Fed should keep short-term rates lower than normal if a glut of world saving is keeping long-term rates low.

posted at 11:47 AM 0 comments   

Google Finance

Further adding fuel to the fire of my love hate relationship with Google: Google Finance. Pathetically sparse for the time being.

posted at 10:52 AM 0 comments   

Media Misinterprets Bernanke Speech

Not surprisingly, the media is misinterpreting Bernanke's speech to the Economic Club of New York last night. They've somehow mistaken the speech to imply more rate hikes latching on to the statement, "To the extent that the decline in forward rates can be traced to a decline in the term premium, perhaps for one or more of the reasons I have just suggested, the effect is financially stimulative and argues for greater monetary policy restraint, all else being equal."

It's easy to see how that statement could be taken to imply higher rates, but the interpretation is logically flawed on two fronts. Assume the reason is X and the conclusion is Y. The statement says if X, then Y. But what is Y? Y says that relatively greater monetary policy restraint is needed, if X. Relative to what? Relative to not X. In other words if X is the reason then Y, otherwise relatively less monetary policy restraint. But the statement is only relative to not Y, it says nothing about how this relates to current rates. If current rates already are considered to contain the appropriate restraint then the rate hikes would be about done, but if it is considered to not be restraining then we probably aren't down. However, that's assuming X is the reason for long-term interest rates remaining low.

Bernanke put forth a number of possible reasons. I don't think X is the dominant reason and apparently Bernanke doesn't either. At several points further in to the speech, apparently further in than the media is capable of listening or reading, he made what he believed were the dominant reasons clear. He says on page six of the seven page speech, "About a year ago, I offered the thesis that a 'global saving glut' –an excess, at historically normal interest rates, of desired global saving over desired global investment was contributing to the decline in interest rates." It's his thesis. It's quite apparent that he believes his reason if the dominant one. He made no indication that he had reconsidered this belief. He then goes into the conclusion saying, "…to the extent that the recent behavior of long-term rates reflects a declining term premium, the policy rate associated with a given degree of financial stimulus will be higher than usual. But to the extent that long-term rates have been influenced by macroeconomic conditions, including such factors as trends in global saving and investment, the required policy rate will be lower."

Ding, ding, ding. Did you pick up on that? He says if the reason is because of an increase in global saving, then a relatively lower rate is needed. He's clearly saying savings glut equals relatively lower rates. And we know that he believes the dominant reason is a global increase in saving. Thus the media has, once again, misinterpreted the Fed. However, again this says nothing about how current rates relate to that formula. That's where all the many other factors, such as inflation data, home prices, etc… come in to play. Also, if he believes the Fed should be done now, then he's going to have to convince other Fed members of that, as it seems many are still hawkish on inflation, and Bernanke may be too for that matter. After all what's going on with inflation outweighs bond price movements.

I would have loved to hear the comments. CNBC said they'd carry the speech live, but they didn't. All they did was have Liesman misinterpret the text of the speech for me. If anyone comes across the text of the comments section, please post the link, or email it to me at mark@blogginwallstreet.com.

posted at 10:47 AM 0 comments   

Monday, March 20, 2006

Bird Flu the Coop

There's a statistical lesson in all this renewed talk of bird flu. Is bird flu really spreading? Or are does it just seem that way because we're looking for it and finding it when we weren't before. Perhaps it is only that with all the media attention given to it people are reporting sick birds when they wouldn't have in the past. Maybe it's a little of both. But we can't say without the proper scientific research to verify it that bird flu is actually spreading.

Offer an anonymous $10,000 reward for turning in pot growers and you can be certain that quite suddenly it would seem as if there's a heck of a lot more pot being grown than ever was realized. Offer a grand each in cash for unregistered handguns and see how money guns will come out of the woodwork like roaches. After 9/11 terrorists were everywhere we looked. Any one slightly Middle Eastern looking was a suspicious character. Ryan White and the aids scare of the 80s took some of the fun out of my teen years. Make something scary or profitable enough and the statistics will be altered.

Just because we find bird flu in the U.S. doesn't mean it wasn't already here.

We see similar logical errors in market analysis all the time. The brain drain fallacy I wrote about in Gross Sales is one example.

posted at 4:21 PM 0 comments   

Keep On, Keepin' On

Warren Buffett was down on the floor of the New York Stock Exchange today to talk about Berkshire Hathaway's purchase of Business Wire. He commented to CNBC about the economy:

"I think over time the dollar is going to weaken. I have no idea whether it will be this year or five years from now, but I think that we're following policies that will cause the dollar to weaken over time."

"When you say policies you're talking about the current account deficit, obviously is getting worse, but it's government policies that are contributing to that?"

"It's the consumer's action in the end that's doing it, but we have no governmental policy that counters the fact that we're sending a couple billion dollars a day abroad. I mean we are trading, we're buying goods, and we're selling capital."

"So the argument that they then take the money and reinvest it here in the United States, that doesn't mollify you in this regard?"

