Friday, November 29, 2013

Crecencio Part 2

Got to thinking more about that Wal-Mart story: Here's a snippet from the IBT article:
Incidentally, it would take the average worker around 750 years to earn the $23.2 million that CEO Mike Duke earned in 2012, approximately 1,034 times more than the company’s average worker.

I suspect that Crecencio suspects that our household income is higher by some multiple than his. And I suspect his employees suspect that his is some multiple higher than theirs'. I don't suspect, however, that Crecencio nor his workers resent the signers of their paychecks good fortune. Of course the multiple in either instance comes nowhere near 1,034 times. Then again, neither Crecencio nor myself possess the skills to manage the largest distributor of low-cost consumer goods (and, btw, the largest single employer) on the planet. That job is reserved for the rarest and, therefore, the highest paid talent.

Speaking of high-paid talent, according to Forbes, Steve Jobs's average yearly income from 2002 to 2007 was $130 million. That would be 3,250 times the average pay of today's Apple Store genius---and, by the way, many many times more than yours truly's. Which doesn't bother me in the least, as I type this on my iPhone while waiting in the car for my wife while she patronizes Bed Bath and Beyond---a retailer (not nearly the largest on the planet mind you) that paid its CEO, a rare talent for sure, $5.5 million more than Wal-Mart paid its last year.

Crecnecio is working today...

Last night my wife and I drove past our local Wal-Mart store; its huge parking lot was packed. We didn't happen to notice (we were a ways away) any picketers. If there were any, it was nothing like the scene pictured in this International Business Times article. "I want to work full time", "Wal-Mart Always Low Wages", "Stop Cutting Hours" and "Stand Up Live Better" were the slogans I could make out in the picture.

The din of the leaf blower outside our front door poses a little distraction as I effort to articulate this morning's message---our yard guy is working today. I haven't bothered to calculate what we pay Crecencio by the hour, but apparently it's as much or more than he would receive by bumping us for another customer. Surely, if he is underpaid he would approach me, make his demand and, depending on my response, either keep me on or move on to the opportunity that signaled him that there's more to be made elsewhere. The last thing in the world Crecencio would do---regardless of his estimation of our annual income---is publicly protest the Mazorra family's stinginess.

The fact that some of Wal-Mart's employees are choosing to demonstrate tells you that Wal-Mart pays a very competitive wage for low-skilled work. The folks dawning the aforementioned slogans are receiving the best the marketplace has to offer for their skill-set (otherwise they'd be working elsewhere). If they're to improve their lot, they'll produce stand-out work---and thus work their way up Wal-Mart's ladder---or devote their time off to learning the skills that would one day garner them better wages with another employer. Publicly complaining---in a personal plea or at the behest of a union---is clearly not a productive use of their spare time.

Thursday, November 28, 2013

Give thanks for what you hold most dear, and the conveniences that make it easy....

"Forever on Thanksgiving Day
The heart will find the pathway home."
Wilbur D. Nesbit

The poet indeed captured the essence of this day. It's all about home and celebrating the love of family---Thanksgiving Day is beautifully simple.

Beautifully simple, that is, until we stop and consider the miracle of the marketplace. The system that somehow delivers the basic amenities we so readily take for granted---the conveniences that allow us to relax and celebrate the things we hold most dear.

Take, for example, the turkey; how does that happen? Where the heck do all those birds come from? There has to be millions of them brought to market. That's right, and the operative word there is "market"---the place where people exploit their property rights and pursue their own objectives. Thank goodness they do!

A virtually uncountable number of profit-pursuing folks, most remaining strangers to one another, organized to bring you today's main course: From the land owner to the fertilizer producer to the farm equipment maker to the fuel provider to the feed farmer to the turkey farmer to the turkey processor to the freezer manufacturer to the truck manufacturer to the trucking company to the grocery store (and, yes, I skipped myriad relationships in between). And of course all the workers who freely bargain the terms of their production, their labor, with the individuals who, while focusing merely on their respective specialties, miraculously got that butterball rolling. Not to mention the cranberries, the cranberry sauce, the potatoes, the gravy, every ingredient in the stuffing, the pies, the pie pans, the plates, the utensils, your kitchen appliances, your fuzzy slippers, the thread that holds your fuzzy slippers together, the thin rubber soles of your fuzzy slippers, the etc, etc, etc, etc, ad infinitum... As Adam Smith put it:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."


This is the world we live in: 

Wednesday, November 27, 2013

A 0% return can be a beautiful thing...

Those who track mutual fund investment flows tell us that, based on flows out of bond funds and into stock funds, the individual investor is beginning to join the party---although just barely beginning. In terms of market implications, the "just barely" part is music to the bulls' ears. There's this widely-held view---one I sympathize with---that heavy retail (individual investor) participation is a classic warning sign that the party's nearing its end. But, honestly, that's not what troubles me most about individuals reallocating their long-term money. What troubles me is the switching from fixed income assets to equities, when it's done for reasons other than periodic rebalancing.

I've maintained, for an embarrassingly (in that I've been wrong till recently) long time, that bonds are no place to be when interest rates are at record lows. One of the few things we know for sure about markets is that when interest rates rise bond prices fall (we just don't know how long interest rates will stay low [or how long the Fed can successfully keep them low]). Hence, my concern for the individual investor who tracks the track records displayed on his quarterly 401(k) statement. When the government bond fund that served him so well after the drubbing he endured in 2008 delivers a negative 4% year-to-date return, and the U.S. equity fund posts a 25% gain, he can't help but wonder if a change is in order.