"Well no, they have to reinvest in the United States. We give them dollars so they have to buy things here and they're happy to do it right now and that's very good. I don't know that they can do that forever."

"Is the public becoming to xenophobic?"

"Yeah, probably a little bit… We're going to live with the rest of the world forever."

There's an oversimplification in Buffett's comments with regard to global trade that I hear constantly. For the most part we don't send other countries our dollars when we buy things from them. The money circulates through the foreign exchange system with banks acting as intermediaries. If I'm a distributor of goods made in China I sell dollars and buy yuan through my bank, and wire the yuan to the Chinese company's bank.

So it's not as if anyone is really stuck holding dollars that they must find a use for. Any dollars they do have they can readily sell in the foreign exchange markets for their home currency. It's simply not true that foreigners have all these dollars they can't think what else to do with. If they take dollars and reinvest them, it's only because they want to do that. The rest of the capital buying that's done is buy choice, just as we choose to buy foreign goods or foreign stocks, governments maintaining various reserves, and increasingly pensions seeking reliable interest payments to fund their obligations with.

His comments were also somewhat of a paradox. He first said in an earlier conversation that he thought American's were being too xenophobic with regard to our dealings with foreigners ie the Dubai ports deal and CNOOC. But what is the answer? We're running a trade deficit because consumers are buying a lot of foreign stuff. But if you don't want them to buy so much foreign stuff, then how do you get them to stop doing it? You protect home industries by making foreign goods more expensive.

It reminds me of back when I was working my way through college loading UPS trucks on the graveyard shift. The norm, as best I recall, was to read and load about 800 packages an hour. But the management constantly pushed for more packages per hour and less misloaded and broken packages, maddeningly impossible. You reach the limits of human capability. The faster you go the more wrong packages that are going to slip by and the less care is taken. It's a mathematical inevitability.

How can you we have a smaller trade deficit without being more xenophobic? The only way is to be more competitive. They say we need better education. But the demand is for low paying workers. If we want to buy produce more of the goods we buy, or have more goods to sell to other countries, then we have to be more competitive on wages, But we can't do that without lowering our standard of living, which in turn would force us to consume less and everyone loses.

All the time I hear that foreigners are funding our consumption. Is that really true? How does your income relate to foreigners? Do you personally know of anyone whose income is related to foreigners investing in the U.S. If you work for a brokerage firm, sure. But most people have no direct relation foreign investment in the U.S. Perhaps when you stay in a cheap hotel run by immigrant Indians who are willing to work cheap and send some of their profits back to family in India, that's somehow funding our consumption because hotel room rates are cheaper than otherwise. But that's not something that has changed. Foreigners have wanted to live, work, and invest in the U.S. throughout the history of the country. What has changed is how diverse our imports have become. And that serves as an economic insulator against inflation and recession.

Fifty years ago if there were an economic slowdown and I decided not to buy a new car nearly all lost opportunity fell on other Americans who then lost their jobs and also couldn't by a new car, or TV also made in America, or toaster oven made by GE, etc… Fast forward to today and what happens when I put off buying a new car, the lost opportunity is absorbed by parts companies across several continents. Fifty years ago American companies lost nearly 100% of the profits if I didn't buy a new car. Today, the lost profits are spread fractionally across hundreds of companies all over the world.

Consequently, when I don't buy a car today, less people lose jobs, consumer spending slows less, and the economy keeps on keeping on.

But I don't buy they xenophobic argument any way. If any thing we're xenophilous, enamored with investing overseas. Just look at the mutual fund flows over the past couple of years. Listen to the constant barrage of talk about what a great idea investing in China and India is, you'll hardly find a bad word to be said about investing overseas these days. We're not getting more protectionist. That's total B.S. We're less protectionist than every before. It's only natural that we're going to draw some lines, suffer a bit of backlash, and get nervous about going overboard at times.

This is why the markets are proving the great minds wrong this time. The stock market crash a few years ago,a slowed corporate spending, and caused job layoffs, but the global nature of the economy, kept the consumer right on spending. Furthermore, retirement accounts, mutual funds that must adhere to prospectus requirements to hold no more than a particular percentage of cash, and foreign investment put a floor on the stock market. If the same thing had happened 50 years ago we'd be in the middle of Great Depression II right now. Stocks would have fell a lot farther, there would have been a run on the banks, companies would have fired far more workers, consumer spending would have ground to a halt, and all the nasty things that happened during the Great Depression would have repeated themselves.

What we had instead was, as Greenspan has said, a more resilient economy than has ever been experienced before, one that has caught the old boys by surprise.

posted at 2:30 PM 2 comments   

Friday, March 17, 2006

My New Motto

Test it, don't guess it.

posted at 6:51 PM 1 comments   

Non-Lightening Round Picks No Better Than Index

I'd say that I hate to burst your bubble, but that would be a lie. I love to burst people's bubbles and I love to show people the truth even if it's tough for them to handle. If you've been watching Mad Money for a while and he's convinced you that he's helping you in some way and you really believe you're getting valuable information, then this information is going to be hard to stomach. No one wants to realize and admit that they are gullible and naïve. It makes them feel stupid. But a show like Mad Money is designed to convince the average naïve investor that the host is right. Get over it. Swallow your pride and move on. If it helps, I'll admit that almost a decade ago I read several of Wade Cook's books and believed what I read, until I learned more about the markets.

I've run calculations on the non-lightening round calls for any one who thinks those are any better. I shouldn't have too though because the lightning round picks count just as much. He's telling people to buy and sell their stocks with random results. That's, in my opinion, irresponsible.

The non-lightening round calls aren't much better:

513 Calls on 375 unique companies in the last three months.
Again, that's still a huge number of stocks.
Average return for all calls = 2.02%
Average return for buys = 5.83%
Average return for sells = -4.14%

The stocks he said to sell have risen almost as much as the stocks he's said to buy. In my view telling someone to sell a stock is the same as telling them to short it for the most part, except that it's appropriate to sell off a dud and put your money to work somewhere with a better return. But Cramer's buys barely did better. After trading costs?

For the same period the S&P 500 has risen 3.15% and the Russell 2000 9.20%.
Cramer's calls consist of companies from all capitalization ranges. You could approximate the picks by buying the S&P 500 and the Russell 2000. The average return for these two indices has been 6.17%.

For a better comparison lets say you just bought Cramer's 56 non-lightening round buy calls made in December. You would be up only 3.33%. You would have done the same as the S&P 500 and had 56 times the trading costs. There's no alpha. Randomness, I tell you. And a sure fire way to bleed to death. Just buy the index, kick back and enjoy a green beer. Then if you want to watch Cramer for entertainment purposes, I question your taste, but more power too you.

posted at 4:54 PM 4 comments   

Calling Myself On the Carpet

I've never gone back and tried to calculate a return for the calls I've made in this blog, because I don't claim to make you money and I don't write or make specific calls I a way that's conducive to tracking a return. But I do know that the few calls I have made have been very good. I know this because I take being wrong personally. I obsess over it when I am and I obsess over figuring out how to be wrong less.

I can't recall a single significantly bad call on the markets or stocks that I've made since I've been writing this blog every single market day for the past 15 months. If I had made one, I would remember it. One obvious way to not be wrong is to not make specific calls at all. I really don't make very many specific calls. But I do make some and when I do I am usually very sure about them before I make them. So you will likely do well to take note when I do.

A year ago February 1 I posted a list of stocks that I had written articles about in the past for The Motley Fool and was still fond of when I posted the list. Given that I have not provided any information to the contrary on any of these stocks since, the presumption is that I still like them, so I've calculated a return an equal weighted average return on those stocks from then to today and posted the results in the chart below:


I don't have the specific historical data for Macromedia since the ticker is no longer any good, so I just used 17% as an estimate based on a news story from last April on the announcement of the merger between Adobe and Macromedia that indicated Macromedia had risen 17% on the news. So that should be reasonably close. Once the deal closed you would have held Adobe shares. That looks to be close enough to a fair estimate. A few percentage points either way for the one stock wouldn't significantly change the overall average. I checked the math on a return for Macromedia of 10% and 20% and it moved the overall average by less than 0.5% in either direction.

Another noteworthy stock I've repeatedly written about going back to last May is Caterpillar (CAT), which has gone up 75%. Besides that there have been numerous calls on the direction of interest rates and fed funds rates, oil prices, etc… Those calls have helped the The Market Spectator newsletter I write to a return of about 60% and growing, 75% annualized, since the first issue last May.

As to the list above I still like the following companies until I say otherwise:
GE, GLW, SCHN, CME, CSC, ADBE, and BID. I'd jettison the rest. This doesn't imply that this is a list of my favorite companies. There just one's that I've written about in the past and I am still fond of. And obviously if you're a value oriented investor some of these companies aren't cheap any longer. GLW especially is a stock that wasn't attracting any attention when I made the call and has since become quite popular with investors. I first wrote about it two years ago and it did nothing for a year before it took off so the 150% gain is more like a two year gain as I view it since I was early on the call, but it's a stock I've stuck by and said good things about on and off since. Eventually, I expect that Corning will come up against too much competition and shrinking margins in its flat screen glass business. But that's probably a ways off yet.

A final note. I have zero confidence that these stocks will do as well over the next year as they did over the past year. I think CSC will eventually get bought by someone. There were two attempts last year that fell through. I was holding the stock in the model portfolio for the newsletter when the first attempt came. I sent a sell alert on a very handsome profit, when the deal fell through I sent a buy alert, then another attempt came in and the stock rocketed a second time, at which point I sent another sell alert for another very nice profit, and if my memory serves correctly we bought it again when the second deal fell through and sold it one more time after a decent gain, and haven't held it since. I admit I got a bit lucky on that one. But if you're holding a stock that gets a buy out rumor, the price