While I entirely understand how the individual investor with a day job can come to that wonder, I'm less understanding of investment advisors, Princeton professors and best-selling authors who suffer the same temptations. In a recent CNBC interview, Burt Malkiel (he's all three rolled into one) offers an alternative allocation for those who've stuck with the traditional 60% stocks/40% bonds mix to this point. While he and I are on the same page when it comes to bonds, we go to entirely different places when it comes to what to do instead. He recommends the following: 

55.0% Stocks
27.5% Dividend growth stocks, emerging market bonds and tax-exempt bonds
12.5% Real Estate Investment Trusts (REITs)
05.0% Cash

That, in my view, is in no way a reasonable alternative for investors who wish to maintain a moderate risk profile. It's like taking what was a traditional bond allocation (the 40%) from the frying pan and throwing it into the proverbial fire.

Here's how those "bond substitutes" performed (according to Morningstar) during a recent period of rising interest rates (5/22/13 - 6/30/13):

Dividend stocks (S&P 500 Dividend TR Index): -12%
Emerging market bonds (BofA ML Glbl Emerg Mkt Credit Index): -4%
Tax-exempt bonds (S&P Muni Yield TR): -5%
REITs (MSCI U.S. REIT PR Index): -12%

And here's how the remaining two asset classes performed during the same period:

Stocks (S&P 500 TR Index): -4%
Cash: 0%

Ironically, during that brief period, three of the four asset classes replacing the conservative allocation declined further than the not-conservative allocation.

As you can plainly see, trading bonds for other interest rate sensitive asset classes in no way mitigates potential risk. In fact, when you consider the economic (and business) risks inherent in stocks, real estate and emerging markets, it exacerbates it.

Here's my suggestion:

60% Stocks (diversified globally and across sectors)
40% Simple, safe, CASH

Rest assured, there will come a day when bonds once again make perfect sense. In the meantime, a zero rate of return (on the "safe" part of your portfolio) is a beautiful thing.

Today's TV Segment (video)

This morning's conversation with Zara was purposely short on market outlook and long on practical advice to the individual investor. Click here to view...

Bring us your huddled masses, and their dollars...

Does it bug you (as it does a lot of Americans) that Americans buy substantially more stuff from the Chinese than the Chinese buy from Americans? And how does that happen? If we spend, say, $40 billion in a month on China-made stuff, and they only spend $10 billion on U.S.-made stuff, what are they doing with their leftover $30 billion? Well, as you may know, they buy lots of U.S. treasury bonds, but that's not all---they also invest in U.S. assets. Back in June, I wrote about the good fortune that trade with China brought to the owners of a hog farm in Virginia. Here's that brief essay:
Worried about the dollar? Worried about jobs? Worried about national security? Well then, you should feel very very good about a Chinese company buying Smithfield foods. Counterintuitive? Perhaps for some, but I’m hoping not so for my regular readers.

Here’s a little refresher course:

The dollar: China goes to great lengths to compete for our business—making us wealthier in the process (we enjoy more of life’s amenities as the world competes on price for our business)—because they love U.S. dollars. They love U.S. dollars because we apparently yet produce goods (like hogs) and services they deem valuable. The Smithfield Foods acquisition proves it. Thank goodness we have more than just federal debt to offer the world.

Jobs: Trust me, Chinese management and workers are not about to descend upon tiny Smithfield, Virginia. Shaunghui bought Smithfield Foods to exploit, and export (or import), its business model (along with its hogs). But we’re not talking merely the preservation of Smithfield jobs, we’re talking $4.7 billion U.S. dollars (a few of them you sent to China to buy the monitor, tablet, or cell phone you’re staring at right now*) flowing back to the U.S. You think Smithfield’s largest shareholders might be looking to grow other successful enterprises with their proceeds — creating jobs in the process? Yyyyep!

(So the next time you cringe before buying an item made in China, remember all those U.S. jobs you helped create when Shaunghui bought Smithfield Foods.)

Worried about national security? This one’s the easiest: Nobody ever shoots their customer (or supplier). Or, as an intuitive individual (most often ascribed to Frederic Bastiat) once said:

“If goods don’t cross borders, soldiers will.”

Today's post was inspired by This CNBC video on the benefits of trade bestowed onto California home-sellers. 

Here's economist Scott Sumner on the same thing going on in Australia:
Chinese are snapping up a lot of properties in Sydney. Aussie labor is employed building houses. The houses are traded for Chinese goods. The only special feature is that the houses don't physically leave Australia. Chalk up one more reason why current account deficits are an utterly meaningless number.

Monday, November 25, 2013

Have a Healthy Thanksgiving...

Dang! I'm running out of market stuff to write about. I've already told you that valuations, while no longer cheap in my view, look okay (some sectors more okay than others). That there's enough bearishness out there to probably support the market's upward momentum (at least for the moment). That the notion that a knockout punch will ultimately come from the Fed tapering QE has become too anticipated to come true: As S&P's Sam Stovall puts it "A boxer is rarely felled by the punch he expects." So I guess today's message is simply about you relaxing and enjoying the season. The market looks to bring you holiday cheer and a happy ringing in of the new year.

Relieved? Since you were thinking the Dow's been floating in some pretty thin air up there at 16,000. That the walls of that balloon have---sooner or later---got to give way to the pressure at that altitude. And of course the last thing you want to see is a big market correction hitting your monthly statement this time of year. You like the market calm. Is that a fair assessment?

Well, shoot, if you can indeed relate to the above you're either not reading, or not believing, my stuff. You see, my friend, there is no such thing as a calm market. In fact I would argue that when the action is light, the uncertainty is palpable. If the players all believed that the market will ride the currents higher into 2014---with little turbulence---believe me, the Dow wouldn't have risen 7.77 points today, it'd be up 777. Conversely, if the players were certain there's a coming shoe to drop that would drop the bottom out of the market, well, the bottom would be dropping as I type. Clearly, at this juncture, there is little conviction one way or the other.

But that's not at all my concern. My concern is that you can relate to paragraph two. That maybe your holiday season could be less cheerful amid a falling stock market. That while you probably get, intellectually, that corrections---and bear markets---are essential to the long-term success of your portfolio, it's a different story emotionally. But that (your emotional ties to the market) is simply not healthy, at so many levels. Seriously, we in no way want the market rising in perpetuity. Why? Because that is pure fantasy. All things are cyclical: Imagine the Earth without rain---that would be the market without corrections. And, more importantly, the chemicals released by negative emotions don't mix well with cranberry sauce and turkey gravy in the tummy.

So, please, forget about the market---and go have yourself a happy and emotionally-healthy Thanksgiving!

Sunday, November 24, 2013

It matters...

The other day I took a very simple stab at debunking the age-old "the debt doesn't matter because we owe it to ourselves" myth.


With government debt (owed to ourselves): The future U.S. taxpayer pays, the U.S.
investor/bondholder receives. The community, therefore---according to the likes of Paul Krugman---doesn't suffer.

Without government debt: The U.S. taxpayer enjoys more of his future income, the U.S. investor invests in the private sector. The community, therefore, when compared to the with-government-debt scenario---forgetting for the moment the potential community benefits stemming from debt-financed government projects---gains.

Clearly---in the view of one who believes the private sector makes more productive use of resources---without is better.

Note: I know there's a reader out there who reads Paul Krugman, and who would, therefore, argue that during a recession---or even a period of slow-growth---investors are not investing, their money sits idle. It is entirely appropriate, therefore, for government to take that money off their hands (borrow it from them) and put it to use. Fund some projects, create some activity that the marketplace does not presently demand. Let's stimulate the housing and auto sectors, invest in education, buy some beef, pave something. Essentially skipping past the rough patch by getting that money off the shelf and into the hands of beneficent bureaucrats. Let them determine where the growth is to come from.

Well, there are volumes of empirical evidence that, in my view, destroys that argument. But for today I'll simply ask the reader to think in terms of incentives, and seasons. Who indeed would make the most of the finite resources at hand? Private sector actors competing in the marketplace, or politicians competing for the support of special interests. Recessions present golden opportunities for politicians to take care of those who have taken care of them (think Wall Street and auto workers), and to pave the way for new relationships. In terms of seasons: is the contraction phase not essential to the business cycle? Is that not where the excesses created during previous expansions are purged? Is not idleness essential to the pricing of opportunities? Won't idle resources turn active when prices adjust to what the market will bear? Shouldn't prices (even for labor) contract as the economy contracts?

Moving on: As I stated the other day, we do not nearly owe all of the national debt to "ourselves". Some $5+ trillion is owed to folks who happen to live beyond those lines you see on maps creating political boundaries between "us" and "them". So let's look at that:

Again, with government debt owed to "us", the U.S. taxpayer pays, the U.S. citizen/bondholder receives.

With government debt owed to "them", the U.S. taxpayer pays, the non-U.S. citizen/bondholder receives.

It presumably matters because the interest payments leave the U.S., right? Well, yes, they---those U.S. dollars---do. But, being that they're U.S. dollars (claims against U.S. stuff) they find their way home. You see, no foreigner would ever sell us the tiniest trinket, or buy a penny's worth of our government's debt if they had no use for U.S. dollars---for the stuff we produce here.

Note: I know there's a reader out there who would argue that it's much more complicated than what I just described. He/she would explain that China, for example, in the process of manipulating the currency exchange rate, prints its own currency to buy the U.S. dollars it uses to buy the U.S. debt. It goes like this:

  • Let's say during the course of a month, Chinese exporters sell $40 billion worth of stuff to U.S. Citizens.

  • And during the same month, U.S. exporters sell $10 billion worth of stuff to Chinese citizens.

  • That's a trade deficit of $30 billion.

Rather than allowing the exchange rate to adjust (the dollar to weaken) to compensate for the imbalance, the Chinese central bank prints brand new Yuan (roughly ¥180 billion today) and buys up the $30 billion, then goes and buys U.S. treasury bonds.

The end result being a stronger (than otherwise would've been) dollar/cheaper Chinese goods, thus boosting their exports to the U.S.

Okay, but that simply supports my point: In that view, China manipulates its currency for the express purpose of capturing more U.S. business, meaning more U.S. dollars---they simply wouldn't go there if there were no market for U.S. stuff. Oh, and by the way, I have absolutely no problem with other countries going to presumably great lengths to bring me great varieties of affordable stuff!

Clearly, as I've explained to this point, Krugman is dead wrong: The domicile of the lender makes no difference whatsoever. Well, in truth, it does. You see, if foreigners had no use for U.S. government debt---if, therefore, the pool of potential lenders consisted merely of U.S. citizens---imagine the interest rates the government would have to promise as it competed with other debt issuers to entice such a smaller market. All else being equal, interest rates (on all forms of debt) would be a lot (a lot!) higher. Therefore, contrary to the essence of Krugman's argument (not originally his by the way), it would matter, in a hugely bad way, if we only owed it to ourselves.

The problem my fellow Americans is not to whom we presently owe the debt, the problem is the ever-mounting debt itself: The burden it levies onto future taxpayers and the greater command of resources it places in the hands of politicians.

Friday, November 22, 2013

The great maybe rotation...

The great rotation story goes like this:

The bond market is bulging at the seams, a bubble, essentially. Trillions sit there, earning nary a real return, simply because it's supposed to be safe and you don't fight the Fed. All the while stocks turn in 20+% gains on the year. Someday soon, bond investors will say enough's enough and capitulate. They'll exit the bond market and enter stocks, propelling them to yet greater heights.

The more I ponder the possibilities, the more I'm thinking that the much anticipated great rotation is a great maybe. Here's the thing: at this juncture, folks can't be holding bonds because they're out to make money on their money. They're holding bonds because they fear what tomorrow may bring. Therefore, the fact that they have to know (one would think) that rates can't stay this low forever, in no way suggests that they're on the verge of storming the stock market, as many bullish pundits seem to expect. In fact, if rates indeed spike based simply on an anticipated Fed move---as opposed to on robust economic data---I'd bet (figuratively-speaking) the stock market will most likely not be the destination of the proceeds collected by former bondholders. Nervous as ever---perhaps more so in that event---cash, in my estimation, would be their king.

So, does that mean stocks go the way of bonds (down)---when interest rates rise---if they aren't the recipient of those proceeds? Decent valuations notwithstanding, that's a distinct---and, at this juncture, welcome---possibility, particularly (but not exclusively) for the most interest rate sensitive sectors. I would not be a buyer of, for example, utilities and real estate stocks here.

So, do stocks have to go the way of bonds in a rising rate environment? Not at all (although I'd love to see a healthy correction, whatever the reason[s]). Rising interest rates (on the long-end of the curve) coinciding (if they do) with an improving economic outlook should bode well for the stock market in general---although I'd still avoid utilities and real estate stocks.

2014 is going to be a very interesting year.

Stay tuned...

Thursday, November 21, 2013

Yesterday's TV Segment (video)

Yesterday morning, Zara and I had a good, and important, conversation about how financial pundits can do a real number on the individual investor's psyche... Click here to view...

Wednesday, November 20, 2013

It's a for sure...

Auto sales jumped a few years ago when the Federal government offered up your tax money for other people's clunkers. About that time, home sales were jumping as the Federal government used your tax money to pay for a tax credit for first-time homebuyers. Of course you know what happened after those programs expired. Yep, auto and home sales plummeted. The only thing your tax money accomplished was a transferring of future purchases into the present. Which of course leaves us with a future period without those purchases----hence, the plummeting. Any economist worth half his salt saw those ones coming.

Now there's the Fed's QE program and the perception that it's what's been fueling the run-up in stock prices. Uh oh!! But there are some differences worth noting: QE wasn't billed as a program aimed at directly subsidizing stock market investors. QE is not the depositing of money onto the earnings statements of publicly traded companies (I'm in the camp that says the rally's been more about earnings than it's been about QE). QE has, however, suppressed interest rates, which makes for higher profit margins (lower borrowing costs) and for less competition for the stock market. So for sure it's helped the rally along.

So how does all this shake out when the days of QE finally come to an end? There are a lot of smart folks (well, at least good test-takers) who are committed to the notion that stocks are going to tank when the Fed removes the punchbowl. They cite the selling that occurs after the issuing of every credible threat that the taper's on its way (a little of that went on today upon the release of the minutes from the Fed's last meeting). And they may very well have it right. My problem with that thinking is that the inevitable taper-inspired selloff is so, well, inevitable. You see, big sell-offs are never that predictable (of course there's a first time for everything).

Given that the stock market serves as a discounting mechanism, if cutting QE is a for sure market-killer, you'd for sure think that after a 25% year-to-date gain in the major averages the smart money would have for sure hit the exits by now (since the taper is for sure coming in the next few months). But, hmm, it hasn't.

All that said, the one thing I know for sure is that a selloff is indeed inevitable (can't know when), I'm just not nearly convinced that cutting QE will be the catalyst. And, by the way, periodic selloffs are not to be feared by clear-thinking long-term investors. They're necessary, cleansing, exploitable, phenomena.

Stay tuned...

Market Commentary (audio)

Click the player button for today's commentary:

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Tuesday, November 19, 2013

Pity for the individual investor...

For my sins I'm forced to read a lot of stock market stuff. Which gives me great empathy and, thus, pity, for the studious individual investor. Here are the titles and gists of 6 articles I read today:

1. "Janet Yellen Nails It"... no bubble
2. "Yes Mrs. Yellen, QE Is Creating An Asset Bubble"... title speaks for itself
3. "The Disinflationary Developed World: 2 Investment Implications"... Low interest rates will support stocks, and avoid TIPS (treasury inflation protected securities)
4. "Why It's Still Only a Cyclical Bull Market Within The Long-Term Secular Bear"... this party's almost over
5. "5 Reasons Stocks Could Continue to Push Higher"... title speaks for itself
6. "The S&P Is Approximately 75% Overvalued" ... title speaks for itself, and OMG!!

5 of the 6 are adorned with charts supporting the authors' cases (#5 even sports a video). Read 1, 3 and 5 and you'll feel great about your equities exposure for the foreseeable future. Read 2, 4 and 6 and you'll want to dash to the shelter of your money market account. Read all 6 and you'll understand what it means to be bipolar---unless, that is,

You view yourself as an investor, as opposed to a trader.
You understand there's a business cycle.
You know that it takes two opposite-thinking parties to transact a stock trade; one's short-term right, the other's short-term wrong.
You see a silver lining in 2, 4 and 6; the opportunity to rebalance to your equities target (buy).
You know that a strong opinion gets one's article published.
You know patience and humility to be the successful investor's 2 most valuable traits.

Monday, November 18, 2013

A Simpler Answer...

Here's Paul Krugman from yesterday's column (he liked Larry Summers' speech at the IMF annual conference):
But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?

Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. America’s working-age population rose rapidly in the 1960s and 1970s, as baby boomers grew up, and its work force rose even faster, as women moved into the labor market. That’s now all behind us.

Okay, sounds plausible. But, you know, I'm thinking there's a better, simpler, answer:  There's a whole lot of cash sitting idle on business balance sheets (and money is dirt cheap [interest rates are very low]). Cash that, if invested in new ideas, would create employment and grow the economy.

So why then is all that cash sitting idle? Well, when we're talking small businesses---the suppliers of 52% of America's paychecks---41% of those surveyed in October by the National Federation of Independent Business say government is the problem. You'll never hear that from Summers or Krugman...

Saturday, November 16, 2013

Is Yellen a better assessor than her predecessor?

Based on several measures of valuation "you would not see stock prices in territory that suggest bubble-like conditions", or so said soon-to-be Fed pres Janet Yellen on Thursday. So let's break out the bubbly and buy buy buy!! Well, not so fast.

You see, the thing about bubbles is that they can float behind your back, above your head, and sometimes just beyond the tip of your nose without you ever noticing them. But man when they burst...

Ben Bernanke gave his famous Great Moderation speech (a promise of economic smoothing resulting from sound monetary policy) back in 2004, and a few years later promised us that subprime mortgages posed little threat to the housing market (my, if he could have those back!). You'd think that Ms. Yellen, having been at Bernanke's side the whole time, would do her darnedest to refrain from calling bubbles. But what's she to say when asked a direct question? Well, she could give the correct answer, she doesn't know.

That said---historically speaking---she's probably right in terms of immediately pre-bubble valuations. But of course the most important factor in the most important of those valuation measures is earnings. As long as corporate earnings can come in near next year's estimates, I'm sort of bullish on the stock market as well. If, however, a black swan swoops through and takes the economy with it, all bets are off. But don't sweat that one, Ms. Yellen also said "at this stage, I don't see risks to financial stability" (of course you never see black swans coming). Let's hope she's a better assessor than her predecessor...

Wednesday, November 13, 2013

Removing the bandage can be painful...

I can't help but wonder, if the Fed could do it all over again, would they have gone as deep into QE?

"Data dependent" is the Fed, or so they say. Their decision as to when to start (and by how much) the taper will depend upon the economic data. In theory, they won't cut until the economy begins gaining traction. But here's the thing---Bernanke's counterfactuals notwithstanding---QE doesn't seem to be having much of an economic impact. And the more they do, the more, I'm certain, they worry about asset bubbles. And if an asset bubble happens to burst against a full-bore QE program and the zero lower bound (short-term interest rates), and inspires the next recession, what then?

In a Bloomberg interview yesterday, Fed governor Dennis Lockhart stressed the importance of signaling to the financial markets their intent going forward---so as to not spark a reactionary spike in long bond yields and a sell-off in the stock market. A couple problems with that: One, as the members descend onto their respective speaking circuits, they signal to the market just how much they disagree with one another. Fisher wants to begin reducing QE in December, Lockhart says it'll be on the table, but, clearly, he's a no vote on any near-term taper. And two, it seems that every time a member signals a potential taper-date, the market recoils (yesterday, Fisher hinted December, and, as I type [early morning] the Dow future contract is pointing to an 80 point decline at the open).

And, now, to add insult to injury, there's a growing populace view that the Fed's efforts have accomplished virtually nothing, other than a widening of the gulf separating the rich (the holders of assets) and the not-rich. Not the loveliest political position to find yourself in these days.

Speaking of injury, do you remember the time you left that band-aid on your leg for too long? The cut had healed and your hairs were growing back. You knew that peeling it off slowly would only extend the pain. So you closed your eyes, held your breath, and ripped the sucker off. And it hurt like hell for a minute. Well, the Fed has done its darnedest to bandage up the wounded U.S. economy. Adding layer upon layer as if more bandaging would somehow lead to faster healing. It's finally gotten to the point where the dressing has grown so thick that we've lost sight of the healing process. And, worst of all, it may have woven itself into the skin to a point where removing it---all at once or slowly---may take a good chunk of flesh with it.

Having taken monetary policy to this extreme, the Fed has to be feeling boxed in. They're dying to taper, but they're praying that if they wait long enough the economy will somehow toughen and separate itself from the bandage, allowing them to peel it back without causing any bleeding. I say hmm...

Today's TV Segment (video)

This morning Zara and I had a good conversation about the market, the Fed, and the individual investor. Click here to view...

Monday, November 11, 2013


Fairness(HT Jim York)

Or, if we deem society unfair because some beings get to climb trees while others wallow below, we---in our demand for equality---are left with no choice but to force the climber down to earth.

Sunday, November 10, 2013

Watch football...

Here are a few comments, headlines, and quotes, each followed by my response in blue.

A client says: "When the Fed finally begins tapering QE, the stock market's going to sell off in a big way." Maybe, however that's, in my view, too common a sentiment. If "in a big way" means an '08-style rout, it'll take something out of the blue.

Another wants to increase his target allocation to the stock market. I said "would you have that desire if the market were down 20% year to date?"

A behavioral economist says: "This continued growth should last in U.S. markets into late 2015, and early 2016. By then, improved conditions in Western Europe, growing economies in Latin and South America, and continued rebuilding in Asia will reclaim their share of investment interest. However, even the redistribution of investment in other regions by that time won't derail U.S. growth to a significant degree." 
I say: The U.S. will have periods of growth, lasting years at a time, and conditions will improve in other nations as well; I won't, however, offer specific timelines. And I will add---without timelines---that the U.S. and other nations will have periods of contraction as well.

Marc Faber says: "We're in a worse position than in 2008"  I say: At some point Mr. Faber, publisher of the Boom, Doom and Gloom report, will surely be right. I'm just not sure it's today.

Ron Baron says: "in 1999 the stock market was selling for 33 times earnings. Stocks are now selling for around 14 times. They're cheap on stock valuations alone." My math has the S&P closer to 16 times. Still not expensive, in my view, but I'm thinking Baron is sugar-coating just a bit.

Bill Fleckenstein says: "stocks will head a lot lower, and enough lower to make people really unhappy." Of course that's a no-brainer, that's the market. But the timing???? Fleckenstein is a perennial bear, which means the guy's been wrong a lot.

Brian Tracey says: "If you want to be known as a great economist in America, predict growth. If you predict growth you'll be right 70% of the time. And if you're wrong temporarily, you'll be right pretty soon." Yep...

John Templeton said: "There will always be bull markets followed by bear markets followed by bull markets." Undeniable!

I say: Don't guess, diversify, and watch football...





Saturday, November 9, 2013

Krugman hasn't done the math...

Paul Krugman says a lot in his latest NY Times column The Mutilated Economy. I've honestly been trying not to pick on the poor professor quite as much lately. In fact, this morning, until I got to the part where he writes "Anyone who talks about how we’re borrowing from our children just hasn’t done the math", I was just going to take in his message and move on to better things. But, dang it!, I just can't.

So, now that I've decided to blow a few minutes on attempting to blow Krugman's tired "we're no poorer because we owe it to ourselves" assertion out of the water, I figure I might as well pick a piece of low-hanging fruit along the way. He writes:
Long-term unemployment — the number of people who have been out of work for six months or more — is four times what it was before the recession.

Of course, to Krugman, this is the result of insufficient government spending.

The other day, I met with a client who farms grapes. He has a problem, he can't find enough people to pick them. He says "another season like this and we're going mechanical". Hmm? Four times as many people on unemployment than before the recession, and a farmer can't find anyone to pick the crop? While I suspect that intense analysis would uncover some complex mix of factors leading to the 4-fold increase in the unemployed-over-6-months number, there is one very simple thing I know for sure; California is one of 49 states that now pays at least 10 months of unemployment benefits.  Not to mention the state's comparatively (to other states) strong social "safety net". Just sayin...

Now let's dig a little beneath Krugman's ever-persistent claim that government debt doesn't make the nation poorer because it's money we owe to ourselves. For one, "we" owe a bunch of it to other nations, but, frankly, it matters little either way. Here's the simple basis of Krugman's position:

A lends to government (buys a treasury bond).
A, and perhaps A's offspring, receives interest payments for the term and the principal at maturity.
B, and perhaps B's offspring, pays taxes to cover the payback to A.
A/A's offspring and B/B's offspring are US citizens.
What B/B's offspring pays, A/A's offspring receives. Therefore: (-$) + $ = a wash to the community.
K says "see, the math says we can't lose when we owe it to ourselves".

Yeah, BUT:

If government operated within its means, there'd be no borrowing from A.
A, therefore, would be left to invest his wealth in the private sector.
And B/B's offspring, therefore, would be left with their wealth.
Therefore, comparing to the government debt scenario, we have: $ + $ = a gain to the community.
I says "K just hasn't done the math".

"Yeah, BUT!" says K:

"We have to account for the benefits to the community resulting from the Government projects funded by A's loan. B/B's offspring's higher taxes would pay for benefits  they received."

"Hmm" says I:

"I guess, therefore, we need to consider under whose command of resources the community would receive the greater benefit: bureaucrats competing in elections or private sector actors competing in the marketplace?"

We can stop there.

Thursday, November 7, 2013

Cycles, Sectors, and Monetary Policy Confusion...

While I forever preach the folly of market timing---having just finished a fairly involved research/due diligence session---I thought I might give you a little insight into my world as a way of illustrating why I preach what I preach.

The following is, in a tiny nutshell, a behind the scenes look at why a forward-thinking investor might like (in order of magnitude of like) the materials, energy, technology, financial and industrial sectors going forward. And shun (in no particular order) the discretionary, staples, utilities and healthcare sectors:

The economy is cyclical. It meanders its way through contractions and expansions and back again. I'll simplify (very much so) matters here and break the business cycle into four phases:

The early-cycle phase is generally characterized by a substantial pick up in economic activity, growing credit, and accelerating corporate profits. Monetary policy is very accommodative. The top four performing sectors are typically consumer discretionary, materials, industrials and technology.

The mid-cycle phase, typically the longest phase, sees continued credit and profit growth. Monetary policy is generally accommodative, but not to the early-phase extent. Inventories tend to catch up to sales growth (versus low inventories in the early phase). The top four performing sectors are typically technology, energy, industrials, and health care.

The late-cycle phase sees slowing economic growth, tightening credit conditions and contracting profit margins. Monetary policy is restrictive. Momentum in inventory growth can continue while sales growth contracts. The top four performing sectors are typically energy, materials, healthcare and consumer staples.

The recession phase is characterized by slumping economic activity. Credit evaporates and corporate profits contract. Monetary policy becomes accommodative. Inventories decline despite falling sales. The top four performing sectors are typically consumer staples, utilities, telecom and healthcare.

Now, one might think that it shouldn't be all that hard---with history as our guide---to know (approximately) which phase of the cycle we're in at any given time, and, thus, how to rotate among sectors accordingly. Well, one might think that, but one shouldn't.

Take, for example, the monetary policy piece. On average, the early phase lasts around 15 months, the mid phase goes for about 4 years, and the late phase tends to go about 18 months. But we're almost five years removed from the last recession and monetary policy is, well, accommodative doesn't even begin to describe how accommodative monetary policy is. If the Fed has it right, we are smack dab in the middle (or maybe the latter) of the granddaddy of all early phases. However, sector performance (at least on a year-to-date basis) doesn't entirely jibe with early-phase history. Materials is supposed to be one of the best performers, but it's 3rd from the bottom. Technology doesn't come close either. However, consumer discretionary and industrials are among the top 4 performing sectors.

Well, I guess 50% ain't all that bad. So, for the sake of this paragraph, let's say we are indeed in the midst of what has to be history's longest early phase. Of course now, after nearly 5 years, we better start thinking mid-phase. Which means our bias going forward should be toward technology, energy, industrials and health care.

But what about valuations? You see, health care has been on a tear of late, and, from a forward price to earnings (p/e) standpoint it's the second most expensive sector. Plus, you'd think, based on health care's performance, we're at least at the end of the mid phase, if not well into the final stretch. And if we're that far down the road, we should be buying more consumer staples, but that's the third most expensive sector. Now, materials look reasonably priced, but if the Fed's right it'll be one of the worst performers for awhile yet. Dang!

Believe me, I can go on and on in this vein, and throw in all manner of nuance, for pages, but I won't. I'll just cut to the chase and share my findings:

For starters, I'm making a guess (a GUESS!) that we're well within mid-cycle. Which suggests that at some point in the not too distant future, we should be looking to rotate out of consumer discretionary, telecom and technology, and into energy, materials, health care and consumer staples. However, when I consider valuations, which I always strongly consider, I do not want to be buying health care and consumer staples anytime soon (unless, maybe, they first take a monster hit), and financials and technology look very attractive to me.

Again, tech looks good, valuationally-speaking, but not (perhaps) cyclically-speaking; I might---my cycle guess notwithstanding---add a little exposure to underweighted portfolios. Same for financials (potential interest rate sensitivity notwithstanding). Staples make cyclical sense, but too expensive to add exposure; I would reduce exposure in overweighted portfolios, but---valuation notwithstanding---I would maintain a reasonable allocation at all times in this economically-defensive sector. Same for health care. Consumer discretionary has been phenomenal of late and, thus, currently has the loftiest valuation, I would not add, and possibly reduce (depending on present position) exposure (but I'd still maintain some exposure to this economically-sensitive sector). Industrials look attractive to me, and I'm willing to increase exposure in under-weighted portfolios, despite where we might be in the cycle. Energy---valuationally and cyclically---is a buy for underweighted portfolios. Same for materials. I would maintain an underweight position in utilities. Same for telecom. You got all that?

So, what should you take away from all that. For starters, if you're our client, consider it a sneak preview of the rambling session you'll suffer through at our next review meeting. For everyone else, may it serve as yet another confirmation that there is no knowing anything for sure when it comes to the financial markets and the economy, regardless of what those whom you watch on CNBC, or whose how-to-invest books you may read, would have you believe. If they truly knew what they'd have you think they know, they'd have no need to promote their methods, or tout their holdings.

Yes, business cycle and valuation-based sector rotation is a worthy undertaking, but only while maintaining a broadly diversified mix among most, if not all, sectors (notice I'm still maintaining some exposure to my currently least favorite sectors), as well as among market caps (small, mid and large cap stocks) and international equities.

Market Commentary (audio)

Click the play button for today's commentary:

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Wednesday, November 6, 2013

Today's TV Segment (video)

This morning Zara and I discussed the market, the Fed, the business cycle, present sector allocation challenges, and one reason why we haven't seen substantial job growth.

Click here to view...

Tuesday, November 5, 2013

Scrooge McDuck's money...

PIMCO's Bill Gross calls America's rich "Scrooge McDucks" and says their taxes should be raised. He's frustrated that "gazillionaires" have been sitting on their gains as opposed to investing in the real economy for the past "five, ten, fifteen years" (I certainly agree with five) and, therefore---for the sake of the average person---should pay higher taxes to fund infrastructure projects. Also, per a CNBC interview that I watched last week, Gross and his wife, reported billionaires, have plans to give their entire fortune to charity over the course of their remaining lifetimes. He clearly puts his money where his mouth is.

I have no problem whatsoever with the latter. If Mr. and Mrs. Gross wish to give their fortune to the less fortunate, that is absolutely their business, not mine. I just wish Mr. Gross---for the sake of the very folks he and Mrs. Gross wish to help---would stay out of the business of his fellow billionaires. I happen to believe that the less fortunate are far better off when capital is allocated to its most productive use. Comparing the productivity of assets when employed by private sector versus public sector actors, is like, well, comparing the productivity of the private sector to that of the public sector.

As Milton Friedman pointed out (below), poverty is mostly the result of failures of government. I would add that the lack of "real economy" investment over the past few years is the result of government failure as well---specifically, the result of government policy-induced uncertainty.

Here's Milton Friedman on gazillionaire investing, poverty, and the perniciousness of minimum wage legislation:

Monday, November 4, 2013

Market Commentary (audio)

Click the play button for today's commentary:

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Sunday, November 3, 2013

The truth don't sell well, or win the Nobel...

Here's a snippet (quoting Matt Ridley) from the Cato Institute's project, (HT Don Boudreaux):
"If… you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize. The bookshops are groaning under ziggurats of pessimism. The airwaves are crammed with doom. In my own adult lifetime, I have listened to the implacable predictions of growing poverty, coming famines, expanding deserts, imminent plagues, impending water wars, inevitable oil exhaustion, mineral shortages, falling sperm counts, thinning ozone, acidifying rain, nuclear winters, mad-cow epidemics, Y2K computer bugs, killer bees, sex-change fish, global warming, ocean acidification and even asteroid impacts that would presently bring this happy interlude to a terrible end. I cannot recall a time when one or other of these scares was not solemnly espoused by sober, distinguished and serious elites and hysterically echoed by the media. I cannot recall a time when I was not being urged by somebody that the world could only survive if it abandoned the foolish goal of economic growth. The fashionable reason for pessimism changed, but the pessimism was constant. In the 1960s the population explosion and global famine were top of the charts, in the 1970s the exhaustion of resources, in the 1980s acid rain, in the 1990s pandemics, in the 2000s global warming. One by one these scares came and (all but the last) went. Were we just lucky? Are we, in the memorable image of the old joke, like the man who falls past the first floor of the skyscraper and thinks ‘So far so good!’? Or was it the pessimism that was unrealistic?"

Here's another:
Where does the skepticism about free market come from? The late Harvard University philosopher Robert Nozick provides one plausible answer. The intellectual elite (i.e., the wordsmiths who occupy many positions within academia, the media, and government bureaucracies) tend to take a more negative view of free market than the one presented here. These individuals shape society’s language and access to information. As such, the anti-free-market sentiment of the intellectual elite carries great weight.

“From the beginnings of recorded thought,” Nozick writes, “intellectuals have told us their activity is most valuable. Plato valued the rational faculty above courage and the appetites and deemed that philosophers should rule; Aristotle held that intellectual contemplation was the highest activity.” Intellectuals have thus come to think of themselves as the “most valuable” members of society and “feel entitled to the highest rewards their society has to offer.” The markets, however, tend to reward “economic contribution.” Consequently, intellectuals tend not to be the most rewarded members of a free-market society. That runs counter to the intellectuals’ expectations. When they socialize with the most rewarded individuals in society, the intellectuals resent that they are not compensated to the same degree. To rectify this perceived injustice, intellectuals advocate for a society that distributes compensation in line with their expectations, rather than economic contribution."

And here are a few titles of books and articles (and one interview) by two widely-followed intellectuals/Nobel Prize recipients. 

Freefall: America, Free Markets, and the Sinking of the World Economy
Joseph Stiglitz

The Price of Inequality: How Today's Divided Society Endangers Our Future
Joseph Stiglitz

The Great Recession, Part II: The world could be headed for another economic disaster if we continue to listen to free-market ideologues Joseph Stiglitz

The Free Market Doesn't Work, an interview with Joseph Stiglitz

The Great Unraveling: Losing Our Way in the New Century Paul Krugman

The Return of Depression Economics and the Crisis of 200Paul Krugman

End This Depression Now! Paul Krugman

Markets can be very very wrong Paul Krugman

Free to be hungry Paul Krugman

Sadly, as Ridley and Nozick observed, optimism truth doesn't sell well, nor (these days) win one a Nobel.

Saturday, November 2, 2013

Are you feeling a little queasy? Then shh!

Last week I told you that I was feeling a wee bit nervous, in a good way---I was sensing, due to a marked increase in market optimism, that maybe a healthy, necessary and overdue correction was on its way (that's that contrarian indicator). Well, if market sentiment, by itself, is enough of an indicator to inspire a few short-termers to shift their positions, if they were thinking sell last week, they're likely rethinking that notion today.

About the time I was penning last week's commentary, pessimism, from some high places, was beginning to bubble. Two of the investment world's biggest, Blackrock's Larry Fink and Pimco's Bill Gross, and others, warned of what they see as bubbliness in today's stock market. Dang! I wish they'd just do their jobs and let the market do its. Just when I was thinking that over-optimism might, as it has in the past, foreshadow a healthy correction, these guys (as utterly clueless in terms of market direction as the rest) go and, maybe, spoil it. Operative word being maybe---it could happen anyway, and the sooner the better.

So folks, if you're feeling a little queasy about today's stock market, please keep it to yourselves (unless, that is, you're our client. In that case I definitely want to hear from you), we don't want it to get out and ruin the market's chances of performing at least a little necessary pruning. Yes, I'm honestly hoping for a drop in stock prices sometime soon (but I'm not yet holding my breath), nothing could be healthier . And no, I wouldn't even begin to try and time it...